As the nation emerges from the COVID-19 pandemic and returns to a more normal business environment, the senior-housing market is poised to face some of its strongest demand ever. This property sector’s long-term demand is robust, fueled in large part by the baby-boomer generation, which represents approximately 22% of the U.S. population.
This large generation — estimated to number about 73 million people — is described as those born between 1946 and 1964. Many will soon be moving into senior-living facilities. As a result, there is a need for more construction and investment in the sector to ensure the availability of affordable housing and care for this imminent demand.
This need for growth will result in an increasing number of deals and a push for financing in the senior-housing sector. While there is expected to be a move toward consolidation, this nationwide surge in new construction is a reason why the senior-housing sector is one for commercial mortgage professionals to watch in the coming years.
The need for senior housing is primarily driven by the population of seniors age 80 and older, with the typical resident age of 84. Many baby boomers are approaching this demographic marker and are adding strain to a market that is already experiencing increasing demand across all industry segments, price points and socioeconomic levels.
According to JLL’s Q1 2022 Seniors Housing and Care Investor Survey and Trends Outlook, a construction slowdown during the pandemic resulted in a decline in senior-housing inventory growth across primary and secondary markets near the end of 2020 and throughout much of 2021. There is an assumption that the reduced capture rate (the share of qualified people in the market that must become senior-housing residents to achieve a stabilized occupancy rate) realized during the second and third quarters of 2020 will hold over the long term.
Even when this is combined with the slower pace of construction, however, JLL projects that the senior-housing sector will be undersupplied by 600,000 units in 2045. This suggests that supply growth would need to increase by more than 25,000 units per year to meet peak demand levels. This also highlights the magnitude of demographic tailwinds.
Senior-housing occupancy rates dipped during the early stages of the pandemic but have been recovering since the second half of 2021. Of note, senior housing has not experienced a downturn in average asking rents during the pandemic.
While the pace of senior-housing rent growth slowed, it still remained positive. The annualized rent-growth rate for both primary and secondary markets from 2017 through 2019 generally ranged from 2.5% to 3.5%. The pandemic slowed the rent-growth rate to a low point of 1.6% in first-quarter 2021 before it rebounded to an increase of 2.5% in fourth-quarter 2021.
Other metrics for senior-housing valuations also have shown major improvements, including the price per bed for nursing homes. Following four consecutive years of declines, the average price per bed increased by nearly 22% year over year in Q1 2021, marking the second-highest price point ever recorded by JLL for nursing-home units.
With operators focused on understanding the ramifications of COVID-19, they now face the opportunity to rebuild occupancy levels. The process of getting back to more normalized market capture rates, however, depends upon an operator’s ability to address concerns that surfaced during the pandemic. Absorption rates are expected to be market and region specific. The industry also is adjusting to the new normal of a post-pandemic world, including:
• Continuing to apply enhanced safety protocols to meet growing consumer expectations.
• Addressing environmental factors such as lighting, temperature, density and sound.
• Incorporating social factors to promote resident engagement and interaction.
• Considering psychological factors such as sense of space, access and belonging.
Senior housing has tended to be a strong asset class, even during the real estate downturn and recession of the late 2000s. At the end of 2021, the average price for a senior-housing unit was up about 9% compared to the start of the year. This $160,000 figure was still below the pre-pandemic peak of about $180,000 per unit, but it’s a sign of the sector’s resilience.
Senior-housing investors are bullish on this asset class despite the operational challenges and changes that COVID-19 created. While the players have shifted during the pandemic due to a large influx of new investors, veteran operators remain. Private equity firms and real estate investment trusts currently serve as the primary senior-housing investors.
The long-term outlook for senior housing is strong. A wave of immense demand is expected to develop during the next decade and supply will struggle to keep pace. The industry is likely to go through a consolidation phase in the near term, which will alienate smaller investors and push deals to larger institutions. Operators that have weathered the health crisis are stronger and more efficient as a result, and there is plenty of liquidity in the market.
Labor and staffing shortages are not going away anytime soon and will continue to cause increased strain on senior-housing facilities. The industry also is facing unprecedented financial pressures due to rapidly rising material and labor prices.
As the industry continues to stabilize in the post-pandemic world, new investors will return to the market in a big way. They have reengaged new development opportunities after pausing for much of 2020 and 2021, thus affirming the mindset of investor belief in this demographic wave over the next decade. The new resident profile, however, is prompting investors to be disciplined when buying older assets that may not meet the expectations of today’s seniors.
An increase is anticipated for short-term investment returns as occupancy and rent growth rebound. Long-term returns will remain intact. And new development projects will increase over time in response to the growing demand, even though the cost of construction is likely to influence the decision-making process of investors when creating new supply. Less-affluent and middle markets do not currently support the cost of construction and the search for middle-market affordability remains unsolved. All in all, commercial mortgage brokers and lenders should expect this sector to be extremely active for the remainder of this year. ●