With the baby boomer population soon reaching retirement age and beyond, the seniors housing sector will likely see continued strength not just in 2018, but for the foreseeable future. However, there are several headwinds that need to be addressed—if not this year, then soon, some industry experts say. Here are some sector-wide trends to watch out for.
- Supply will be a concern—but possibly only in some markets. Too much supply will be a headwind for the sector in 2018, as there has been declining occupancy year-over-year that is likely to continue as supply growth peaks over the next 12 months before decelerating, says Michael Knott, managing director at Green Street Advisors, a real estate research firm. “We’ve been in a period where demand has been healthy, but supply has been growing,” Knott notes. However, the story differs among markets, according to Beth Burnham Mace, chief economist and director of outreach with the National Investment Center for Seniors Housing and Care (NIC). For example, San Antonio, Texas had an occupancy rate of 78 percent in the fourth quarter of 2017 because of over-supply. Meanwhile, San Jose, Calif. saw a 95.3 percent occupancy rate. “It’s a tale of many markets,” Burnham Mace says.
- Still, the sector won’t struggle this year or in the years after. “It’s a substantial and growing sector,” says Burnham Mace. Demand for units and investor interest remain strong, though the baby-boomer generation—whose oldest members are 72 years old this year—has not yet reached the prime seniors housing age, Burnham Mace notes. The sector’s penetration rate for the 80-plus age group has climbed 70 basis points from 2009 to 2017 to 11.7 percent, according to Green Street’s most recent figures. This should continue to rise over time with increasingly strong population growth, Knott adds. “We think seniors housing has a nice decade in front of it once you get into the early 2020s,” he notes.
- The lending outlook should be brighter. The Federal Reserve announced that it intends to raise interest rates three times this year, which will impact short-term borrowing. However, long-term rates have remained stable and low—a signal that borrowers should lock in these rates now, says Steve Kennedy, senior managing director at Lancaster Pollard, which provides financial advice and financing solutions for the seniors housing sector. “We expect the lending volume over the next 12 months to benefit from the low long-term rates,” he notes. Accessing this lower, longer-term cost to capital is becoming more important as the sector increasingly faces pressures—such as from growing labor costs and challenged occupancies due to supply growth—that are squeezing margins, Kennedy adds.
- Differentiation will be critical for new projects. Seniors housing is at the differentiate-or-die stage in the product cycle, in terms of consumers’ desires, says Andrew Carle, and adjunct professor of seniors housing at George Mason University. While there is demand in this sector, cookie-cutter projects are being overbuilt, Carle notes. He cites demand for LGBT or university-affiliated communities as examples of seniors housing developed around specialties. “After 30 years, you need to start to think about differentiating,” he says.
- Labor and wage issues are not going away. With low unemployment nationally, it becomes increasingly difficult to attract and retain labor and puts upward pressure on wage rates, Burnham Mace says. “It’s a very people-oriented business, and we’re having issues with employment shortages,” she notes. While this has been an issue for some time, it is not one that will disappear this year. Because of this, operators are starting to focus on developing worker loyalty, whether through the quality of their working environments or offering benefit programs, Burnham Mace adds.
- Residents may push for more services and amenities. The newer generation of seniors housing residents is starting to demand more services compared to older generations, says Burnham Mace. “Seniors housing operators will be more involved in, say, taking a resident to the doctor or planning the doctor’s appointment,” she notes, which pulls some responsibilities away from adult children. Beyond 2018, this trend will only escalate as baby boomers begin to move into these facilities. However, with more amenities and services come increased expenses. “I think a lot of operators are trying to figure that out now, what the requirements are going to be here,” Burnham Mace says.