Seniors Housing Construction 'Grinds to Nearly a Complete Stop'

The seniors housing construction starts “are grinding to nearly a complete stop,” Charles Bissell, Managing Director, JLL Capital Markets, tells GlobeSt.com. Yet at the same time, “demand is on the precipice of a 20+ year spike due to the aging of the baby boomer generation.”

For Q3 of 2022, NIC MAP Data Service reports construction starts for seniors housing in the markets tracked by NIC were only 2,412 units, down from as high as 12,000+ units in Q4 of 2017.

Starts have declined in each of the most-recent three quarters – a trend Bissell said is expected to continue for the fourth quarter, and on into 2023.

He said factors impacting the steep decline in starts are:

• Increases in construction starts have made it harder to find deals that will pencil;
• A difficult lending environment – making it hard to finance new construction; and
• A pullback by equity providers.

But ‘Now Is the Optimal Time’ to Build

Nonetheless, Bissell said this environment of “very low construction starts” means that deliveries of new units over the next 36 months will be very low.

“At the same time, demand is spiking,” he said. “The oldest baby boomers will be 77 in 2023 and will start turning 80 in 2026. Over the next five years, ESRI forecasts the 75+ population will grow by 18% and will double by 2045.

“There are developers and operators who believe that now is the optimal time to begin new projects.

“They believe that projects that can move forward will deliver in an environment where there are higher occupancy levels, little new competition, and strong demand. But convincing capital sources to deploy capital in the current environment is extremely challenging, so we expect only a trickle of new projects will break ground over the coming year.”

Developers and investors who buck the trend and proceed with new developments are likely to be highly rewarded for their foresight and vision a few years down the road.

Seniors’ Inability to Sell Homes a Negative

NIC MAP Vision Primary and Secondary market report pointed to additional factors that are slowing today’s construction. When aging adults are unable to sell their homes demand in seniors housing move-ins takes a hit, it said, and existing home sales fell in September for the eighth month in a row due in large part to higher mortgage rates.

It was one of a multitude of variables that contributed to a slow third quarter for the seniors housing construction market, according to the NIC MAP Vision Primary and Secondary market report.

The Federal Reserve has raised interest rates 300 basis points over eight months in 2022. A similar climb took more than four years from 2015 to 2019. “It’s a shock to the market,” Kyle Gardner, COO at NIC MAP Vision, said in prepared remarks. “The big takeaway is the speed of change.”

Rising construction costs are not helping. They are forecast to rise by 14.1% year-over-year, according to Coldwell Banker Richard Ellis (CBRE).

Transaction Volume at 2008 Level Lows

Transaction volume has not been as low since the “fallout of the 2008 recession,” according to the report. Q3 saw a 64% decline compared to the previous quarter.

Steve Jorgenson, CEO and president of Solterra Companies, tells GlobeSt.com that on the acquisition side, “stabilized assets are a really good option at this point in time. What investors can buy will be cheaper than what they can build for the time being. New development will likely increase in the second half of 2023 based on where construction costs and interest rates are in the near future.”

NIC MAP Vision reported that “all buyer types declined in the third quarter, but the steepest decline was among public and institutional investors and lower property valuations have occurred in virtually every market starting in spring,” NIC MAP Vision reported.

NIC MAP Vision said the construction slowdown is most prominent in higher-acuity settings.

“Majority nursing care has the lowest absolute level of construction activity, a trend established over the last several years,” according to the report. Majority assisted living properties had below-average starts for six of the last seven quarters, it added.