Wave of New Supply Hits Senior Living Hard

Long-standing fears of oversupply are coming to a head for some of the nation’s largest senior living providers, raising questions about which markets and types of properties are most affected.

Those impacted by new competitors are facing occupancy and pricing pressures, with some senior living providers discounting their rates in an effort to keep occupancy up. Indeed, the nation’s largest senior living provider, Brookdale Senior Living (NYSE: BKD), reported one of its worst earnings quarters as of late, with executives placing the blame on new competition within its mid-size markets.

And Brookdale is hardly alone, as provider Five Star Senior Living (Nasdaq: FVE) and owner New Senior Investment Group, Inc. (NYSE: SNR) have reported their own struggles with new competition opening up.

Supply Sound Off 

During the third quarter of 2016, Brentwood, Tennessee-based Brookdale cited struggles with new competitors within its mid-size markets, pointing to an “unprecedented” number of new openings in some areas. The rate of new openings close to Brookdale communities caught the company off guard, executives acknowledged during an earnings call with analysts Tuesday.

Another major senior living provider, Five Star, similarly had significant exposure to new competition—up to 50% of the company’s properties in metro areas where NIC is tracking supply data are exposed to new competition within a 10-mile radius, executives said this week.  As a result, the company has had to take a hard line with its pricing.

“In markets where we’re seeing more pressure because of competition, we probably will be more selective with rates,” Bruce Mackey, president and CEO of Five Star, said during an earnings call with analysts this week. “It’s market-dependent, community dependent. It’s a balance where we sacrifice occupancy for rates.”

New Senior Investment Group (NYSE: SNR), the only pure-play senior living real estate investment trust (REIT), has similarly utilized incentives to offset occupancy challenges related to competition.

“We are seeing it in areas where there is more competition, and so we are seeing our operators use it as a tool to drive …occupancy,” New Senior CEO Susan Givens said during an earnings call this week. “I think when you look at our numbers, you are seeing that occupancy is going up, but there is also increased incentives, so we are working with our operators to try to strike that balance.”

Still, not every provider has been ringing alarm bells about supply. Capital Senior Living (NYSE: CSU), a Dallas-based senior living provider with roughly 130 communities, didn’t feel the same sting from new supply. In fact CEO Lawrence Cohen even stated supply is “tapering off” across the senior housing market. The provider only operates a few communities in three of the top 10 metro areas with the highest construction rates identified by NIC.

Despite this limited exposure, CSU has still had to make concessions by offering rent discounts as the company saw a high number of move-outs—though not as a result of new competition.

Concentrated Markets

As has been noted in the past time and time again, new supply pressures are limited to specific markets where construction rates are particularly high. It’s worth pointing out there are some markets in the country with no ongoing senior housing development at all, according to data from the National Investment Centers for Seniors Housing & Care (NIC).

While Brookdale and Five Star did not name specific locations where they are under supply pressure, Brookdale did say the issue is greatest in mid-sized cities. This is in line with the most recent data on where construction is most robust.

Within secondary markets, 31% of senior living construction is confined within just four markets—Charlotte, North Carolina; Austin; Columbus, Ohio; and Ft. Myers, Florida—according to Beth Burnham Mace, chief economist with NIC.

“In general, for those markets that have growth in their existing inventory of construction underway right now, the incumbent population of senior housing properties, the guys existing today, they’ll start to feel pressure in terms of occupancy and rent growth because of the competition that’s there,” Mace told Senior Housing News.

In the last few years, more development has shifted to secondary markets, where occupancy remained stronger than primary markets for some time. However, in the last year or so, occupancy levels in secondary markets have become less than that of primary markets, according to Mace. Yet construction continues to ramp up in secondary markets.

“It might be getting more challenging to develop in some of the primary markets, with more barriers to entry, land constraints and competition for construction labor,” Mace said. “We’re seeing that some developers are finding it difficult … because of competing construction projects from other sectors.”

Sector Sweet Spots

Beyond looking at specific markets, construction rates vary widely between different senior housing segments. Independent living was looking stronger compared to assisted living in third quarter data from NIC, with a slightly lower construction vs. inventory rate and a higher absorption rate.

“Assisted living is generally perceived to be a more resilient property type, more of a sure bet in terms of maintaining higher base occupancy because it’s more needs based,” Mace said. “But, there’s more development in that area. Now, we’re seeing more activity moving into the independent living area, as well.”

For many providers this quarter, independent living appeared to be the crown jewel of their portfolios.

HCP Inc. (NYSE: HCP), which underwent a number of transactions in the last week, cited resiliency within independent living.

The REIT boasts insulation to new competition because roughly 30% of its senior housing portfolio is independent living and continuing care retirement communities (CCRCs), reducing the impact of new competition within assisted living, executives said on the company’s earnings call Tuesday.

Similarly, despite its high exposure to new supply, Five Star saw the greatest gains in occupancy in independent living—a 60-basis-point boost during the third quarter.

New Senior saw its recent investments in independent living start to pay off big time during the third quarter. Seventy-one percent of the REIT’s NOI comes from its independent living assets.

“… For us, independent living has held up very well, and, in fact, this is a great quarter for independent living,” CEO Susan Givens said during an earnings call this week. “It’s really the assisted living assets which we’re not happy about that, but it does comprise a smaller percentage of our overall portfolio. But those are the assets where we have seen more challenges.”

With new competition springing up, there are some things that senior living providers should do to position themselves to retain their occupancy levels without devaluing the product by offering pricing incentives.

“NIC has been saying for a while it’s time for property managers and owners to roll up their sleeves and …find what their own competitive advantage is relative to the shiny new product,” Mace said. “You do that, especially in senior housing, in large part by your existing reputation and ability to care for residents. If you offer strong value propositions in terms of services and care and the physical building itself, you’ll definitely feel pressure, but you should be able to maintain your market share.”

Written by Amy Baxter