It’s been a challenging start to 2023 for many owners, operators, and lenders in the seniors housing market. However, based on what we’re seeing and hearing from companies and clients in the Seniors Housing space, we’re optimistic that better operating results await us in the latter half of the year.
From the Companies:
Brookdale Senior Living recently reported that May 2023 occupancy was up, and with the traditionally strong third quarter now underway, it is expected that occupancy would continue to increase throughout the summer months. Solstice Senior Living also recently announced that occupancy is nearing 90 percent and that margins are improving across its 32 communities.
Welltower announced that due to better operating results, they were able to raise guidance. They stated that for the fifth consecutive quarter, RevPOR (revenue per occupied room) outpaced ExpPOR (expense per occupied room), as agency labor at communities continues to fall.
One private equity firm provided a few updates from its portfolio, stating that occupancy continues to increase while expenses continue to decrease due to the reduction in agency utilization, similar to what Welltower is experiencing. The group went on to state that agency spend has been reduced by more than 60 percent since its peak in February 2022, all while increasing market rates with minimal pushback from residents.
Given the encouraging news from longtime leaders in the industry, Berkadia set out to understand what exactly was driving these better operating results.
Occupancy and profit margins are increasing for two main reasons:
- Occupancy continues to climb.
- The population of Americans over the age of 80 continues to grow. According to Morningstar, seniors housing utilization has already surpassed pre-pandemic levels, which is evidence of the desire of the 80+ population to utilize these communities.
- Further, occupancy has only recovered about half of its total loss dating back to the beginning of the pandemic. This is mainly attributable to the construction starts from 2017 to 2019 that came online during the pandemic and into 2021.
- NIC MAP reports that inventory growth is at its lowest point in nearly a decade as construction starts are significantly lower than pre-pandemic levels. Fewer projects are coming online due to three primary reasons:
- The current lending environment remains challenging for new developments and for anyone with variable rate debt. Many banks are hesitant to allocate new construction dollars as balance sheets are stressed due in part to debt service escalations and lease-up challenges. Many banks are currently taking a low-risk approach, and construction lending has always been considered a higher-risk financing position. Equity requirements and additional guaranties from borrowers have also been a major factor in the slowdown.
- Projects that opened during 2020 and 2021 are encountering lease-up challenges. Those developers and operators dealt with delays and limited move-ins along with new competition coming online. However, we are hearing and seeing that development pre-leasing and occupancy at newly opened communities are outperforming underwritten projections.
- Construction costs have remained historically high, from the cost of materials and labor to long lead times for certain building supplies. As new construction starts have begun to slow in many real estate asset classes, many groups anticipate these costs to trend down.
- Rent growth remains positive.
- Some of the largest owners of seniors housing have reported that their operating partners are receiving little pushback as they continue to increase market rents. With the recent Social Security cost of living increase, strong housing values, and strong returns in the equity markets, seniors have ample liquidity.
- With utilization increasing and supply slowing, operators can increase margins by passing through year-over-year base rate increases at rates ranging from five to 11 percent.
- Several operators that we spoke with have begun to explore new revenue sources through new care delivery models and partnerships. A few examples include partnerships with local healthcare providers, fitness/wellness centers, and pharmacies.
- New revenue and care delivery models are generating continued optimism in the sector.
We believe the seniors housing sector is well positioned to quickly bounce back once the debt markets normalize. New construction starts are significantly down, demand is growing by the day, and operations are stabilizing as we move farther from the COVID-19 era. Long-term demographics are very favorable for this sector, and the recent trend towards higher revenue and lower expenses give this space an optimistic outlook.
Download Berkadia’s U.S. Seniors Housing Commentary for Spring 2023 for a closer look at how prevailing demographics, debt and financing, labor and expenses, as well as current sales and marketing trends, are allowing savvy investors to navigate today’s market and find enduring success in the seniors housing sector.
– Dave Fasano, Managing Director – Seniors Housing & Healthcare, Berkadia