Senior Housing Oversupply Creates Near-Term Headwinds

Following the economic downturn, the senior housing market has experienced a strong recovery on many fronts: investment from interested parties, some of whom have not yet before invested in the sector; and a construction boom that has led to new and improved communities.

But investors and prognosticators have begun to ask the question: when does the heyday end?

Recent mainstream news coverage began to address the topic, suggesting that some areas of oversupply are beginning to serve as cause for concern, and recent occupancy data from the National Investment Center for Seniors Housing and Care (NIC) echoes some of those concerns.


“There are pockets,” says Beth Mace, chief economist for the association. “There are certain areas that have a lot of supply.”

Among them are San Antonio, Sacramento, Dallas, Atlanta and Chicago, Mace says. Those are markets that now measure 10% or greater for their share of units under construction as a share of current inventory.

In San Antonio, that figure is particularly high: 31%.


In terms of units under construction, the numbers are also striking. In Dallas, there are about 21 projects under construction, equating to around 1,700 new units. In San Antonio, there are 8 projects being built, comprising 700 new units.

“That’s a lot of new properties that are coming online and have to be absorbed,” Mace says. “Today we’re at that point where you want to be careful. It always behooves you to do your homework and know what markets you’re going into. It’s more important than ever to be mindful of your existing and new competition.”

Demographics are one explanation for some of this oversupply phenomenon. Many have talked about the baby boom being a driver of future senior housing occupancy and the “undeniable” population shift that will need senior housing options. But that shift is actually many years away from impacting the market, Mace showed in recent analysis.

The current cohort of people living in senior housing today is actually shrinking slightly in the short term. Deceleration in the population of 82- to 86-year-olds will lead to near term weakening in demand well before baby boomers begin to reach the age when they are seeking senior housing.

There are some factors that could offset the weakening population influences, but those factors are uncertain, Mace says.

“It may be offset by different types of influences,” she says, “such as the broader economy. If I look at the broader economy, it may be strong enough to offset that.”

Some operators and investors have addressed the issue as one that is top-of-mind, with equity analysts pointing to the topic during the most recent flurry of earnings activity disclosed by the industry’s public operators and investors.

“We are in the right markets where there is not oversupply,” said Health Care REIT CEO Tom DeRosa of the REIT’s portfolio. “There is oversupply in many markets in the United States, and those are places we do not choose to own real estate.”

The company sees its calculated approach to ownership as differentiating itself during the oversupply period.

“Now that we are entering this period where it may be operations are a bit more challenged…I think the quality of our real estate will increasingly stand out and differentiate itself,” said HCN’s Chief Investment Officer Scott Brinker.

Written by Elizabeth Ecker

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