Senior living occupancy fell short of expectations last year but ended the year with “better than expected momentum … that sets the stage for a favorable outlook in ’24,” according to a new report from Green Street Advisors.

Although the first half of 2023 was sluggish, Green Street said, the sector had recovered about 85% of its pre-pandemic occupancy by year-end, and occupancy in the sector is expected to continue to tick up this year.

“The senior housing sector is not without its risks, but the positives are likely to outweigh the negatives as fundamentals are still recovering from depressed levels, and the sector is on the cusp of a significant demand versus supply imbalance,” the experts said. “Over the long term, lower supply barriers and outsized cap-ex [capital expenditure] needs may weigh on returns relative to other areas of real estate.”

Market rents are expected to moderate during the course of the year after a bumpy ride in 2023. A separate report from commercial real estate investment sales brokerage Marcus & Millichap in November noted that, at that time, rent rates were increasing at approximately double the pace seen before the pandemic, up 6% to 6.7% year over year.

“Regionally, a rising operating tide lifted most boats; however, Midwest metros generally saw stronger rent and occupancy growth, on average,” Green Street said.

Real estate investment trusts Welltower, Ventas and Diversified Healthcare Trust; investment firm Harrison Street; and operators Benchmark Senior Living and Brookdale Senior Living are among the biggest owners of senior living properties, according to Green Street

Several factors affect the viability of senior living, including changing demographics — an increasing number of adults aged 80 or more years — savings, affordability and health/lifestyle trends involving older adults, the report noted.

“In practice, variables are circular in nature – supply growth will fluctuate alongside demand as builders respond to weaker or stronger operating fundamentals – but the odds seem high that demand growth outstrips supply growth by a healthy clip over the next five years,” according to the report.

Wealth and affordability metrics have improved for older adults over the past several years, the authors said.

“Senior housing affordability has increased more than 10 percentage points since ’13. Today, more than 40% of seniors can afford to pay for senior housing through income

without having to dip into savings,” Green Street said. “Increasing income levels in the near term should generate more demand as long as consumer preferences to live in a senior care facility remain intact.”

Wage growth in senior living has begun to level off, the company noted.

In a separate, independent report published Wednesday by global cloud-based human capital management solutions provider ADP, ADP Chief Economist Nela Richardson said that, overall, “[w]ages adjusted for inflation have improved over the past six months, and the economy looks like it’s headed toward a soft landing in the US and globally.”

A challenge for investors in senior living, Green Street said, is that property values have declined 20% to 25% since late 2021. But the company is optimistic about a turn-around soon.

“Prospective private market returns for senior housing seem attractive relative to other property sectors,” the report said. “investors are able to buy properties at higher initial yields than many sectors, with stronger intermediate term NOI [net operating income] growth prospects.”