What is Holding Back New Construction in Senior Housing?

With the recession dragging on, the senior housing market has experienced a significant slump. New construction starts have dropped by 53% since the 2008 crash, and now make up just over 1% annually of the senior housing inventory, according to the National Investment Center for the Seniors Housing & Care Industry (NIC).

At the same time, however, demand for such housing is expected to increase radically over the next few years as baby boomers reach retirement age.

The Boomers are Coming

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“We have started to see that demand for retirement and assisted-living housing [is] now outstripping supply,” said Sampada D’silva, senior vice president of underwriting/acquisitions with Cambridge Realty Capital Companies.

n the second quarter of 2011, the NIC reports that the annual inventory growth for seniors housing was 1.1%, down from 1.3% in the first quarter of 2011 and 2.1% in the second quarter of 2010. According to the NIC, this is the lowest level seen in the current market cycle.

Occupancy rates dropped during the recession, standing at about 88% currently. NIC researchers expect those rates to soon begin inching up, putting pressure on a marketplace that just isn’t creating enough new housing.

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“More and more of the unoccupied units will be filled,” said Chuck Harry, director of research and analysis with the NIC. “There will be an increase in the level of demand.”

Finding the Funds

This dilemma is due in part to the difficulty builders and developers have had in securing financing for planned or ongoing projects.

“Many developers and builders had projects in the pipeline that have not been started because of the economic downturn,” explained Bill Kauffman, a senior research analyst with the NIC.

For senior housing construction projects to succeed, they need a combination of solid financing and good business planning, and the fact is, not all projects meet these criteria.

“Not every senior housing project can succeed in today’s economy,” said D’silva. “Successful senior housing projects require a combination of strong balance sheets and extensive operating experience. Most of the developers are small- to mid-size regional experienced owner/operators who are familiar with their local markets and have a track record of successfully operating the facilities.”

Cutbacks in federal subsidies for housing through the Department Housing and Urban Development’s programs combined with a difficult market have created a perfect storm in which housing for seniors has suffered.

“Regional banks, who have been the traditional source of construction financing for the senior housing industry, aren’t lending to the level that they were prior to the credit crisis,” explained D’silva. “HUD 232 health care loans remain popular, but the agency has been swamped with orders. The senior housing industry may have a supply problem in the coming years unless the credit markets thaw and new construction commences.”

Some analysts say the biggest concern in the senior housing market is the lack of affordable options for seniors with limited incomes.

“There is certainly not enough senior housing for lower income seniors,” said Sloan Bentley, president of Seniority, Inc., a retirement community management company. “I believe in the value of senior housing, and I’m concerned about this problem. It’s going to be very challenging. People with lower incomes are going to need places to live.”

Written by Vivian Walker