Nearly a quarter of the way through 2018, early predictions are holding true that this should be a strong year for the senior housing industry, even as it grapples with changing economic and demographic factors.
The senior housing sector spans active adult and independent living communities to assisted living, skilled nursing and memory care facilities.
Changes in U.S. tax law, set to greatly reduce the advantages to homeownership, are seen as one boon to the senior housing. Homeownership among those 75 years and older has fallen for four straight years, from a peak of 80% in 2013 to 76.8% at the end of 2017, according to Marcus & Millichap’s National Report: Seniors Housing Research (first half of 2018).
And the trend of senior homeowners opting to sell their single-family homes and instead move to senior communities is expected to only gain speed as baby boomers age. Construction in senior housing has been strong, particularly in the assisted living space, and there’s no sign of weakening demand. As noted by Scott Stewart of Capitol Seniors Housing in National Real Estate Investor’s August 2017 Research Series entry More Growth Ahead for Senior Housing, “…we are looking at the tip of the iceberg in terms of boomers hitting retirement age” so any worry about overbuilding is misplaced “because there just aren’t enough places for everybody today.”
Whether new construction or redevelopment of aging facilities, the building boom is enabling owners to address the varying needs and desires of residents. The younger retiree demographic has decidedly different ideas about what constitutes an important amenity. Among their “must-haves” are variable dining options, infrastructure supporting their use of consumer electronics and smaller living spaces with shared common areas.
A new, increased buyer pool is emerging in the wake of these changes and in the growing mainstream awareness of senior housing. In addition to REITs, private capital groups and owner-operators, the industry is seeing more crossover capital.
According to the Marcus & Millichap report: “Rising interest rates are compressing yield spreads across commercial real estate assets, but with initial returns in seniors housing historically 50 basis points to more than 200 basis points above other property classes, spreads will remain favorable amid a period of increased borrowing costs.” Buyer demand is up, drawing more investors who should be able enjoy a higher ROI by responding to potential residents’ preferences for value-add options.
Following is the outlook from the Marcus & Millichap report for various senior housing sectors:
INDEPENDENT LIVING FACILITIES
Demand for IL units remains intense, keeping occupancy above 90 percent again this year. As completions in the segment remain elevated this year, this could potentially place additional downward pressure on the overall stabilized occupancy rate, resulting in a decline again in 2018. Rent growth will continue to moderate as operators compete for tenants, and the average rent rises 1.7 percent to $3,158 per month.
ASSISTED LIVING FACILITIES
In 2018, the number of majority AL units underway remains above historical norms, though the figure is down approximately 5,000 units from the peak last year. Developers in the segment are preparing for an increase in demand as the baby boomer generation ages into their senior years. Downward pressure on the overall occupancy rate will persist and rent growth will continue to temper.
SKILLED NURSING FACILITIES
The skilled nursing segment is undergoing many changes, and healthcare reform specifically related to Medicare and Medicaid reimburse-ments is causing some facilities to shift focus from long-stay custodial-care residents to focus on short-term, post-acute care patients to improve profit margins. Occupancy in the segment will continue to decline this year, but the changing healthcare landscape will keep daily rates on the rise.
CONTINUING CARE RETIREMENT/LIFE PLAN COMMUNITIES
A balance between supply and demand in the CCRC/LPC segment will persist this year, keeping occupancy around 91 percent. Stable occupancy trends will facilitate another year of 3 percent growth in the average asking rent and entrance fees will continue an upward advance.