Editor’s Note: This article appears in the 2018 Dealmaker’s Handbook, which can be downloaded here.
Times seem rough for many seniors housing and care providers. The occupancy rate for assisted living in the second quarter was the lowest it has been since the National Investment Center for Seniors Housing & Care began reporting data in late 2005. And several surveys and anecdotal remarks this year have shown that a number of real estate investment trusts, developers and investment firms have cooled on skilled nursing.
In the big picture, however, these trends are short-term blips, not long-term doom for those who care for older adults or who back operators financially, according to several experts.
“While they may be going through a challenging period, both the senior living and skilled nursing sectors are fundamentally sound,” Green Street Advisors Senior Analyst Lukas Hartwich says. “In the case of senior living, people are actively making the decision to spend out-of-pocket — their own money — for the offering, which is strong evidence of its value in the eyes of the consumer. Meanwhile, skilled nursing’s role as a low-cost setting for high-acuity care makes for an attractive value proposition in the overall healthcare ecosystem.”
Providers are facing labor shortages, construction cost increases and other major issues that won’t disappear any time soon. “It’s hard to see that changing until we see some sort of economic slowdown,” Hartwich says.
Perhaps the biggest immediate matter facing senior living, however, experts say, is the supply pressure due to overbuilding in some markets in anticipation of the continued move-ins of members of the Silent Generation and the impending arrival of the oldest baby boomers (although at 72 this year, those oldest boomers may be a few years away from becoming residents).
It’s not the first time the relatively young senior living industry has experienced the overbuilding issue. Both Lawrence “Larry” Cohen, vice chairman and CEO of Capital Senior Living Corp., and Robert G. Kramer, NIC founder and strategic adviser, point to a similar period that began in the late 1990s and say the industry has reason to hope.
“As we saw with the overbuilding in 1999 to 2003, eventually, all these buildings will fill,” Kramer says.
“The lesson learned,” according to Cohen, “is to be patient and to manage expenses well. This industry has always been resilient.”
Unlike the 1990s, or even the economic recession of a decade ago, Kramer says, demand for seniors housing remains strong today, despite challenges related to oversupply, especially in assisted living and memory care.
Changes necessary
That current and future demand is enough to cause the NIC founder and others to remain bullish on seniors housing and care. But that doesn’t mean the industry won’t see changes. Indeed, experts say, for a healthy future, operators will need to cater to the evolving wants and needs of older adults, although how that catering manifests itself remains to be seen.
“We have to realize that we’re on the tail end of a first-generation product, and we’ve not yet really seen what the second-generation product will be,” Kramer says of senior living. Communities of the future will be shaped by new generational preferences, however, he adds.
Members of the Silent Generation, the generation preceding the baby boomers, Kramer says, value safety, security and comfort, “so they accepted senior communities that were to a great extent isolating elders from the activity and connections of the rest of society.”
Baby boomers, on the other hand, want their lives to be more integrated with the surrounding community, he says. Seniors housing and care providers could address this desire with new buildings in more central locations, and in that case, some existing buildings could be repositioned at a lower price point or for a different type of care or service, Kramer says.
But changing preferences also will be addressed through new programming in existing buildings, he predicts. “In the communities of the future, residents, and therefore the communities, will be known by what the residents do, not just by what they did,” Kramer says.
Culture, education vital
To stay successful in the long term, Kramer predicts a greater emphasis on culture, which he calls “one of most important issues” in seniors housing and care.
“The successful companies are going to be differentiated on culture, because it’s their culture that’s going to enable them to get the employees to execute their strategies,” Kramer said. “Without that culture — and therefore, without those employees — you may have a great strategy, but you won’t be able to execute.”
Consumer education and awareness are keys to a healthy future as well, believe Cohen, who recently announced his retirement, effective Jan. 1, and David Schless, president of the American Seniors Housing Association.
