house on upward trend line

Despite persistent labor and inflationary headwinds, senior living and skilled nursing are seeing growth in occupancy and rents, according to new reports from Marcus & Millichap released Wednesday. 

“Challenges are present, however, as worker shortages are requiring sizable wage growth to bring in staff, and these added costs are difficult during a period of recovery,” the authors wrote. “Investors looking beyond these near-term hurdles could discover longer-term upside supported by demographics.”

Senior living

The omicron variant of COVID-19 earlier this year created a mild challenge for the senior living sector in an otherwise “stellar” first half of 2022, according to the senior living report. Marcus & Millichap attribute the positive movement to “social aspects and care-based services [that] drive occupancy gains.” Many older people who put off moving into senior living at the height of the pandemic are more comfortable with the prospect now, the authors said.

“Some older adults have cited an eagerness to experience the community-based aspects, after an extended period of social isolation. Others urgently need the care-based services that senior housing offers, with friends and family able to provide at-home care during the early stages of the health crisis now returning to workplaces,” the authors said. 

The senior living sector is recalibrating, they said, by injecting capital into “shoring up health and safety protocols.” Others are beefing up their technological infrastructure.

“These added costs are challenging in the current environment but may pay dividends

down the line,” the authors said.

The average rent across senior living rose by 4.7% year-over-year in the second quarter, representing the fastest annual gain in more than a decade, according to Marcus & Millichap. Labor challenges are offsetting that growth, however. 

“Operators have significantly increased wages to attract workers, after negative press and health protocols during the pandemic created headwinds. …Bringing in the necessary staff to restore occupancy will require sizable hikes in labor costs, however, the higher operating expenses are not being met by adequate rent growth,” the authors said.

Senior living development has slowed, which Marcus & Millichap said will provide somewhat of a buffer as it will mitigate competition between operators trying to restore occupancy in the short term. 

“In the longer term, this could be a boon for the sector as an aging baby boomer

demographic could push demand past supply,” the authors said. 

Rents are on the rise, the report noted. The publication shows that independent living, assisted living and memory care each posted their fastest annual rent gains in more than a decade.

Transactions, too, are on the rise. The first quarter was one of the strongest on record, the authors noted. The average sales price increased by 12% to $150,900 per unit. 

“Nonetheless, momentum started to taper in the second and third quarters as inflation and interest rate hikes impacted the market,” the authors said.

Skilled nursing

Skilled nursing occupancy recovered almost one-third of the ground lost since the pandemic, according to the skilled nursing report. 

“The recovery timeline for skilled nursing facilities likely extends beyond 2023, given the magnitude of losses during the pandemic. However, an inflection point has been reached, and occupancy is steadily climbing,” the authors said.

Labor remains a prime challenge for the skilled nursing sector. Although the solution might be to increase wages, Marcus & Millichap noted that with rent growth of 2.6% during the past 12 months ended in June, nursing home employment still is almost 15% percent below where it was in February 2020.

Skilled nursing occupancy is creeping up, which is driving activity from investors, according to the report. The average skilled nursing property sale price increased by 5%t during the 12-month period ended at midyear, to $91,500 per bed. 

“A robust longer-term outlook, bolstered by an aging population, is allowing some buyers to look beyond the near-term challenges. Stabilized properties perceived as lower risk are favored, but investors are showing interest in assets with upside as well,” the authors said of skilled nursing. “The rise in prices is a positive sign, but the sector still faces headwinds, and higher interest rates will present additional hurdles.”