Editor’s Note: This article appears in the 2019 Dealmaker’s Handbook. If you’re attending the NIC Fall Conference, pick up a copy where publications are displayed. Others can download the publication here.
Second-quarter occupancy in senior living — including independent living and assisted living — was at its lowest point since the second quarter of 2011, according to the National Investment Center for Seniors Housing & Care.
Look only at assisted living and the current picture seems even more bleak: Occupancy was at its lowest point since NIC began collecting data in 2006. Skilled nursing occupancy, meanwhile, was basically flat, dropping very slightly, from 86.8% to 86.7% in the quarter, according to numbers released in July.
The news is enough for any operator, developer or investor to reach for the aspirin. A look at other NIC data, as well as discussions with experts from NIC and elsewhere, however, give hope.
The skilled nursing sector continues to be leveraged in many ways by Centers for Medicare & Medicaid Services and certificate of need requirements, bed moratoriums and the growth of managed care. It also is feeling pressure from other parts of the care continuum, NIC Senior Principal Bill Kauffman said. But “over the past year, and specifically since June 2018, we’ve seen some stabilization, and we’ve actually seen an uptick in occupancy,” he noted.
Nursing home occupancy had its first year-over-year increase since January 2015 in the first quarter, according to NIC’s latest Skilled Nursing Data Report, which was released in June.
“Most likely, the demographics are at play somewhat, because for a couple of years, the demographics were not growing like they were over the past year,” Kauffman said.
Skilled nursing and senior living industry players are eagerly anticipating the “silver wave” of baby boomers, although the oldest boomers are “only” turning 73 this year, and the youngest are turning 55. That anticipation, however, is thought to have been a contributor to inventory growth that resulted in oversupply in some markets, especially in assisted living. But construction starts appear to be slowing now in independent living and especially in assisted living.
“In the next seven to 10 years, we’re going to see that demographic growth expand tremendously, knowing that we’ve got a good 20 years of strong demographic growth ahead of us,” NIC Senior Principal Lana Peck said. It’s so strong “that if we continue inventory growth at the same rate that we’ve been recently, even though it’s been strong, we still probably will not be able to have enough units to really serve all those seniors who are coming through the pipeline,” she added.
Shorter term, “we should start to see occupancy rates starting to rise in some of those markets that have seen some of the highest levels of construction,” she said.
Many factors go into predicting when demand will peak, Green Street Advisors Senior Analyst Lukas Hartwich pointed out.
“Realistically, the demand wave is more likely to gradually filter in over several years as opposed to step function up in a given year,” he said. “That being said, we should start to see larger percentage gains in demand by the mid-2020s.”
NIC’s one-year forecast, through the middle of 2020, shows independent living occupancy remaining fairly flat, with a slight uptick in assisted living occupancy, NIC’s Chuck Harry noted.
The industry needs to determine whether and how to change to serve the baby boomers in the coming silver wave, Peck said.
“We know that they are more diverse than previous generations,” she said. “They’ve saved less than previous generations. Their tastes and interests are different than previous generations. We don’t really know exactly the right product mix — with the right setting, the right price points, the right design, the right partnerships — that it’s going to look like in the next 10 to 20 years. It’s an evolving industry.”
Some continuing care retirement communities have seen success attracting “younger old” adults through various efforts.
“Some of them are still able to draw in a slightly younger crowd — in the upper 70s,” Peck said.
Efforts have included renovating, changing programming or adding single family homes or cottages or different types of apartment designs that are more independent, as opposed to apartment buildings.
Some of those communities, Peck said, focus their marketing efforts more on lifestyle aspects of senior living rather than on “care.”
Urban development also increasingly is being looked at by investors, developers and operators as a potential growth area, Peck explained.
Eighty percent of baby boomers who live in large cities want to keep living there after they turn 80 — either in their current homes or someplace nearby, according to the results of the 2017 Aging in Cities survey commissioned by real estate investment trust Welltower.
