Following the 2008 recession, senior housing was one of the top-performing asset types, establishing itself as a compelling opportunity for investors.
But over the last 18 months investing in senior housing has been a challenging proposition as operational risks, caused primarily by the COVID-19 pandemic, have been magnified. This comes after years of consistent growth following the Great Recession.
Senior housing, specifically assisted living and memory care communities, has borne the brunt of the pandemic, with all types of senior facilities suffering financially due to lost occupancy as well as the occurrence of unexpected expenses for personal protective equipment and hero pay for staff members.
While near-term risks remain, there is optimism for the long term as we look at trends in supply along with demographics.
According to the National Investment Centers for Seniors Housing & Care, since March of 2020, occupancy in assisted living has fallen from a high of 85.1 percent. The decrease in AL occupancy was driven by three factors. One was pandemic-related deaths since AL residents were the most vulnerable to contract COVID-19.
Another was reduced demand, as prospective residents and their families delayed their decision to move in due to pandemic-related restrictions in the communities and fear of infection. New supply, which started prior to the onset of the pandemic, was added to the market (9,637 units according to the NIC) making it more challenging for existing facilities to fill empty beds. In addition to labor shortages, inflation has increased the costs of operating these communities.
As we near the end of third quarter 2021, we’ve seen several positive developments. The continued roll out and success of the vaccine as well the return to near “normal” operations at senior communities has resulted in increased demand from residents and families. As of the end August 2021, while occupancy essentially remained flat from the first quarter of 2021, we are beginning to see increases in absorption. Continued reductions in COVID-related deaths should result in further positive net absorption going forward.
Looking towards the long term, a number of trends should help offset any near-term challenges and create further upside to investors and owners of AL communities.
The Supply Side
First, capitalizing development projects, especially senior housing projects, during the pandemic has been challenging due to the impact of the pandemic and the near term risks described above. According to CBRE’s Q2 Senior Housing Market Insight report, COVID-19 continues to take a toll on the construction activity in the senior housing space.
New construction starts declined further during Q1 2021, making it the fourth consecutive quarter of muted new construction activity. Under-construction units as a percentage of current inventories were at the lowest levels in the last five years across all segments. Significant dip in occupancy, pullback from construction financing lenders, and the skyrocketing material costs were among the major reasons impacting the construction activity.
The lack of new inventory should help drive occupancy and revenue in the future for existing facilities, giving those already operating in the industry some positive traction moving forward.
Second, in order to make it through in the near term, operational changes will need to be implemented to address labor shortages and increased operating costs. These operational efficiencies should be sticky and will help improve operating margins and profitability once the labor market and cost of goods stabilize. Third, as has been anticipated for many years, the oldest Baby Boomers are 75 years old today, which is the lower end of the age range (74-84) at which many seniors transition into assisted living.
While the pandemic created some serious challenges, the outlook for the senior housing sector is stout. Increasing demand for senior housing is forecasted as the 85-plus population is expected to grow 177 percent to 18.5 million by 2050. The growing demographic demand and constrained new supply should help the senior housing sector to rebound nicely, offering significant value-creation opportunities for investors moving forward.