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Senior Housing Demand Continues To Outpace New Supply

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The senior housing market appears set for a steady and ongoing recovery, with occupancy levels in 2024 expected to meet or exceed pre-pandemic levels, provided no unforeseen difficulties occur.

That is the conclusion of an analysis of 3Q 2023 data by the National Investment Center for Seniors Housing and Care (NIC).

Senior housing occupied stock is now 2.6% or 15,026 units above the pre-pandemic 1Q 2020 level, NIC found. Demand continued to outpace new supply for the ninth consecutive quarter. In primary markets, net absorption rose 1.3%, or 7,583 units, from the previous quarter and 4.3%, or 24,627 units, over the prior year. The stock of senior housing in these markets rose 0.4% from 2Q 2023, and 1.3% above the prior year, NIC stated.

However, construction remained below pre-pandemic levels, and the 11,133 units under construction in the year ended 3Q 2023 amounted to less than half the starts reported during all of 2019. A new measure of senior housing, the Absorption-to-Inventory Velocity ratio, stood at 28:10 for primary markets, which implies that for every 10 newly added units, 28 were absorbed. This indicates that the senior housing market has been able to absorb a significantly higher number of units than were added during the third quarter of 2023.

The senior housing all-occupancy rate rose to 84.4% in 3Q 2023. It remained below the 87.1% rate of 1Q 2020. However, it is expected to reach or exceed that level in 2024, NIC predicted. Risks remain in the form of economic uncertainty and the possibility of a future threat to public health.

However, current capital market conditions and the resulting lending environment, today’s relatively limited construction pipeline, and elongated delivery times of new projects suggest that supply growth is manageable and is not expected to outpace demand through 2024, the report noted.

It also pointed to differences in the all-occupancy rate between independent and assisted living facilities in primary markets. It stood at 86% for majority independent living properties, a 0.7% increase from 2Q 2023. For assisted living, it stood at 82.6%, up 0.9%. Though occupancy for both was above pandemic lows, in neither case did it reach pre-pandemic 1Q 2020 levels.

In secondary markets, though, the occupancy rate for majority assisted living facilities reached 84.3%, slightly above its 1Q 2020 level of 84.2%, indicating a full recovery explained by limited inventory growth and restrained supply pipelines. The one good thing that did emerge from the pandemic, NIC commented, is increased recognition of the value proposition that senior housing offers. It also highlighted the resilience and adaptability of senior housing operators.

 

Source: GlobeSt.

Investors Sizing Up Seniors Housing’s Impending ‘Bull Run’

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Large investors are making a macro call that time is right to enter the seniors market after being on the sidelines even before the pandemic, according to Ted Flagg, Senior Managing Director for JLL Capital Markets, speaking to GlobeSt.

“Finite life investment vehicles that put planned sales on hold with the pandemic are now testing the market with marketing processes,” Flagg said. “There is a widely held view that we are in early days of a bull run in seniors housing (e.g., double-digit annual NOI growth over the medium term) – the question is not ‘if’ there will be outsized growth but rather debate around the timing of that recovery.”

A New Initiative

One sign this timing is getting closer comes from an announcement last week from Monarch Alternative Capital, an investment firm with approximately $9 billion of assets under management, and American House Senior Living Communities, a national leader in the senior housing industry, that they were forming a joint venture to acquire, develop, and manage senior housing properties across the US.

Monarch and American House launched the partnership through the recapitalization of six properties partially owned by American House and one property acquisition from a third party. The newly formed joint venture has the capital, sourcing capabilities, and operating expertise to capitalize on the severe disruption in the senior housing industry caused by COVID-19 and the anticipated supply-demand imbalance resulting from construction and demographic trends.

The seven-property portfolio totals 1,047 units, comprising 525 independent living units, 356 assisted living units, and 166 memory care units concentrated within Florida, Michigan, and Ohio, with an average age of approximately five years.

Monarch believes that the senior housing industry is at an inflection point given the trends of a growing elderly population against the backdrop of a significant slowdown in construction activity of new properties. The joint venture expects to opportunistically invest in additional properties in the near-term.

Distressed Buyers Not Seeing Distressed Prices

Some are seeking distressed assets and looking to strike a bargain on those communities that are available.

“Distressed buyers have been mostly disappointed with the lack of truly distressed pricing,” Flagg said. “Buyers believe pricing was irrationally high in 2018-2019, leading up to the pandemic; now there are more opportunities for reasonable risk-adjusted returns even if not deeply opportunistic. Active-adult (age-restricted housing) is showing the most liquidity today as it catches the tailwind of white-hot traditional multifamily cap rate compression.”

This ‘Arrow is Pointing Up’

Kevin Kinigstein, lead partner of Cox Castle & Nicholson’s senior housing practice group, tells GlobeSt that he thinks seniors housing is a great asset class to invest in.

“The pandemic was particularly difficult on the seniors housing industry, but I believe the arrow is pointing up,” Kinigstein said. “The impact on the seniors housing industry lasted well into 2021 (and is still being felt in many ways). However, while the short term has been challenged, the medium- and long-term outlook remains strong.”

Waiting Out A ‘Challenging’ Period

“This is a sector that has strong medium- and long-term fundamentals, and there’s a recognition that many of those fundamentals remain constant,” Kinigstein said. “While there is no doubt that the industry has taken a hit and there are some improved buying opportunities as a result, a majority of the most active investors in the sector are experienced seniors housing investors who have waited out a very challenged period (as distinguished from inexperienced but opportunistic investors who think the industry has bottomed out). I believe the majority of transactions that will be completed over the next six to 12 months will be by investors who were already invested in (or interested in investing in) the sector pre-pandemic.”

 

Source: GlobeSt.