Austerity was the most searched word on the Merriam-Webster online dictionary during 2010. In case you’ve been living under a rock the past two years, the word means ‘enforced or extreme economy’.
Quite different than luxury or other indulgent phrases that led up to the recession of the last few years. As you peruse this year’s trends in senior housing, keep the word ‘austerity’ in mind but contemplate a new bifurcated mindset: one for the wealthy, well prepared and another for everyone else. This bifurcation in the 55+ demographic will be more pronounced during the next two years but the world will have to deal with the larger majority, which we feel to be in the “everybody else” category. Housing for the masses may not be as sexy as luxury housing on Lake Shore Drive in Chicago or a CCRC in Manhattan, but it’s more critical to the future of aging in America and around the world. If austerity was the word for 2010, let’s hope the word that defines 2011 is pragmatism. Now for our look at senior housing trends in 2011….
1. Economics 101 – Supply Decreases, Demand Increases….News Flash: Prices will go up for Independent Living, Assisted Living and Nursing Care
Declining supply and increased demand based upon demographics as well as higher labor and material costs will start to drive senior housing prices up in 2011 at a faster rate. As supply has remained relatively flat during the past few years with a lack of new construction and rehab in facilities and communities, the natural growth of the elderly population will provide a steady stream of increased demand. We think the real wake call on supply realities and increase in prices will come in 2012. The question is at what pace and rise in prices can be passed along until customers opt to remain in place despite their needs?
Choices of venue for senior housing will take greater importance as seniors will need to exist on fixed incomes. Since senior housing choices are predominantly a local decision driven by economics, where will the price point be to avoid sticker shock and where?
The economics of the senior housing solution will continue to further expand the notion of multigenerational and small group housing in the coming year. See our architectural comments for more insight on multi-gen housing.
2. 3 – R’s of Senior Housing – Rehab, Renovate, Repurpose
New home construction and new senior living projects (independent living, assisted living, nursing homes, CCRCs) will slowly start to accelerate during the second half 2011. Home renovation is expected to rise significant in 2011 according to the Harvard Joint Center for Housing Studies and have double digit growth during the year. We feel this is right on par with conversations and observations we’ve had with various industry participants. The upfront costs for renovating a single family home or installing a monitoring system may be more palatable if it allows a consumer to defer entry into assisted or skilled care for a certain period of time. While the decision is based on a probable return on investment if they can accurately predict how much longer they would age in place. The most difficult part is calculating the intangible value of happiness of remaining in the local home and community for a longer period of time. We can see it now, if you rehab your kitchen to be senior friendly, will you get 70% of your money back at the time of resale?
3. Technology – Monitoring Networks, Apps, Devices and Systems Integrators
Ladies and Gentlemen, start your monitoring …..through gadgets, apps, networks and the cloud! During 2010, a trickle of vendors released new monitoring systems and delivery options. The flood gates are going to bust open as the economy heals and companies are looking to invest and expand into high growth markets. Look for continued announcements and product offerings from old and new technology companies as well as acquisitions and roll ups of related products and services for the senior care market. Some products will be “me too” products that will provide additional market choices but few, real new features. Who will win? We’re betting on well designed products that are simple without feature overload at reasonable prices.
One of the areas that will start to accelerate in 2011 is systems integrators working in local markets to deploy various monitoring systems that employ industry standards. If vendors work within established standards, the costs for deployment and support have a higher probability of being adopted faster than those that are built upon proprietary technology. These systems integrators will need to provide better service than the Geek Squad but also know about concepts on senior living design and general contracting besides the technical nature of deployment of these networks. What are we forgetting? The most important features: selling and servicing seniors and their children. How many local GC’s are ready for this? If you said very little, you’re probably being generous. The costs of a design and tech make-over may make your stomach turn at first but if amortized over an additional 5 years in the home versus assisted or skilled care, it will seem like a bargain. In a society of instant gratification, that will be a hard sell.
4. Campus Extensions and Home Healthcare
Many CCRCs, assisted living facilities and even nursing homes have started rolling out extended campus models as a means to augment their current revenues as well as provide a consistent marketing pipeline for new residents who are comfortable in their campus settings. The concept of extended campus will begin to gain traction as companies look to either to enter this realm with build or buy decisions with home care providers. Given the highly fragmented market of in-home senior care providers, a localized roll up strategy may make sense in some cases dependent upon local operations and reputation. Home healthcare and senior care franchises fall into this spectrum and were one of the most prolific franchise stories during 2010.
5. Finance & Capital Markets – Chicken or the Egg
When will those bankers open their checkbooks for those aren’t perfect 10s? Banks continue to press operators for new loans but with the caveats of:
- Management Experience
Risk based price will need to return for thinly capitalized projects or less than experienced developers in various markets but with continued questions about long-term funding scenarios for Medicare/Medicaid and entitlement reforms. In 2011, we are predicting more of the same of 2010. As a banker told us, “Just because you believe that if you build it they will come does not mean that the Bank feels the same way no matter what your ”
Funding from the government is still the cheapest and most attractive vehicle for debt capital in the senior housing market for small and medium sized operators. The role of government financing will take on greater importance during 2011 with the changes rolled out in the Section 202 reform bill passed at the end of the year. What’s the catch? Time and effort. Most developers cite the processing and underwriting times as unattractive to meet their needs to bring to market product quickly. If the government wants to get the economy started, it should put a full court press on making sure that government agencies that support senior housing development are fully staffed with competent new hires to augment existing staff.
