A new report by the National Investment Center for Seniors Housing & Care confirmed that senior housing occupancy in the U.S. dipped to new lows during the fourth quarter of 2020 as the COVID-19 crisis continued to take a toll. But it may finally be time for some cautious optimism.
MHN recently caught up with long-time real estate advisor Mel Gamzon, principal of Senior Housing Global Advisors, who has had a front row seat to the industry’s ups and downs for four decades. During our in-depth conversation, Gamzon shared his observations on the sector’s recalibration, potential bright spots ahead and opportunities for investors.
What are the short- and long-term outlooks for the sector?
Gamzon: No question, we are in unprecedented times for the senior housing sector. Declining occupancy levels over the past year have reached historically low levels. Entering 2021, overall industry occupancy was at 80.6 percent. Senior housing financial performance has been under horrific strain due to the cost of personal protective equipment and COVID-19 testing, occupancy erosion, skyrocketing staffing and numerous other issues.
With that said, the industry is on a measured road to recover. This is in large part due to the recognition that COVID-19 has created the necessity to address lingering industry challenges such as technology, staffing, building design and innovative new operating models.
The short-term prospects going into the second half of 2021 are cautiously optimistic as owners and operators fine-tune their development, management and marketing/sales platforms. Let’s be clear, this is not a cakewalk and tough decisions at all levels are being made to create more appropriate environments for residents in light of safety and health related concerns.
So, for the remainder of 2021, investors and developers will be rewarded through close alignments with their operating teams driven by customer satisfaction, motive, profitability, and the significance of enterprise value that will drive improved results. Many unknowns exist including the cost and availability of capital along with the all-important timing of vaccine distribution. More so than ever, industry practitioners will need to stay laser-focused on sharpening their business models and remain flexible to innovative approaches to regaining profitability.
The industry is slowly turning the corner even though an elongated occupancy recovery is possible. In the longer term, the industry’s prospects are indeed promising. While demographics are on our side, statistics alone will not be sufficient. Relying on the best-caliber operating partners or internal capabilities is essential. Given the massive dysfunctions caused by the pandemic, the time has come to invest in the industry’s infrastructure, especially value-add technologies and operating philosophies that embrace resident health and wellness in balance with profitability.
Is the industry bouncing back from the pandemic more quickly than anticipated?
Gamzon: The good news is there was no time wasted in formulating an industrywide effort to secure federal funding and supplies. There was a general unity of purpose between many industry participants. Given the monumental health and economic circumstances, the overall industry’s response to the pandemic has been mostly positive. Due to early action by many owners and management entities—and the infusion of much-needed capital by investors—it appears that the worst is hopefully behind us. However, the dramatic decline in overall occupancy rates in all asset categories will take time to remedy.
After more than a year of industry struggles, there does appear to be light at the end of the tunnel. But there will be an increasing number of owner/operator casualties over the coming 12-18 months. Unfortunately, over the past year, property valuations industrywide have declined by at least 5 percent to 10 percent, if not more in some cases. Under-capitalized sponsors with marginal operating partners are paying the price as the industry is left with the “haves and the have nots.” In the rubble, there will be opportunity!
So to summarize, it appears that through diligent efforts that support the best interests of residents, the pace at which the industry recovers is a reflection of how we create well-capitalized new business models that represent the framework for a new generation of industry offerings. We recovered from the Great Recession and became the highest-performing real estate asset class for several years to follow. This time, while the circumstances are compounded by catastrophic health issues, pent-up demand and solid industry fundamentals will also prevail. It is just going to take some time.
How has the pandemic changed operations in the senior housing sector? What will these changes mean to investors?
Gamzon: Dramatic changes to senior housing operating platforms are evolving throughout the industry. The sector will emerge from this industrywide reset safer and financially stronger than prior to the pandemic. Owners and investors are recalibrating their business models to meet the changing consumer value-proposition for more health-care and preventative wellness models within seniors communities.
As a result of the pandemic, to prosper in the future, the industry will need to become more of an integral part of the nation’s health-care delivery ecosystem. It’s a logical fit as health-care providers are dealing with many similar issues compounded by government regulations and funding constraints. We need the health care industry’s expertise and infrastructure while the health care community seeks added sources of revenue and the lowest cost for service-enriched housing solutions to accommodate their senior patients. It’s a win-win solution and is becoming a priority for both sectors.
For the senior housing investor, strategic alliances with health care providers can be extremely rewarding on a number of fronts. Some of the operating costs for on-site health care staff at a seniors community can be mitigated by shifting the cost burden to health care-providers. Furthermore, the credibility of an established health-care strategic partner can be invaluable coupled with the possibility of securing valuable real estate owned by health-care entities for new developments.
What role is technology playing?
Gamzon: The pandemic has inspired the acceleration of innovative technology solutions that reinforce the resident experience while enhancing the need to reduce operating costs. Without question, technology solutions are at the forefront of industry thinking. While this was not the case several years ago, there is a necessity now to ramp up the integration of technologies such as telehealth, resident monitoring, wellness checks, virtual tours and other resident-focused platforms, along with sophisticated sales and marketing tech solutions.
On the operating cost side, there is no greater industry challenge than the cost and availability of staffing. New technologies are emerging to mitigate some of the burden. For example, the KARE digital platform—the first employment marketplace dedicated to connecting care workers with senior communities—has taken off.
A recent nationwide industry survey revealed that 87 percent of respondents said they expect to increase technology budgets in 2021. This trend will accelerate going forward as it is clear that health preparedness and technology will be essential elements to renewed industry success.
What would you say to real estate investors who are considering this sector?
Gamzon: The pandemic has forced innovation that will spur the repositioning of existing assets and new development models that will evolve over time. Controlling costs at all levels while enhancing the resident experience is essential. From the design-build process through operations and marketing, value-add platforms will prevail. More cost-efficient buildings are being designed with the focus on health security and safety protocols including safe indoor/outdoor common areas, upgraded HVAC systems and wellness-focused environments.
In terms of industry investment opportunities, the residual effects of the pandemic over time are encouraging. This is particularly relevant for commercial, multifamily and hotel investors who are exploring alternative investment strategies.
For well-capitalized investors who can act quickly, this is prime time to consider the acquisition of underperforming seniors housing assets, portfolios and loan purchases. Undercapitalized and/or unsophisticated senior housing owners and operators have been compromised by the pandemic impacts and acquisition opportunities will intensify as we progress through 2021 and for at least the next few years.
With new development slowed during the pandemic, supply and demand dynamics in most markets are more in equilibrium than prior to the pandemic. Accordingly, this is a good time to target asset valuations below replacement costs while impatient capital that does not want to ride out the storm is heading for the exit door.
Beyond a burgeoning acquisition market and given the timely realities of the new development cycle, one should consider ventures throughout the senior housing product spectrum. In particular, active adult development is a prime candidate for the multifamily and/or hospitality investor/developer. There is limited or no existing health-care infrastructure, and the focus is on wellness, fitness and preventative health maintenance. The Baby Boom generation is prime for this product type especially when combined with on-site lifestyle amenities.
Beyond active adult development opportunities, investors will have a broad range of options in the areas of mixed-use ventures (both urban and suburban) that include senior housing; middle-market projects; high barrier to entry developments; strategic alliances with health-care providers and not-for-profit entities; and even condominium or co-op formats in select higher-end markets.
As I mentioned earlier, the longer-term value proposition for the industry is favorable. However, in the near term it all comes down to the resurgence of the national economy hopefully later this year; reinvigorating consumer confidence in the sector; capital markets underwriting criteria and the availability of investable and targeted funds; and most importantly, the investor’s discipline to insist on operational excellence.