The senior housing and nursing care sectors suffered tremendously during the pandemic with stabilized occupancy rates falling to record lows at the height of the crisis. In turn, investment volume dropped 43 percent on a year-over-year basis in fourth quarter 2020—its weakest transaction volume in eight years. The tide changed throughout 2021. Market fundaments made a 180-degree turn as stabilized occupancy rates rebounded, closing out the year at 82.2 percent in primary market locations and 83.7 percent in secondary markets. While not quite back to peak levels, this shift is a positive indication that the sector has endured the worst of the pandemic.
Senior housing rents have also improved. By the end of 2021, primary and secondary market rents were up 2.4 percent on an annual basis, as compared to the 1.6 percent increase recorded at the beginning of the year. Additionally, after two years of tapering, construction picked up last year as well, particularly in the Sun Belt areas, which is reflective of the 55-plus migration trends. In fact, eight of the top 10 markets for new construction are in the Sun Belt, led by Austin, Jacksonville, Memphis and Miami.
Strong market fundaments are bringing investors back to the sector. Investment activity bounded up 61 percent from first quarter, reaching levels last seen at the close of 2019. In addition, investment in nursing care facilities, which continue to be hindered by operational difficulties, saw a 24 percent increase on a year-over-year basis.
By fourth quarter 2021, senior housing prices were up to about $160,000 per unit, just shy of the pre-pandemic average of $180,000. Average capitalization rates remained stable at 6.4 percent, which is a 50-basis-point increase from the beginning of 2020.
According to a recent JLL investor poll, 86 percent of respondents indicated that the worst of the pandemic is over and expect fundamentals to continue to improve and capitalization rates to remain the same throughout the year. In addition, 76 percent of respondents indicated they intend to increase their exposure in the sector in 2022.
The Silver Tsunami
Demand for senior housing is primarily driven by a population aged 80 and older, with the typical resident between 83 and 84. As of 2020, there were 73 million Baby Boomers (born between 1946 and 1964) in the U.S., representing 22 percent of the overall population. By 2030, the oldest Baby Boomer will be 84 years old, so, by 2050, this aged population is expected to comprise 47.5 million people and account for 12 percent of the overall population.
The industry recently entered a new 10-year investment cycle just as this massive Baby Boomer population is beginning to plan to or consider a move into a retirement community. This influx of new residents entering seniors housing, dubbed “silver tsunami,” should create a supply shortage, which will, in turn, magnify demand. JLL projects that the sector will be undersupplied by 600,000 units by 2045, and, in order to meet peak demand levels, the supply growth must increase by more than 25,000 per year.
While the senior housing sector has traditionally withstood cyclical challenges, the pandemic was beyond the pale; however, strong quarterly improvements and increasing occupancies are quickly bringing the market back to pre-pandemic levels.
As investors continue to seek alternative commercial real estate assets for growth outside of the traditional sectors, senior housing investment is poised to flourish and has depth in every U.S. market.
For 2022, investor activity in senior housing is expected to continue at a pace higher than 2021 due to plenty of capital/liquidity in the market, REITs continuing to sell their secondary market product and more core funds entering the space. Additionally, capital for commercial real estate investment continues to accelerate to all-time highs, reaching $243.7 billion in February 2022.
Rising interest rates are concerning for some investors, though the relationship between benchmark yields or Fed rate-hike cycles and commercial real estate yields has historically been relatively weak. Strong fundamentals and the amount of available capital targeting U.S. commercial real estate, coupled with strong macro fundamentals, are driving prices in the current market. These factors offset against any upward pressure of cap rates driven by inflation and/or rising benchmark yields.
Despite the distress the market suffered during the pandemic, demand remains solid. Overall, long-term opportunities for investors are quite attractive, particularly for institutional capital looking to diversify their portfolios or hedge against oversold investment classes.
Managing Directors Brian Chandler, MAI, CRE, and Bryan Lockard, MRICS, are co-leads of the Seniors Housing Practice, JLL Valuation Advisory.