Recent seniors housing data is giving industry leaders hope that the market will stabilize soon. Though the occupancy rate decreased during the second quarter, construction starts also slowed, which is a positive sign.
We’re starting to see the market get back in balance. We think that slowing new construction will improve absorption, and occupancy will stabilize and start to creep up soon.
–Doug Checketts, Senior Vice President, Seniors Housing Finance, PNC Real Estate.
As of the second quarter of 2019, the seniors housing occupancy rate was 87.8%, a decline from 87.9% this time last year, according to data from the National Investment Center for Seniors Housing & Care (NIC). This number represents the lowest occupancy level since the second quarter of 2011. The sector recorded its most recent high of 90.2% in the fourth quarter of 2014.
Fewer construction starts
Nationally, NIC’s 31 Primary Markets saw 19,113 new construction starts in the last four quarters, the fewest new starts since 2014. These construction starts amounted to 3% of total existing seniors housing inventory, down from 4.3% a year ago.
“We are seeing a clear downward trend occurring in construction starts nationwide for new senior housing units, especially for assisted living,” said NIC Chief Economist Beth Burnham Mace.
In the second quarter, assisted living starts totaled roughly 1,700 units, the fewest starts since the first quarter of 2014. And on a four-quarter aggregate basis, starts totaled 10,175 units, also the fewest since 2014. As a share of inventory, this amounted to 3.5%. For perspective, in late 2015, it was 6.5%.
There is also a downward trend for independent living. Starts on a rolling four-quarter basis totaled 8,939 units in the first quarter. As a share of inventory, this equaled 2.7%. As a construction lender in the seniors housing space, PNC Real Estate has seen a slight shift in the type of projects seeking financing, according to Checketts. On an annual basis, the lender reviews roughly $5 billion in new seniors housing requests, he said.
Checketts noted the majority of recent requests are sponsored by strong developers and operating entities with significant experience in seniors housing. “Over the past several years, from 2012 to 2016, we saw a lot of projects sponsored by developers without any seniors housing experience trying to capitalize on the hot new product type,” he explained. “That seems to be tailing off with the decline in construction starts, leaving the field open for experts.”
Taking a closer look at NIC’s 31 Primary Markets, during the second quarter, 13 posted occupancy rates lower than the year prior. The same number of markets recorded higher occupancy rates, and five markets were unchanged.
To give those numbers some perspective, in the first quarter, 17 of these 31 metropolitan markets had occupancy rates lower than the year prior, while 13 markets had higher occupancy rates than one year ago, and one market was unchanged.
During the second quarter, San Jose, California, (95.7%) and Portland, Oregon, (91.6%) experienced the highest occupancy rates, while Las Vegas, Nevada, (82.3%) and Houston, Texas, (81.1%) recorded the lowest occupancy rates.
Of all NIC’s tracked markets, San Antonio, Texas, deserves particular mention. Considered a “hot market” for seniors housing, San Antonio saw construction levels spike for both assisted living and independent living over the past several years. In the first quarter of 2015, for example, construction as a share of inventory had reached a very high level of 21.6%, according to NIC.
Though San Antonio struggled to absorb the new supply, during the second quarter of 2019, the market experienced the largest occupancy increase from a year ago, rising from 78.5% to 82.9%. Despite the impressive gain, San Antonio still has the third lowest occupancy rate of NIC’s Primary Markets.
The good news is that very little development is underway in San Antonio — only 302 units or 3.1% of market inventory. To that end, experts expect San Antonio’s seniors housing fundamentals to continue to improve over the next several quarters.
Beyond San Antonio, new construction activity is heavily concentrated in major metro areas, particularly those in the South and Southwest, according to Checketts. He notes that the trend seems to be larger projects in higher barrier-to-entry markets — projects that require significant commitments of time and money to control and entitle sites before even getting to ground-breaking.
Serving the middle market
Demand for seniors housing in the United States isn’t going to slow, experts agree. With the aging of the Baby Boomer generation, the total number of middle-income seniors ages 75 and over will grow by 82% by 2029, from 8 million in 2014 to 14.4 million in 2029. Even then, more than half of Baby Boomers will not yet have turned 75.
According to NIC, opportunities for seniors housing developers will likely be for the so-called “Forgotten Middle” — a cohort of Americans who have too much in financial resources to qualify for government support programs such as Medicaid, but not enough to afford most private payment options for very long.
NIC recently funded a study of this group. Conducted by NORC at the University of Chicago, the study focused on individuals with annual financial resources ranging from $25,000 to $74,000 for people ages 75 to 84 and $24,000 to $95,000 for those ages 85 and older in the year 2029.
The study’s conservative estimates reveal that more than half of the nation’s middle-income seniors (54%) will not have sufficient financial resources (which includes income and non-housing assets) to pay for projected average annual costs a decade from now of $55,000 for assisted living rent and $5,000 for out-of-pocket medical costs, even if they generate equity by selling their homes and commit all their annual financial resources.
Two-thirds of middle-income seniors ages 75 and over are projected to have three or more chronic conditions in 2029, and 20% will have high needs — meaning they have three or more chronic conditions and at least one limitation in activities of daily living. Six out of 10 seniors are expected to have mobility limitations, which may make it difficult for them to navigate their homes independently.
"New development projects are primarily focused on the high-end markets with ever-increasing amenities, and there is a corresponding price that accompanies such projects," Checketts said, “We do see some developers/operators who focus on more value-oriented rehab and conversion projects that appeal to the middle-market, but that is a difficult balance to strike despite the greater potential demand from middle-income seniors." All the demographic growth doesn’t occur in the top 10% of income/wealth, so we are actively looking for those sponsors who can operate efficiently at a lower price point.