“There are lots more opportunities for mixed use than there were before in more urban areas,” she said. Rather than entitle an office building, Peck said, “[a] lot of municipalities would prefer to entitle mixed-use properties, which may include some retail, some intergenerational housing, some seniors housing and medical.”
The good news, Harry predicted, is that boomers will look more favorably on congregate housing than predecessors did.
“The vast majority of [senior living] residents continue to be women, and it was the boomer generation where the women entered universities and colleges with a great vengeance,” he said. “So this is a generation that is more acclimated to communal living, by a long shot, as compared to prior generations. I would imagine that presents the sector great opportunity.”
At least in principle, Peck added.
Seeking middle ground
“We have the issue of current price points in seniors housing that will need to be addressed, and the sector will have to find profitable ways to serve that whole generation,” she said.
A recent NIC-funded study estimated that 54% percent of the 14.4 million middle-income older adults in 2029 in the United States will lack the financial resources to pay for senior housing and care. A combination of public and private efforts will be needed to address the potential crisis, said the researchers, who published their findings in the journal Health Affairs.
“Certainly technology and home health can help a little bit with that,” Peck said. “But these folks are more social, and they’re more apt to be interested in living among like-minded people and staying very active in life.”
Active adult communities may provide one answer.
Such lifestyle-focused communities represent a “significant disruptor” to traditional senior housing, said Zach Bowyer, senior managing director at CBRE. Independent living and assisted living are the segments of senior housing and care that are most appealing to investors right now, according to CBRE’s Summer 2019 U.S. Seniors Housing & Care Investor Survey, but interest in active adult communities is increasing.
Bowyer defines “active adult” as the space between 55+ communities and independent living. Such communities, he said, are designed similarly to independent or assisted living communities in terms of percentage of common space and unit designs, but they have flexible space instead of commercial kitchens and full dining.
Another difference is that services — transportation, laundry, meals, assistance with activities of daily living, and care — are outsourced, so residents pay only for what they need. From a psychological and financial perspective, the difference may make it easier for people to move before they need services. That’s good news for independent living especially.
“That is resulting in people moving in three to five years earlier” than they otherwise might move into an independent living community, Bowyer said. “But it’s typically the same person. They’re getting them a little bit early, but it is for the most part what would otherwise be an independent living resident.”
Active adult communities may represent an opportunity as well as a challenge for traditional senior living, however, as their potential is attracting traditional multifamily investors who like that active adult communities are less “operationally intensive,” he said.
“I think what’s working the best is when they’re partnering,” Bowyer said, referring to multifamily developers and senior housing operators. “They really get a great understanding of the various components.”
A caveat to senior housing operators, however, is that returns from services may not be realized if those services are outsourced, he said.
Green Street Advisors’ Hartwich recommended that those in traditional senior housing and care “continue to focus on its strengths, which include cost efficiency for an equivalent level of care, as well as the health benefits that come from the social aspects of communal living.”
They also should temper financial expectations because much new demand will be met with supply, he predicted.
“While senior housing is likely to enjoy strong secular demand tailwinds as baby boomers age, it’s important for the industry to be realistic about the impact on financial returns,” Hartwich said.
Regardless of housing models that may emerge or evolve, and regardless of new technology that may be developed to make it easier for older adults to age in place and receive care and services at home, the need for residential senior housing and care settings will continue for the foreseeable future, NIC experts predict.
“There’s a portion of that demographic now, and most likely in the future, that’s going to need some kind of care,” Kauffman said. “They’re going to have too many conditions to be able to be taken care of in the home, even though they would certainly love to be.”
Some of that advanced-level care will be provided in skilled nursing facilities, he said. Senior housing could be able to serve at least some of those needs as well, Peck explained, citing changing rules for Medicare Advantage plans and moves by senior living operators to form or join such plans.
“The idea is to be providing care in the right setting in the right amount in order to really start to reduce costs across the system,” Peck said. “It’s still pretty early to say how it’s all going to shake out with Medicare Advantage and seniors housing, but I do think there are some indications … we’ll be providing more care in people’s homes, which can include the assisted living or independent living level.”