Across the senior housing sector, owners and operators are facing unprecedented challenges due to the COVID-19 pandemic. They are facing these challenges head-on, applying learned best practices and adapting to change, as they prepare for a period of rebuilding.
In 2019, and prior to COVID-19, transaction volume for senior housing and care was at $15.3 billion, with $10.6 billion specifically related to senior housing transactions—the highest total reported since 2016. Additionally, absorption rates were increasing, and Fannie Mae reported closing $3.1 billion in loans in 2019—a year-over-year increase of 34 percent.
Given these strong numbers, many are remaining hopeful for a stronger future as we head toward reentry. To gauge confidence levels for industry investors, JLL distributed a spring 2020 survey to transactional professionals focusing on senior housing and care investments. Over 100 professionals responded.
Keeping in mind these indications are on a short-term basis and don’t account for discounts in relation to COVID-19 expenses, the survey results showed investor sentiment jumped from 72 percent of respondents expecting no change in senior housing capitalization rates to 83 percent expecting a post-COVID-19 increase. According to these experts, the industry consensus is that capitalization rates will return to pre-COVID-19 levels upon recovery and that many are placing more weight on discounted cash flow in valuing senior housing properties.
That said, we wanted to dive deeper into the state of the market. Below is a snapshot of the current state and what could be ahead for senior housing.
The present: slow but steady
Many lenders are taking a wait-and-see approach with new prospects to determine the outcome post-COVID-19. However, they’re also using this time to focus more attention on existing clients, as most lenders already have solid pipelines that could be ready to launch as early as later this year. Because of this, a strong foundation of liquidity and strategic operating partners has already been built, so lenders are being more selective in who they do deals with.
On the transaction front, investment activity and construction have tentatively slowed or been postponed, but haven’t come to a complete halt. In fact, some private equity firms are still looking to invest in senior housing. In 2018, a record 21,000 units were added to the senior housing sector—a figure that should continue to grow as our aging population seeks housing in upcoming years. And although new construction has slowed and some projects are delayed until later this year or first quarter 2021, those that were underway in March can be completed this year. Moreover, reduced construction in the short term is resulting in increased net demand and lower construction and land costs, opening opportunities for those wanting to get a piece of the industry.
Another factor impacting transactions is the possible disconnect between the buyer and seller. Some nondistressed sellers are holding on to their deals until later this year for better pricing, while buyers are currently looking for a better deal. Some deals have seen a discount of up to 15 percent, so some buyers are striking while the iron is hot.
Occupancy levels are segmented by region, with some properties more impacted than others, making it challenging to state a baseline. Many operators are reporting declines in occupancy, while some are seeing no change. For example, based on data from early May, 50 percent to 70 percent of independent living/assisted living operators reported a decline in occupancy, and 70 percent of memory care operators and 80 percent of skilled nursing facility operators reported a decrease. Meanwhile, one-third of operators for IL/AL and MC reported no change in occupancy, 12 percent of SNFs reported no change and 3 percent to 10 percent reported an increase. Occupancy is also impacted by admission changes determined by the specific properties, including limiting or completely restricting admissions, 14-day quarantine requirements for new residents and supplementing in-person tours with virtual ones.
Rebuilding for a better future
Although the senior sector is currently facing challenges, many are looking forward to what the future holds. In many ways, the pandemic has accelerated innovations in technology, infrastructure, design and health protocols.
Medium and long-term investment sentiment is still bullish as experts prepare for the “silver tsunami” in the United States. Currently, there are about 13 million seniors age 80 and older with an estimated 1 million people expected to join this population every two years. Additionally, experts say that by 2030, 20 percent of Americans will be 65 and older. That means although development has temporarily halted, it can’t stay frozen for long, as supply is needed to keep up with the needs of this rising group of people.
In the short term, the $2 trillion CARES Act contains support for senior housing operators that includes health-care grants and low-interest loans. This creates the potential for resolving the lack of middle-market senior housing assets for residents that may not have enough resources for private pay but have too many investments to qualify for Medicaid. Further, the federal government is providing about $4.9 billion in stimulus money to help relieve skilled nursing facilities. This relief fund is intended to help nursing homes continue to focus care and attention on seniors, with the Department of Health and Human Services announcing that each nursing facility will receive a baseline of $50,000, plus an additional $2,500 per bed for facilities hosting six or more certified beds.
For the long term, safety is key. Buildings across the United States are applying safety guidelines and protocols recommended by the Centers for Disease Control and Prevention and the World Health Organization to ensure the safety of staff and tenants. This is even more imperative for seniors,who are categorized by the CDC as a high-risk group for COVID-19. New technologies such as heat mapping sensors that help identify which areas within the building are being used and need to be cleaned more frequently, and virtual tours that promote social distancing will assist in that effort.
This emphasis on safety leads many to believe we’re heading toward a major labor shift in which senior living community operators will be hiring more health care and nursing, housekeeping and room service, and maintenance professionals.
We must continue to look to our health-care leaders for expertise around health and safety in senior housing as we reopen to meet the demands of this immensely growing population.
Brian Chandler, Brian Lockard and Zach Bowyer are managing directors with JLL‘s valuation and advisory team.
