Labor, Other Rising Expenses Make Seniors Housing Development More Costly
Market rents have been below the level needed to support new development.
Higher labor and materials costs, operating deficit reserves and entitlement outlays are making seniors housing development more costly, according to a recent report from CBRE.
Daniel Lincoln, national practice leader of Seniors Housing & Healthcare for CBRE’s Valuation & Advisory Services, said in prepared remarks, “Due to a slow post-COVID recovery in occupancy, market rents have been below the level needed to support new development in many markets; a more balanced market could be on the horizon as many high-end communities are fully occupied and poised for rent increases.”
Not all centers are fully occupied, one small-business operator of five communities said he’s at 80% occupancy, not because there are no residents, but because he can’t fully staff his property.
The nursing shortage in particular is plaguing many operators nationwide. And with hospitals and hiring agencies poaching some full-time workers from independent communities – and offering to pay them more per hour for a four-day workweek – some operators can’t afford to compete for labor.
Above-Average Rent Growth Expected Next Year
Lincoln added, “Given the gap between average contract rent at seniors housing communities delivered between 2016 and 2021 and the rents required today to justify new development, we expect above-average rent growth for core assets in the majority of major U.S. markets in 2023.”
According to new research from CBRE, the average cost of a seniors housing development has increased by 17.8% since 2020 to $317,400 per unit or $333 per square foot.
Average returns (stabilized net operating income as a percentage of overall development costs) fell to 8.6% in the first half of 2022 compared with 9.6% in the first half of 2020, the report indicated.
CBRE said that the decrease is attributable to significantly higher input costs combined with a slightly slower market rent growth.
CBRE derived data from the valuations of 142 seniors housing developments scheduled for delivery. The properties in the data set include independent living, assisted living, and memory care communities.