Senior Housing Occupancy Could Stabilize in 2018

There may be light at the end of the tunnel for the senior living providers struggling to keep beds filled.

Senior housing occupancy rates could stabilize this year, with the potential for occupancy growth beginning in late 2018 or early 2019, according to a new “Seniors Housing and Health Care Market Outlook” report from investment banking and advisory services firm Lancaster Pollard.

Around 30,000 new senior housing units opened within the National Investment Center for Seniors Housing & Care (NIC) primary and secondary markets in 2017, according to data cited in the new report. As a result, senior living occupancy trended downward in 2017, beginning at 89.0% and finishing the year at 88.6%.

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“The occupancy rate declined despite significant gains in the economy, jobs, housing and stock markets,” the report’s authors noted. “This suggests to investors and market participants that seniors housing occupancy rates are ultra-sensitive to heightened levels of supply growth.”

Better days ahead?

Using historical inventory growth patterns, the report’s authors projected that slightly fewer units—around 28,000—would open in 2018. Meanwhile, fewer senior housing units are starting construction now compared to the levels seen just a few years ago.

As long as the U.S. economy holds up, that could spell good news for the senior living industry throughout the rest of this year, according to Steve Kennedy, senior managing director with Lancaster Pollard.

“We feel that there is going to be a little bit of a decrease in the number of units that open up, and because the demand continues to be strong, that will help really stabilize [occupancy rates],” Kennedy told Senior Housing News. “Maybe we’ll start to see signs toward another increase in senior housing occupancy as we go into 2019.”

At the same time, some high-profile skilled nursing facility (SNF) operators—such as Kindred Healthcare (NYSE: KND), Genesis Healthcare (NYSE: GEN) and HCR Manor Care—saw significant challenges in 2017. The challenges might be attributable to an increasing population of Medicare Advantage enrollees.

“This is an issue for any skilled nursing operator,” Kennedy said. “We first see it really highlighted by the big boys because they’re having to report on it and they’re having to answer questions about it.”

Acquisition market remains hot

The acquisition market for senior housing and care properties remained active in 2017, with the $7.4 billion merger between Sabra Health Care REIT (Nasdaq: SBRA) and Care Capital Properties (NYSE: CCP) representing the largest deal during that time. On the whole, senior housing and care transaction dollar volume totaled $16.6 billion in 2017, according to recent NIC data.

“The biggest differentiator we’re seeing in the market is on the skilled nursing side, where the M&A activity is, in some measure, being driven by problematic properties,” Kennedy said. “On the senior housing side, in both independent living and assisted living activity, we see in 2018 as being a similar tenor to 2017.”

Interest rates are another market indicator to keep an eye on in the year ahead. The 10-year treasury rate has risen to more than 2.75%, and some experts believe it could climb above 3% by the end of 2018, the report explained. That could help raise the cost of capital for investors in the space and impact the price they are willing to pay for properties.

Construction costs are another industry bellwether to watch in the year to come, Kennedy said.

Written by Tim Regan

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