6. Government -Healthcare & Entitlement Reform
Healthcare & entitlement reform will become (if it hasn’t already) a key news and social topic at the national, state and local levels as government (as a whole) is strapped for cash. Pension obligations and a decline in real estate tax revenues will lead to tax increases, most likely in local real estate taxes and other taxes in your area. Painful conversations, choices and consequences. Cuts in local funding will occur almost everywhere from jobs, pensions and benefits. What does this mean for senior housing and retirement choices? Three overly simplistic statements/questions come to mind:
- Assuming there is limited or no cash flow other than savings and minimal retirement income for the vast majority of retiring Americans, how much cash flow will come from social security and how much of that will go to pay for the dwelling unit?
- On top of living expenses and money needed for housing, how much will consumers spend on healthcare outside government provided care?
- What’s really left after housing and healthcare? Probably not as much as you thought.
7. Home Prices – Lending Constraints and Mortgage Interest Deduction
Double Dip in home prices? We think so (but did we ever really stop?) but the knife will stop falling in 2011. Why? In order to have a floor established in the housing market, the cessation of job losses and start of job growth will provide a firmer base for the economy that will solidify the housing bottom. We don’t expect home prices to show any substantial recovery but the return of the possibility of jobs in 2011 will provide more confidence about having a job to pay the mortgage.
Additionally, the reform process for Fannie Mae and Freddie Mac will attract significant attention in 2011 will provide additional support to home prices whatever the solution. Word is on Capitol Hill that a plan is in the works for some significant changes but reflects the underlying need for government support of long-term housing finance. Look for evolution rather than revolution with a focus on keeping long-term, fixed rate financing alive and a return to affordable, multifamily housing solution for low to moderate income citizens, which includes senior housing. This certainty over a portion of the mortgage finance market will spur banks and non-banks to get into private lending programs. Dare we say that bankers will take greater risk and be compensated for that additional risk through higher down payments and rates. Sub-prime lending? Probably not like it was but solutions will provide more options for borrowers who are less than perfect and/or fail to meet agency standards. Look for a return to sub-prime lending circa 1995 and 1996….40% down and 2 year adjustable rates at 9+ percent.
The other home related topic that will cause some downward pressure at certain price levels maybe the conversation around proposed changes to the home mortgage interest deduction through tax reform proposed released in late 2010 by the Federal Deficit Commission. While many lobbyists have cried foul over this suggestion, there is buzz around limiting the deduction at certain levels in home prices or mortgage debt and even eliminating the deduction for those with second homes. As Congress and the Administration wrestle with the deficit, healthcare and entitlement reform, look for this to be part of the possible solution not by eliminating the deduction completely but limiting it which will bring in additional tax revenue from those fortunate enough to live in large homes or have second homes.
8. Local is Cool – Local, Face-to-face social networks make a comeback
Fact: Social media will continue to grow in 2011 in the Baby Boomer and senior demographic. Our thought is that while technology adoption and use through social media will continue to grow rapidly, but we feel there will be push back at some point for a more human connection in the senior and Baby Boomer market. Bridge on a IPAD is certainly not as social as with a deck of cards, close friends and a glass of wine. Is social media going to decline in the 55+ segment anytime soon? Absolutely not but the social values of Boomers and seniors were founded on pressing the palm versus checking in on Foursquare.
What’s your real social network? It’s probably a 5-10 mile radius from the home. Local communities matter. Look for growth in local community centers for senior activities and solutions for those seniors who need places to live as part of the need to meet the needs of low and moderate income consumers. HUD and other federal agencies will continue to pump funding into these local organizations which will drive services and offerings for the local market to bloom.
9. Architecture & Design
Architects and designers will be in high demand in 2011 as plans and demand for development and rehabilitation makes as comeback as the economy and finance markets heal. In 2011, Green reaches ubiquity. Every architect, developer and PR person loves their roofs, gardens, parks, rainwater recycling, permeable landscape and passive solar power. Some of the conversations we’ve had with leading senior housing architects that look at the near future note include:
- The “in-law” suite becomes the Granny suite and opens itself up for renovation and remodeling
- Simpler design in new construction and rehab projects
- Prefab & Detached Housing – hear the word granny pod or our favorite granny shack? Some Americans think that putting mom and dad in the back yard is the future way to keep them close at a reasonable price point. Next thing we expect is Home Depot to start having classes on options to make the home more ‘senior friendly’. Why not just park an Airstream in the backyard? Tacky, maybe. But a whole lot classier than a 10 x 12 barn with some drywall, an outhouse and a house for bathing.
- Blank interior spaces, user designs the space to meet their needs. Senior apartments or dwelling units as a blank canvas.
- Continued growth of small housing clusters, greenhouse, villages.
- Continued development of wellness centers, spas and better exercise facilities
- Single story homes and apartments that are not specifically part of an age-restricted community are old “new” trend in 2011 for seniors in downsizing strategies.
10. Go Long Grannie Stocks
If there has been one very bright spot in the stock market during the past 12 months, it has been senior housing REITs. The REITs have been able to consistently access the capital markets to fuel ‘move the needle’ transactions in the billions during the year. If the cost of capital remains low as it has been during 2010, look for 2011 to be another banner year.
For managers and operators, 2011 will be dependent on their success during the past two years on restructuring their balance sheets. Litigation, healthcare reform and headline risk will hold back some of their growth. Will operators rise again as attractive investments in the eyes of the public market? We think the answer is yes but will not be fully realized until 2012 until there is more certainty over the future of entitlements in America.
* SHN Editors and staff writers do not own any senior housing REITs or other senior housing related stocks
While we’ve not mentioned international opportunities in our top 10 for 2011, those trends are similar but challenges will be more country specific with added complexity on access to local capital, regulation and infrastructure. Some of the more interesting research and trends may originate from Japan, China and other Asian countries during the next decade as their aging population dwarfs America’s elderly population statistics. More on international senior housing in the coming months.
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