Advancements in the broader economy forecast a favorable outlook for across all senior housing property types in the second half of 2014, and growth is likely to continue well into next year, according to a new Marcus & Millichap report.
Independent, assisted living, skilled nursing and continuing care retirement communities (CCRCs) stand to benefit from improving economic conditions, especially as need-driven demands are likely to trigger increases in occupancies, rents and ultimately investor purchase prices per bed or unit, says Marcus & Millichap’s Second Half 2014 Seniors Housing Research Report.
“A stellar national economy and improved housing market are paying dividends for all sectors of seniors housing,” writes Marcus & Millichap. “Retirees are locking equity once trapped in their homes due to the soft housing market and deploying those funds towards entrance-fee CCRCs or other seniors housing options.”
The Rising Tide of Independent Living
Over the past 12 months, 3,400 independent living units came online nationwide, down from 3,800 units in the previous year-long period, according to NIC MAP data from the National Investment Center for Seniors Housing & Care (NIC).
But despite the decrease, development for the property type has seen some significantly heightened growth compared to last year. Halfway through 2014, 85 properties containing 9,200 units were underway, up from 7,900 units during the second quarter of 2013.
Occupancy for independent living facilities, on average, tightened in the second quarter to 91%, marking a 30 basis point increase in 2014 thus far. During the past year, the rate improved 120 basis points as seniors were less resistant to move into IL facilities due to healthier equity and housing markets, M&M writes.
“A strong economy will facilitate further gains in occupancy in rents for IL operators in the second half of the year,” the report states.
During 2014, M&M forecasts occupancy will climb to 91.5%, up 80 basis points from year-end 2013, while the average rent will climb 3.1% to $2,859 per month. In the second quarter, average rents for IL units were $2,813 per month, up only 1.4% compared to last year.
Assisted Living on Aggressive Path
Similar to IL facilities, though with more fervor, developers have been aggressively bringing assisted living projects out of the ground, resulting in 9,700 units added to the market in the past year and leading to an increase in inventory of 3%.
At mid-year, NIC MAP is tracking 17,700 units under construction, an increase of 2.9% from a year ago. However, new demand for this housing type is outstripping supply growth in the assisted living sector, which has pushed up occupancy 80 basis points in the last 12 months to 90.8%.
As development rises, the pace of occupancy is expected to ease, however, M&M anticipates occupancy will climb 9.3% this year signaling a 50 basis point increase compared to 2013. Meanwhile, average rent is expected to grow 3.4% in 2014 to approximately $4,218 per month.
CCRC Performance to Follow
For CCRCs, the forecast is largely dependent on demographic and home price projections.
Whereas there were approximately 13.2 million residents aged 75 to 84 years in 2013—an increase of 1.7% from 2010—this group is expected to grow 4.4% to 14.3 million by 2018.
Additionally, the median home price nationally rose 4.2% annually to $204,800 in the second quarter. And while the annual pace of home price growth has dissipated recently, greater equity in homes will enable additional seniors to unlock that capital and move into CCRCs the report states.
“The baby boomer cohort will begin generating demand for CCRCs within a decade,” writes M&M.
Occupancy at CCRCs climbed 60 basis points to 90.4% in the past 12 months. Year-to-date, occupancy has ticked up 20 basis points, according to NIC MAP, with average rent at $2,899 per month at mid-year, a 2% increase over the past 12 months.
However, despite a change in fortunes for CCRCs, developers in this sector have largely remained inactive. At mid-year 3,500 units were under construction, representing just 1% of inventory. A year ago, 4,300 units were underway.
Looking ahead, M&M forecasts average occupancy for CCRCs will rise 80 basis points to 90.6% this year as more seniors sell their homes and make the move into these communities. As for rent, average monthly rates will kick up to $2,910, about 1.7% higher than one year ago.
Skilled Nursing Slowing, Not Stopping
On the skilled side, SNF inventory was stable in the last 12 months as development kept pace with stock removals, according to the report. Overall, the number of beds in the county is down just 1% since the beginning of the last recession.
Currently only 6,800 beds are under construction, down 28% from a year ago and 36% below the peak level at the end of 2012. Slowing inventory growth, however, along with healthy demand looks to support a small occupancy bump during the second half of the year.
SNF occupancy is expected to climb to 88.4% this year, 40 basis points higher than its year-ago level, with average rents also rising 3.6% to $284 per bed per day. At mid-year, the average rate was $281 per bed per day in a SNF.
Collectively, the outlook is generally favorable for all senior housing property types as 2014 unfolds, especially as demographic trends stand to impact demand over the next year and beyond.
“Baby boomers have been a large benefactor of the healthier economic situation,” writes Marcus & Millichap. “Boomers’ parents are the primary utilizers of assisted living facilities and, equipped with refilled retirement accounts, this group will feel more comfortable with the expenditure for seniors housing when the need arises.”
Written by Jason Oliva