Due to increased debt costs and other inflationary pressures, rate increases in long-term care are inevitable, Evans Senior Investments Director Kris Lowes said Wednesday. He called for operators to “aggressively raise rental rates.”
Lowes’ remarks came in a webinar hosted by the Chicago-based senior housing and skilled nursing brokerage firm.
On the positive side, however, he said, occupancy also will grow.
“We should all expect a recession, whether it’s a soft recession, as the president said [Tuesday], or who knows if that’s more of a longer trench. That remains to be seen,” Lowes said. “So that’s at the forefront of the economy today.”
Increased debt costs mean that buyers ultimately will need a high rate of return on deals, “creating downward pressure on valuations,” Lowes said. “Margins have eroded from a profitability standpoint.”
Also, he said, “the amount of debt we can put on a new deal acquisition can be rather difficult today.”
To increase valuation, the big focus needs to be on revenue, Lowes said, adding that it is time for operators to “aggressively raise rental rates.” Bigger companies, he said, are averaging 8% increases, and some are implementing double-digit increases.
“They’re really getting minimal pushback because the residents and their families understand what’s going on out there today,” Lowes said. “They understand that it costs more to care for folks. They understand that inflation is increasing. …The last thing they really want to do is have it so you can’t operate the building and take care of these people at the level they’re accustomed to.”
Interest rates have increased 300 basis points via five Federal Reserve rate hikes since March, he noted, adding that interest rates are expected to increase through the rest of the year and into spring.
“We’ve never seen the Fed raise the interest rate so quickly as they have in the past five months. Never been done before,” he said.
There’s hope of increased occupancy, according to the expert, as the baby boomers — those born between 1946 and 1964 — age. The typical age of residents in long-term care, however, is 82, Lowes noted, which means that today’s average resident was born in 1940, before the Baby Boom.
“We’re going to have a huge amount of demand of residents coming to live in our industry,” Lowes said. “It really just comes down to the demographics at this point. We’re finally getting to this tide when the baby boomers are going to need care.”
With COVID mostly behind us, providers can focus on more tours, too, he said.