“In certain markets, there’s only so many people who have the need and the financial wherewithal to move into some of these settings,” Schless says. “That being said, I’m still also a believer that the opportunity is there for the industry to increase the number of people who move into these communities. That’s a big part of the Where You Live Matters program that we’ve developed. We know we’re serving somewhere around 10 percent of the population on a national basis. And we know that there are markets in the U.S. where we’re serving 20 percent — even more than 20 percent. So we’re very committed to trying to help educate consumers and trying to dispel some of the misperceptions that people still have about what senior living is.”
Cohen agrees.
“There are many markets where we see a lot of supply, but that supply is still serving less than 5% of the age- and income-qualified senior,” he says. “There is the population that will be introduced to senior housing to fill those units, and I think as consumer awareness increases — and supply will increase awareness — you’ll see that in most of these markets, properties will stabilize and then we’ll go to the other side of the pendulum, when hopefully there’s growth in the demographic and demand will outpace supply.”
Independent living, a strong performer over the past several years, according to NIC and other research, continues to be a potential growth area, Schless says.
“There are some interesting new product offerings out there that are more focused on independent living,” Schless says. “The senior population is very diverse, and to some extent, the industry has gravitated more toward serving frail seniors. So I think it’s a positive thing that we see some very interesting new models being built that are oriented at serving people who are younger and more active. I’d be very interested to see how some of that new product works and how that evolves.”
The need still will exist for higher-acuity segments such as assisted living, however, he adds. “Obviously, that market is clearly there and clearly going to be there,” Schless says.
But be prepared for changing segment definitions and new names, Kramer advises.
Senior living communities, he says, “won’t be called senior communities, because the boomers hate that word.”
And a new model of independent living — “It won’t be called that.” — will serve people from their late 60s through their early 80s, Kramer says.
“The model that’s going to serve boomers in the 70s, in terms of large scale, doesn’t exist yet,” he says. “There are tons of experiments going on, and many of them won’t even be age-restricted, or they’ll soft-pedal the age restriction. What we know today as independent living, which is what assisted living was eight to 10 years ago; assisted living, which is what the SNF was 10 years ago; and SNF, which is what the medical-surgical unit of the hospital was five to 10 years ago — those models are all going to be part of integrated models of managing healthcare and creating quality of life for people with multiple chronic conditions, and in many instances, multiple activities of daily living needs and/or cognitive impairment.”
Don’t forget about data
Whatever the offerings are called, providers will need to be prepared with data so they can solicit and accept referrals from other parts of the healthcare continuum, Kramer and Cohen say.
“We’re going to have to up our data game, because that’s the only way you can play in what I think will be this new world of value-based care,” Kramer says. “Ultimately, we’ll be involved in not only in personalized care, but personalized aging, which is all about quality of life and engagement, not just about healthcare.”
On the private-pay senior living side, where operators aren’t necessarily beholden to Centers for Medicare & Medicaid Services requirements, Cohen says, “We’ll have to create that data independently, working with our affiliations to come up with relevant data so you have a good baseline and measurement of outcomes to show there is quality of care at a lower cost for seniors living in senior housing than in alternative settings.”
Electronic medical records and electronic health records systems, both within senior living communities and within collaborators such as hospitals and accountable care organizations, will be part of the solution, he says.
“That’s a challenge but yet an opportunity to this industry to start to have better information, better data so that we can understand hospitalizations, falls, illnesses and other issues happening there, to have a better understanding of the effectiveness of the care that’s provided to residents in our communities,” Cohen says.
The opportunity to use those data will grow as demographics finally catch up with supply in the next year or two, the experts say.
“While the supply headwinds have been easing, they will likely continue to be a drag in 2019,” Hartwich says.
Cohen looks to the past for hope for the future.
“As I said, the business has always been resilient, and I expect it will continue to be as we work through this time gap of the construction that occurred over the last few years,” he says. “NIC MAP shows that supply is coming down, and we know the demographic is growing and will grow much more rapidly, particularly starting in 2020.”
