'Inflection Point' for Skilled Nursing Sector as Occupancy Climbs

An “inflection point” has been reached for the skilled nursing sector as occupancy slowly climbs from pandemic-era troughs, but analysts say the recovery timeline likely extends beyond next year.

According to NIC Map® Data Service, net absorption from April through June 2022 was positive for a fifth straight quarter at more than 30,000 beds over that span.

But “despite this positive momentum, the recovery is being constrained by a lingering uncertainty among prospective residents, with the health crisis still posing a potential threat,” the Marcus & Millichap analysts say. “Labor shortages are also making it difficult for some operators to replenish full occupancy, lacking the necessary staff to provide care.”

Nursing care employment is still around 15% below February 2020 numbers, and a significant share of workers left the sector. Skilled nursing operators may need to boost wages to restore that deficit but rent growth – which has hovered at 2.6% nationally this year – may make that difficult.

There are some bright spots, however: as baby boomers age into skilled nursing, demand will flourish and “investors able to withstand near-term obstacles could find potential upside,” analysts say. Nearly 69 million people are estimated to comprise the generation, and most are entering their 70s soon. That demand driver has also boosted growth in the senior housing sector, with average rent growth ticking up by 4.7% year over year in Q2, the quickest gain in a decade-plus.

The skilled nursing investment market also appears to be stabilized thanks to that longer-term robust outlook.

“Stabilized properties perceived as lower risk are favored, but investors are showing interest in assets with upside as well,” the Marcus & Millichap report notes. “A stronger transaction market helped lift the average sale price by 5 percent during the 12-month period ended at midyear, to $91,500 per bed. This was the fastest rise since 2017, when the average sale price peaked. The rise in prices is a positive sign, but the sector still faces headwinds, and higher interest rates will present additional hurdles.”