Seniors Housing Demand Will Soon Be At Its Highest Point Ever

There is no question the pandemic hit seniors housing hard. In some cases, facilities had to manage COVID-19 outbreaks that put patients and staff at risk.

In 2020, stabilized occupancy rates closed Q4 at 82.9% in primary markets and 83.2% in secondary markets, according to the fourth annual Seniors Housing Investor Survey and Outlook from the JLL Valuation Advisory. Those were unprecedented lows, according to JLL. The additional operating expenses from COVID came in at between $1,420 per unit for independent living and $3,320 for nursing care.

Things are improving with vaccination rates at an estimated 91% among seniors housing and care residents and 65% among staff, according to the National Investment Center for the Seniors Housing & Care Industry.

Despite 2020’s troubles, the Seniors Housing Investor Survey and Outlook shows a sector on the verge of growth due to strong long-term demand from an aging baby boomer population within 10 years of occupancy.

In fact, the JLL Valuation Advisory says demand will soon be at its highest point ever. Helping magnify that demand will be supply shortages as construction delays from the pandemic hindered starts. As a percentage of existing supply, units under construction dropped from peak levels of 7.0% in Q4 2019 to 4.7% in Q1 2021.

JLL says the need to serve the middle-income population will increase, resulting from the global impact of COVID-19.

“Investors remain bullish on seniors housing and care investments,” said JLL Managing Director Zach Bowyer, MAI, head of Alternatives Asset Sectors, Valuation Advisory. “We anticipate market fundamentals to steadily improve and the market to re-stabilize between two and four years, depending on the location.”

Before the pandemic, in 2019, the seniors housing sector had one of its strongest years for transactions. While 2020 was poised to be a promising year, the pandemic disrupted that. During the year, volume fell 48 percent year-over-year to $9.2 billion. Senior housing assets fell nearly 46% to $6.5 billion in 2020, while nursing care volume was down 35% to $3.5 billion.

However, 53% of respondents told JLL they plan to increase their exposure to the sector this year. In Q1 2021, things did improve, with volume increasing $2.4 billion, which was a nearly 31% year-over-year increase. While private capital investment increased in 2020 to 61% of purchases, it fell to 47% in Q1 2020.

The pandemic did push valuations to an eight-year low in 2020. The average price per unit fell 16% year-over-year to $141,800. After reaching an all-time low of 5.9% in 2019, average cap rates for seniors housing transactions increased year-over-year by 50 basis points to 6.5%. However, the average price per bed for nursing homes increased by nearly 20% to $88,600 in 2020 after four straight years of decline. That is the second-highest price point on record.

While seniors housing faced significant issues in 2020, distressed sales haven’t materialized. Distressed sales peaked in Q3 2020 at 2.1% of total volume, but seniors housing represented only 1.2% of distressed loans for all commercial real estate as of Q1 2021, according to JLL. Still, 21% of respondents tell JLL they expect to see a decline in property valuations and an increase in loan delinquencies throughout 2021.

The types of seniors housing of interest are also evolving, with more traditional and need-driven segments drawing attention. Thirty-seven percent of respondents said assisted living was their most sought-after investment opportunity in 2021.

Capital is still plentiful for seniors housing. JLL says the seniors housing and care sector is experiencing a significant increase in the percentage of private capital placement.

Some groups are looking for creative ways to fill the seniors housing supply shortfall. Eleven percent of the 187 hotel or motel conversions that members of the National Association of Realtors reported were for senior housing or assisted living.. Still that trailed the 60% were for multifamily housing, workforce housing, housing for veterans or housing for health care workers, according to a NAR report.