While the economy hasn’t fully recovered yet, the senior housing market appears to be in full swing, with positive trends likely to push investment in the category into the future.
Rising demand and falling vacancy levels are among these positive trends, as demand outpaces supply additions, according to a recent report on the state of the senior housing market from research firm Reis.
“It will likely be late in this current decade when demand begins to really ramp up,” says Brad Doremus, senior analyst at Reis and co-author of the report. “As demand ramps up, a shortage of supply would mean higher rent growth. But, a wave of new supply, if it were to come, could counteract this benefit.”
The senior housing annual inventory growth rate in the second quarter of 2014 was at 1.5%, an increase of 0.1% from the first quarter, according to the most recent data released by the National Investment Center for Seniors Housing & Care Industry (NIC).
While inventory growth is on the rise, demand is increasing at a much faster pace. Since 2012, occupied inventory has expanded by 2.4% versus inventory growth of 0.8%, Reis data shows.
As 10,000 people are turning 65 every day for the next 15 years, a slowly growing inventory will not be enough to withstand the market demand for senior housing.
“Some forecasts I’ve seen show the growth rate of the 75+ population more than doubling from between 1.0%-1.5% in 2013 to roughly 3% around 2018,” Doremus says. “So if we are already short on supply, supply growth will have to ramp up considerably in the meantime in order to accommodate all of those extra potential tenants.”
And by 2030 — when all baby boomers will have reached age 65 — there will be about 72.1 million older Americans, more than double their number in 2000, according to data from the Administration on Aging.
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“The nation will likely have a huge supply-demand imbalance on its hands unless development increases substantially,” Doremus says.
With demand outpacing supply conditions, vacancy is falling, pushing occupancy levels up.
The average occupancy rate for all senior housing properties was 89.9% in the second quarter, up 0.1% from the previous quarter and 1% over the same period in 2013, according to NIC data.
The overall national vacancy rate as of the second quarter was 8.7%, down from 10.1% at the end of 2012, according to Reis data.
Broken down, vacancy levels among independent living, assisted living, memory care and skilled nursing all fall in the high single digits. Skilled nursing has the lowest vacancy among the group at 8.1%, while assisted living has the highest with 9.7%.
These vacancy levels have shifted since the end of 2012, when independent living facilities had the highest vacancy level at 11%. Since then, the property type has had the largest vacancy compression of the four segments, with vacancy dropping to 8.8%.
Memory care facilities, on the other hand, had the lowest vacancy at the end of 2012, but now have the second-highest vacancy level at 9.3%, due in part to an increase in supply, much of which occurred in the second quarter of 2013.
In the past year and a half, the inventory of memory care units has increased by 3.1%, far outpacing the supply growth rates of the other senior housing segments. Independent living inventory has expanded by 1.1%, while skilled nursing inventory has grown by just 0.3%. Reis data was not available for the growth rate of assisted living inventory.
Although risks and uncertainty still remain, favorable demographics, along with rising demand and falling vacancies, contribute to a growing interest in senior housing.
Written by Emily Study