Favorable economic and investment conditions are driving positive momentum throughout the spectrum of senior housing in 2015, new data shows.
Occupancy is projected to climb between 10 and 80 basis points, depending on the senior housing product type, by year-end 2015, according to the 2015 National Seniors Housing Report presented by Marcus & Millichap.
Senior housing’s rising performance is also assuaging previous concerns regarding how the Affordable Care Act might impact the sector.
“Strong job growth across nearly every state is refilling local coffers and relieving pressure on state-funded reimbursements,” says Marcus & Millichap in a statement. “Additionally, more questions surrounding the implementation of the Affordable Care Act and how it will impact operators have been answered, enabling owners to navigate the new system.”
The housing market is also having a positive influence on the sector, as seniors who elected to stay in their homes during the downturn are now “financially and psychologically in a position to transition into some form of seniors housing,” says Marcus & Millichap.
Assisted living facilities
Low interest rates are encouraging investors to diversity their portfolios in the space. About $30 billion in non-traded real estate investment trust (REIT) funds could enter the market this year, with a significant share targeted at private-pay assisted living facilities.
“New construction will limit improvements in the sector this year, resulting in a 10-basis point rise in occupancy to 91.4%,” says Marcus & Millichap about its outlook for assisted living. “Strong occupancy and high rents commanded by new properties will support a 2.3% gain in average rents this year to $4,268 per month.”
Independent living facilities
In independent living, acute demand for apartments is spilling into the sector as buyers outnumber sellers by a wide margin, data show. And the added spread between cap rates and interest rates for these properties has been a strong selling point for investors, says Marcus & Millichap.
About 3,000 independent living units were added to inventory during 2014, down from 4,400 units during the prior year, according to National Investment Center for Seniors Housing (NIC) MAP data. Development is rising as 11,600 units are under construction across the country, the highest level since mid-2009. Underway units represent 2.4% of existing stock.
“Both occupancy and rents should improve this year as seniors unlock equity in homes and move into independent living units,” says Marcus & Millichap, adding that occupancy is expected to rise 50 basis points to 92.3% by year-end 2015 while average rents advance 3.1% to $2,923 per month.
Skilled nursing facilities
The skilled nursing sector is “poised for a renaissance” of smaller operators in 2015, Marcus & Millichap says, noting that uncertainty took a toll on deal flow at the lower end of the quality spectrum the past few years. The current bright outlook could help investors recoup lost time.
“Although occupancy has been stuck in neutral for the past several months, a slowdown in construction will support a 30-basis point increase thisyear to 88.5%,” the company says regarding its outlook for skilled nursing. “Rents will climb 2.1% in 2015 to $290 per bed, per day as tight government funding limits reimbursements.”
Continuing care retirement communities
Continuing care retirement communities (CCRCs) are projected to undergo the most basis point occupancy growth, as occupancy is expected to rise 80 basis points in 2015 to 91.2%, data show.
“A slowdown in the housing recovery could encourage some seniors who have been on the fence about releasing equity in their homes to move forward,” says Marcus & Millichap, adding that entrance fees in 2015 are expected to climb at a similar pace to 2014.
Entrance fees for CCRCs were $292,000 at the end of 2014, up 4% from the same period in 2013, according to NIC Map data.
Access the report here.
Written by Cassandra Dowell