Senior Living Providers Brace for Labor Cost Surge

Between minimum wage hikes occurring across the country and the prospect of extending overtime pay to currently exempt workers, senior living providers are facing wage pressures that could take a direct toll on their bottom line.

Most senior living communities already pay more than minimum wage levels by an average of $0.75 to $1.50 per hour, according to Moore Diversified Services (MDS), a Texas-based organization that provides operations analysis, marketing development and investment advisory services. But even a modest increase could result in lower net operating profit margins and more conservative cap rates.

A recent White House proposal aims to increase the minimum pay for overtime-eligible employees from $455 a week to $970 a week, according to the Obama administration. If the proposal goes into effect, salaried employees making up to $50,440 a year will become eligible for overtime compensation. Currently, only hourly and salaried employees making less than $455 a week or $23,660 a year can generally be compensated for hours worked over 40 each week.

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And efforts across the country to bump up the minimum wage are quickly gaining momentum, with Los Angeles becoming the largest city to mandate a $15-an-hour minimum wage by 2020 and New York state recently setting minimum wage for fast-food workers at the same rate.

“When other industries raise the minimum wage, that creates more pressure [on senior living providers] to retain workers,” Roy Barker, director of special projects at MDS, tells Senior Housing News.

Earlier this year, MDS conducted a financial sensitivity model to provide some insight as to how the senior living industry might be affected by an uptick in the minimum wage by looking at an assisted living community with 110 units and 55 full-time equivalent employees. Entry-level wages range from $11 per hour to $11.70 per hour, and the model was run with $1.50 per hour increase.

The analysis revealed an annual payroll increase of 10.2%, a total expense increase of 4.5% and a net operating margin decrease of 3.4%. Further, the community’s intrinsic value would decrease by about $1.9 million at a cap rate of 8%, according to the model.

A close eye is being kept on wage changes at The Clare, a 326-unit high-rise continuing care retirement community located in Chicago. Executive Director Kyle Exline told SHN that he doesn’t expect a minimum wage increase to significantly impact The Clare since hourly rates are already well above that threshold due to location. Still, he said market wage studies will be conducted to ensure that pay remains competitive with other senior housing providers in the area.

“We are including the expected increase in our five- and 10-year forecasts,” Exline said. “It will be interesting to see how market rates that are already above $15 are impacted with this change. The anticipation is that those will go up, but at what percentage is unknown.”

Calculating outcomes of different wage scenarios is something Barker highly suggests, so that communities can gauge how they’ll handle increases at various increments. Also important is maintaining  pay rates that are comparable or above those in other industries in order to better retain staff and preserve a stable work force.

“At least if you’ve thought about it, you kind of know how to react,” Barker said. “Otherwise, it would make your job a lot harder if wages do go up, and you’d probably have some pain between figuring it out and implementing solutions.”

Of course, such number-crunching means deciding how to make up for new labor expenditures. Typically, providers fall back on raising rents, Barker said, but affordability then becomes a concern, which in turn can harm occupancy.

“These operators are now so challenged at having a good mix of being affordable and paying a living wage as well,” Barker said. “If wages go up too much and if operators have to absorb all the costs, then it doesn’t become a viable business operation.”

Staffing accounts for about 50% of a community’s expenses right off the bat, said Aaron D’Costa, director of senior living acquisitions at Virtus Real Estate Capital, and it’s inevitable that increased costs get passed along to the consumer.

“I agree that the minimum wage should increase, but there’s a significant cost burden that goes along with that,” he said. “Ultimately, that cost is borne by the consumer.”

Written by Kourtney Liepelt

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