Commercial real estate (CRE) investors still see senior housing as a highly attractive asset class, and a majority expect occupancy to be on the upswing in the next year. Yet, they are tempering their expectations to some extent based on industry headwinds.
This is according to a cross-section of CRE owners, managers, developers and lenders who weighed in for the fifth annual seniors housing survey from National Real Estate Investor (NREI) and the National Investment Center for Seniors Housing & Care (NIC). Findings were released Monday.
Broadly speaking, investors are bullish on senior housing, due largely to the surge in demand that is expected as the baby boom generation ages. As in all the past NIC/NREI surveys, the respondents ranked senior housing the most attractive property class for investment. Senior housing had an average score of 7.2 out of 10, followed by industrial at 6.9 and apartments at 6.5.
However, that 7.2 score is the lowest for senior housing since the survey began, down slightly from 7.3 last year. The sector scored highest in 2014, at 7.8.
Concerns for senior housing focus largely on the high volume of new supply that has impacted some U.S. markets, as well as the continued high level of new construction.
Asked about various factors that have been impacting occupancy, “new and competing facilities” was the most common answer among respondents. Nearly 70% of respondents rated this as a concern, compared with about 60% of respondents last year and only 47% in 2014.
In addition, respondents are expecting more supply to come online, with 48% of respondents saying they expect an increase in construction starts over the next 12 months. However, among those respondents, only 27% said that the new construction would create oversupply.
And oversupply is not the only headwind hitting senior living. With the national unemployment rate around 4%, tight labor markets present another challenge, NIC Chief Economist Beth Burnham Mace noted.
Indeed, some senior living communities could find themselves in a tight spot, if new supply constrains their occupancy and in turn erodes net operating income, at the same time that labor-related expenses are rising, she told Senior Housing News.
About 60% of the expense load for a typical senior housing operator is labor-related, she noted. Providers are experiencing 4.5% to 5% upward pressure on hourly earnings, according to Bureau of Labor Statistics data that NIC has analyzed.
In addition, the labor issue is likely to persist for some time, Mace believes. While the mass retirement of the baby boom generation should boost senior housing occupancy, it might only worsen the labor crunch. Experienced workers will be replaced with less experienced people, which compromises productivity to some extent.
The low unemployment rate is just one indicator of an overall strong U.S. economy. Fiscal policies that the Trump administration has put in place, including the recent package of tax cuts, are giving the economy a boost at the moment; however, around 2020, a downturn could start to take effect as the stimulative effect of these policies wears off, Mace said.
Yet, the prospect of a recession might not scare investors away from senior housing. Needs-based products such as assisted living fared well during the last downturn. About 50% of respondents rated the state of the U.S. economy as being a “very” or “somewhat” significant factor currently affecting occupancy.
Despite the overbuilding and labor challenges, 65% of respondents said they expect occupancy rates to increase in the next year, and 76% believe that rents will also go up. This is in keeping with responses from last year. However, those expectations did not come to pass, on an industry-wide basis, as senior housing occupancy hit an eight-year low of 87.9% in the second quarter of 2018, according to NIC data.
The supply picture is also influencing acquisitions and new development. Market selection is key, as there are certain metro areas and sub-markets that are attractive while others are currently overbuilt. Some developers, such as Newark, New Jersey-based PGIM Real Estate, are starting to target smaller cities.
“We’re finding opportunities to develop in markets as small as 300,000 to 400,000 people where existing inventory is fairly dated and the occupancies for the market are very attractive,” PGIM Senior Portfolio Manager for Seniors Housing Steve Blazejewski told NREI.
Acquisition opportunities are also available, but investors are wary about new development. In some cases, acquisitions are being done at discounted prices as investors pick up troubled assets with an eye toward the long-term, but Class A properties are selling at premium prices, Blazejewski said.
Overall, about 48% of respondents expect transaction volume to remain about the same over the next 12 months, while 39% expect it to increase and 14% expect it to decrease.
Other key findings from the survey include:
—58.4% of respondents believe cap rates will rise in the next year, with most saying they will go up only slightly
—28.8% of respondents said they expect equity capital to become easier to access in the next 12 months
—19.4% of respondents said they expect equity capital to become harder to access in the next 12 months
—20.6% said that debt would become easier to access, while 36% said debt availability would become tighter
Written by Tim Mullaney