Can there be too much of a good thing in the investing industry? It’s possible, say respondents to the fifth annual National Real Estate Investor/ National Investment Center (NREI/NIC) Senior Housing Survey. The fundamentals are still steady for senior housing – occupancy rates and rents are continuing to increase – but the growing amount of new construction is creating some caution in senior housing investing.
“There are more concerns this year about construction and new supply and new competing properties than in prior survey years,” says Beth Burnham Mace, chief economist for NIC, in an interview with NREI’s Beth Mattson-Teig.
As the baby boom generation enters its retirement years, senior housing has become a profitable place for investors to go. The generation’s attractive level of disposable income and its preference for all things custom has led to new definitions in independent and assisted living facilities in particular, options that include open floor plans, modern décor, fitness centers, and coffee shops and pubs on site.
Invitations to the online survey were emailed to subscribers of NREI in May 2018. The research company Informa Engage received 140 completed and qualified surveys in response; surveys were only accepted if the respondent had an involvement in senior housing.
A majority of the respondents believe that occupancies and rents will both continue to increase over the next 12 months; 65 percent are optimistic about occupancy rates, and 76 percent are optimistic about rents. Those rates are nearly identical to the answers in the 2017 survey.
Amount of development causes caution in senior housing investing
But there is hesitation about the steady increases in senior housing development. In the second quarter, construction as a share of inventory was 6.3 percent, about 38,000 new units in the 31 largest metro areas. That’s a near record-high for senior housing overall. The rate is even higher for projects that have a majority of assisted living units, at 7.9 percent of inventory.
NIC data shows that occupancy rates are dropping slightly for senior housing properties. The rate averaged 87.9 percent overall in the second quarter, down 0.8 from 12 months earlier. The high was in the fourth quarter of 2014, at 90.2 percent; that’s 2.3 percentage points above today’s rate.
“I am cautious about the sector right now, because there are pockets of the country where there is more supply currently in the market than there is existing demand today, which is resulting in downward pressures on occupancy rates,” says Mace. Owners and managers are less able to raise rents when occupancy levels are flat or declining. Plus, new properties need workers, and labor costs are rising in many metro markets due to worker shortages. “So, there is a cascading sequence of events,” she adds.
Competing facilities has been a concern in past surveys, but is higher this year. In 2018, 69 percent of respondents said they are concerned about new facilities. That’s 10 percentage points higher than the 59 percent in 2017, and more than 20 percentage points higher than the 47 percent of respondents who felt this way in 2014.
Owners expect even more supply in the future
Nearly half the survey respondents (48 percent) believe there will be an increase in senior housing construction again next year. But investors still believe in the strength of the sector due to the changing demographics of retirement-age people and the existence of so many submarkets and micro-markets that are underserved. The demand for upscale facilities is still on the upswing.
“With respect to development opportunities specifically, what we really see in the market right now is a flight to quality,” said Steve Blazejewski, senior portfolio manager for seniors housing at Newark, N.J.-based PGIM Real Estate. His company is focusing on properties with modern amenities, favoring them over buildings constructed 18 to 20 years ago or even longer.
One factor affecting respondents’ optimism about the future is the fact that about half the current growth is concentrated in only a handful of major markets. Chicago, for instance, saw 1,900 new units come online in the last 12 months, and its occupancy rate fell to 84.8 percent. But that’s the exception rather than the rule.
Investors plan to stay the course
Of the survey respondents who have senior housing in their portfolios, about half (48.2 percent) plan to keep their holdings, about a third (30.6 percent) plan to acquire more, and about a fifth (21.2 percent) say they may sell. And most believe that the senior housing sector is the most promising property type right now; they gave it an average score of 7.2 out of 10 (industrial followed at 6.9, and then apartments at 6.5.)
Regarding cap rates, 58 percent of respondents expect cap rates to increase over the next 12 months, while 22 percent of respondents said cap rates will stay the same, and 19 percent believe cap rates could decline further.
“Seniors housing is being looked at by some investors as more of a core investment opportunity,” Mace says. “They look at the fundamentals and demographics and think that they can’t go wrong because of the aging of the population.”