Seniors Housing Continues on the Road to Recovery

COVID preventative measures and case counts are important factors that continued to drive the short-term demand and supply in the senior housing sector, according to Moody’s Analytics’ Q3 2021 National Seniors Housing Quarterly View.

It’s “happy to pronounce that the market recovery has been sustained and is accelerating” spurred by the solid 130 bps vacancy decline, which marked the highest quarterly drop in nearly a decade.

At the same time, the sector is adapting to the grim realities of the pandemic.  According to the Centers for Medicare and Medicaid Service, the report stated, more than 86% of the nursing home residents and over 73% of staff are fully vaccinated nationwide. Confirmed Covid cases and deaths in Q3 2021 were higher than Q2 due to the surge of Delta variant, but the magnitude was nowhere near the peak of the previous waves. 

But while momentum is building on the demand side, the labor shortage and high material costs are starting to weigh on the inventory growth, which puts downward pressure on vacancy rates. Personal Protective Equipment and staffing shortages continue to be an ongoing challenge for the sector.

Buyers Finding ‘Newfound Confidence’

Despite these challenges, observers are bullish about the sector. Kevin S. Kinigstein, lead partner of Cox, Castle & Nicholson’s seniors housing practice group, notes that “buyers seem to be entering the market with newfound confidence, and I don’t anticipate development slowing down either. The combination of these two factors should, in my opinion, lead to a very active year in transactional seniors housing,” he tells GlobeSt.com. 

The demographics are in senior housing’s favor as well, according to Mark Cotsakis, senior executive VP, Housing Finance at Wells Fargo, who spoke at NIC’s fall conference. “We are finally almost at the front end of the 80-plus demographic surge, something the industry has been anticipating for 20 years. That’s huge. We’re seeing rent growth. With the stock market at an all-time high and the appreciation in housing prices, rent growth is being accepted.”

Cotsakis said that Social Security beneficiaries will get a 5.9% increase in their monthly checks in 2022.

“With wage and staff pressures, adult children are aware that they are going to have to pay more to provide good care for their parents,” he said. “We’ve heard of 5% to 10% rent increases across the board. The quality of the product and service in the industry is much more consistent and appealing than it was 20 to 30 years ago. New infill locations will be a good opportunity. The challenges are wage inflation, COVID-related expenses, and the occupancy recovery. There will be moderate term rent concessions for those properties with lower occupancy. For buildings at 70% to 80% occupancy, front-loaded concessions might be limited to the elimination of the community fee, or to the third month rent free.”

Occupancies will continue to rise in the long-term despite the temporary blip in occupancy caused by Covid-19, Rich Lerner, co-president FHA at NewPoint Real Estate Capital, tells GlobeSt.com. “Any forthcoming impacts of the Omicron variant will be temporary, and we should see a tailwind of occupancy driven by demographics.”

“Occupancy rates will inevitably increase given US population data and vacancy rates will decrease with the Baby Boomer generation shifting toward the resident age demographic. We expect that staffing demands will prove a much more significant challenge than occupancy in the near future,” he also says.

National Vacancy Rate Snaps 7-Quarter Slump

Moody’s wrote that the seniors housing sector’s combined national vacancy rate trended down 10 bps for the first time after seven quarters of continuous increase. 

While there is still a way to go, the substantial movement down to a 15.6% vacancy rate indicates another step closer to the senior housing sector’s pre-crisis level. Independent living, memory care, assisted living, and skilled nursing facilities all recorded vacancy declines in the third quarter, ranging from 120 to 150 basis points. 

In Q2, independent living facilities recorded the most vacancy drop and continued to lead the recovery with another 150 bps of vacancy decline in the third quarter. Its 14.4% vacancy rate marked the lowest level amongst all four segments. 

Skilled nursing facilities rank the second-lowest following independent living facilities with a 15.3% vacancy rate. It was the only segment with a flat vacancy rate curve last quarter, and finally reached an overdue inflection point in Q3. 

Its 120-bps vacancy decline put it back on par with the rest. Assisted living facilities continued to recover steadily, with the vacancy rate declining by 130 bps to 16.9%. Since the onset of the pandemic in Q1 2020, memory care facilities have been hit the hardest by the challenges presented by COVID-19. The vacancy rate increased by 900 bps for a year but has since come down this year from its peak of 20.1% in Q1 to 18.7% in Q3. 

Rent Growth Relatively Mild, Still Impressive

Rent growth in Q3 ranges from 0.3% to 0.4% across all four segments. The quarter-over-quarter (QoQ) growth rates were stronger than the same period last year and the year before, but remained relatively mild compared to Q1, as most surveyed senior housing properties have their rent changes scheduled at the beginning of the year. Year-over-year (YoY) data suggests the rent growth accelerating in Q3 2021 across all four care types. 

Assisted living sector, with YoY growth rate edging up 30 basis points from 1.6% in Q2 to 1.9% in Q3, remained the segment with the fastest rent growth. Independent living facilities, also with a 30bps uptick in rent growth, are already back to their YoY rent growth level in Q1 2020. Memory care and skilled nursing facilities both recorded 1.4% YoY rent growth in the third quarter. 

Net Absorption Extends Positive Trend

Net absorption extended its positive trend established in Q2, with 22,000 units recorded nationwide in the third quarter. That’s the highest level in our nearly 10-year tracking history and close to a 300% increase compared to Q2. 

All four segments have strong demand momentum backed by a record-level net absorption rate. Skilled nursing facilities’ net absorption turned positive for the first time since Q1 2020, with over 7,300 units.

Memory care facilities’ net absorption increased five-fold, from close to 200 to over 1,000 units. Net absorption of Assisted Living and Independent living facilities were over 5,400 and 8,200 units respectively, the equivalent of a QoQ increase of 124% and 174%! Meanwhile, new construction reached its lowest level since 2014. In Q3 2021, about 2,000 senior housing units came online in the US. This is less than half of the number delivered in Q2 2021. Inventory growth tanked to 0.12%, 14 bps lower than the last quarter and 73 bps below its peak of 0.85% in Q1 2019. 

Of the total, 55% of the new inventory was constructed as independent care facilities, 34% were assisted living facilities, and 11% were memory care facilities. The shrinking construction pipeline is a direct result of increased investor caution around senior housing due to weakness in sector fundamentals, labor shortage, and supply chain disruptions.