The Truth Behind Senior Housing ‘Supply Surges’

With dipping occupancy feeding fears of senior housing oversupply, scrutinizing a market carefully before developing a new property is essential. And conventional wisdom has singled out some metro areas, such as San Antonio, as especially risky bets. But taking a longer-term—and bigger-picture—perspective reveals some surprising trends and a more nuanced take on some markets with shaky reputations.

To undertake this type of longer-term analysis, real estate services firm Rockwood Pacific teamed up with Phil Downey at Senior Housing Analytics. They looked at data from a variety of sources, including the National Investment Center for Seniors Housing & Care (NIC), the Department of Commerce and the U.S. Census Bureau, to analyze supply and demand patterns in 30 of the nation’s largest metropolitan markets over the last 25 years.

“This is a long-term analysis, so it’s not meant to be a substitute or compete with the latest stats coming out of NIC about changes in occupancy,” Frank Rockwood, co-founder of Rockwood Pacific, told Senior Housing News. While it probably won’t help developers decide whether to pull the trigger on a project tomorrow, he said the analysis could help guide a longer-term strategy, such as a five- to ten-year plan about where a company wants to be in deep and where not as deep.

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One question that the analysts tackled had to do with “supply surges.” Certain markets—including Denver, Houston and Minneapolis—currently are experiencing surges in the number of new openings to existing inventory, according to NIC data.

It turns out that there is a discernible pattern in which some markets more frequently experience supply surges than others. And markets that frequently experience assisted living surges also tend to experience independent living surges.

The analysis assigned a “surge score” to particular metros based on the frequency and magnitude of high new openings ratios over the 25-year time horizon. Among the metros most prone to surges: Boston, Denver, Houston, Atlanta, San Antonio and Riverside, Calif.

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There is a mixture of reasons—“good and not so good”—that these markets tend to have frequent supply surges, Rockwood said. One good reason: they tend to be high-growth population centers, suggesting that supply is increasing to keep up with demand. One not so good reason: these locations simply have lower barriers to entry.

“You can build a project more easily, but that’s going to be the same for lots of other folks in the same market,” Rockwood said. “I’m making an assumption about what the market looks like, but a lot of other folks down the road are getting a green light too, and that can mean a supply surge that means the assumptions you based your analysis on have changed.”

Los Angeles, Seattle, Phoenix and Orlando were on the other end of the spectrum, having the lowest surge scores. This means that they have a good track record of not having a lot of new supply hit the market at the same time. There were some surprises here, notably Phoenix.

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The analysts had a theory that surge scores would roughly correlate with where a city falls on an index created by the University of Pennsylvania’s Wharton business school, which identifies how difficult it is to build residential housing in various markets. This arguably should be a reasonable proxy for how easy it is to build senior housing projects as well, Rockwood said.

Phoenix is a relatively easy place to build, according to the Wharton index, but it has not experienced frequent senior housing surges.

The result is unexpected, but perhaps suggests how perhaps a metropolitan area might be too large a tract to get a real sense of the state of senior housing supply, Rockwood said. Anecdotally, it seems that most of the senior housing product in Phoenix is concentrated in one area: Scottsdale.

“[Scottsdale] might actually feel high risk from a supply surge standpoint,” Rockwood said. “But that might mean there are other areas of Phoenix that are even lower risk. I’m speculating, but it gets at the submarket idea.”

Where Supply Meets Demand

The concept of supply surges is useful but basically ignores the demand side, so the Rockwood analysts also looked at how senior housing construction has aligned with the growth in the 75+ population over time.

Washington, D.C., is one example they focused on; in the nation’s capital, growth in senior housing was largely in “lockstep” with growth in the older adult population until about 2000, Rockwood said.

At that point, supply began to exceed the population growth, throwing the ratio “out of whack,” he said. However, supply then began to decline, creating more stability as of 2014.

The list of metros with the most stable ratios over time includes Los Angeles and San Diego, as well as some of the cities that have gotten a reputation as oversupply hotspots, such as San Antonio and Denver.

“San Antonio gets spotlighted as a surge market, and it is,” Rockwood said. “But the counterargument is that it’s a high growth market, so it might not be as bad as you think.”

Rockwood graphic
Source: ASSESSING RISK OF SENIOR LIVING OVER-SUPPLY – A LONG-TERM PERSPECTIVE

And then there are the cities with the most notable declining ratios, where recent penetration rates are well below their peaks, which typically were reached five to ten years ago. These cities are Riverside, Orlando, San Jose and Sacramento.

The implication is that there could be room to grow in these markets. However, the presence of cities like Riverside again highlight how complicated the supply-demand question can be. Riverside also is prone to supply surges, so there’s a lot of product coming online and a growing senior population, yet penetration rates are moving in the wrong direction. Perhaps this means that product in this area is not properly configured for market needs, Rockwood said. For instance, units might not be right-sized, the proportion of AL to IL might be off, or developments might not be located in the right submarkets.

Indeed, there are many variables to weigh when looking at supply and demand in a given area, including the state of legacy product and the ability of new developments to compete with them. But one key takeaway from the Rockwood Pacific analysis is simply that supply growth patterns do appear to exist over time, and are worth considering as investors, operators and other stakeholders weigh the risks of new development.

“Senior living supply is but one component driving overall market performance, albeit an important one,” Rockwood wrote in the report. “This framework is not expected to be particularly helpful in forecasting near-term changes in occupancy and rent growth, however, it does appear to have merit in gauging risk and in valuing properties.”

Written by Tim Mullaney

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