The senior housing market is finally turning around for investors, who had high hopes of surging rents and soaring occupancy levels prior to the pandemic. The pandemic significantly impacted senior communities with high death rates, resulting in elevated vacancy rates. However, occupancy rates at private-pay senior housing facilities have now returned to pre-pandemic levels. According to the Wall Street Journal, in the fourth quarter of 2023, the average occupancy rate was 85.1% in the 31 largest U.S. markets, as reported by the National Investment Center for Seniors Housing & Care. Despite still being 2 percentage points below the first quarter of 2020, this represents a significant increase from its pandemic low point of 77.8% in the first half of 2021. Meanwhile, rent increases have been outpacing inflation, with independent living averaging $4,126 a month in December, and more intensive assisted-living units averaging $6,422.
These improving trends are partially attributed to pent-up demand, particularly among seniors with the most acute healthcare needs. The Wall Street Journal article elaborates that senior citizens who had to postpone their plans for care during the pandemic are now urgently seeking housing.
“The seniors housing industry is well-positioned for growth due to the foundational factors of limited new supply and ongoing strong demand; however, the broader capital markets have become less appealing with the increasing cost of capital,” said Brian Chandler, MAI, CRE, FRICS, Partner Valuation Advisors’ National Practice Leader of Seniors Housing. “The Federal Reserve seems inclined to maintain a vigilant stance on inflation, which means that interest rates are likely to remain high. This sets the stage for what we expect will be increased headwinds in the investment real estate sector compared to the previous cycle. Given the robust demographic trends and limited supply, the seniors housing sector will offer an attractive investment environment for committed, long-term investors with strong operational relationships,” Chandler added.
Although there is a bright spot in the senior housing space for investors, there are a few persisting challenges. For instance, many senior-housing facilities are facing staffing shortages because of the tight labor market. High interest rates have hurt the value of senior-housing communities, mirroring the impact felt across other sectors like office buildings and apartments. Increased borrowing expenses within the debt-heavy industry translate to reduced prices that potential buyers are willing to pay.
However, these challenges in senior housing are likely to be less significant compared to the massive demographic shift approaching the sector. By 2030, Americans aged 65 and older are expected to make up around 21% of the U.S. population, a significant rise from the 15% recorded in 2016, according to the U.S. Census Bureau. This demographic surge, stemming from the baby-boom generation, will hit the market at a time of limited supply. Leading up to the pandemic, developers had overbuilt in anticipation of this demand, resulting in an excess of inventory. Yet, in recent years, this surplus has largely been absorbed as developers have scaled back on new projects. In 2023, only 10,000 new units were introduced, marking the lowest level since 2014, as reported by The Wall Street Journal.
The Partner Valuation Advisors Senior Housing Investor survey found the following trends and sentiment:
• The most preferred investor return for seniors housing was leveraged IRR followed by cash-on-cash returns.
• The top concerns of survey respondents were related to the availability of financing and increased interest rates.
• The consensus of respondents indicated that property values have declined due to the increased cost of capital and increased cap rates.
• Respondents indicated that the biggest investment opportunities in the seniors housing sector were related to active adult and assisted living communities.
While the senior housing market space presents a few challenges, it’s important for investors to understand emerging trends so they can adapt their strategies and capitalize on new opportunities. With occupancy rates nearing pre-pandemic levels and clear signs of pent-up demand, now could be an opportune time to consider adding senior housing to an investment portfolio.
