NIC: Chicago’s Hefty Construction Pipeline Might Depress Occupancy Growth

While the Midwest is on its way toward recovery in the seniors housing and care market, Chicago’s progress may be impeded as a hefty construction pipeline might depress occupancy rates, said an industry analyst for the National Investment Center for the Seniors Housing & Care Industry (NIC) at the NIC MAP Midwest Market Briefing held in Chicago, Ill. on Nov. 10.

“Chicago still has a sizable construction pipeline,” said Michael Hargrave, Vice President and leader of NIC MAP. “On a relative basis, it has a lot more construction going on in the market compared to MAP31 [the 31 largest metro areas].”

In the rest of the nation, including the Midwest, dwindling supply of senior housing means increasing demand and consequently occupancy rates that are edging higher. This isn’t exactly the case for Chicago, however.

Advertisement

NIC’s 2011 Seniors Housing Construction Trends Report ranked the city first in the number of new units, with about 3,200 under way, and an inventory of nearly 35,000 units. Its inventory is more than double that of Minneapolis, Minn., and Detroit, Mich., the cities with the second- and third-highest inventories.

Chicago’s average occupancy, at 86.3%, was lower than the Midwest’s average of 88.5%, and the region’s overall occupancy rates are slightly lower than the MAP100 (all the metro areas that NIC tracks) average. In contrast, Minneapolis and Detroit had average occupancies of 90.1% and 88.9%, while some Midwest markets with small inventories saw occupancy grow as high as 93.8%.

On the bright side, the amount of inventory compared to the absorption rate has improved since 2008, when the construction starts vs. inventory rate was at 6.2%, nearly double the 3.4% absorption rate.

Advertisement

“Now, the opposite phenomenon is in effect: construction starts vs. inventory is 1.3%, and absorption is 2.4%,” Hargrave pointed out. “That’s the ingredients that you need.”

Throughout 2011, absorption began to outpace construction starts in Chicago, resulting in steadily rising occupancy growth, but it’s important to make sure raw demand or absorption is greater than construction when considering new development projects, he cautioned.

Contrary to national trends, independent living has fared better than assisted living in Chicagoland, as assisted living saw a much steeper decline in occupancy and still has not outpaced independent living, said Hargrave.

“Much of the occupancy rate declines were as a result of the assisted property types, not as much the independent living property types,” he said, adding that it “seems counterintuitive.”

A majority of seniors housing inventory in Chicago was for independent living.

Written by Alyssa Gerace