Though senior living is more recession-proof than many industries, an economic downturn would likely worsen current occupancy challenges and make affordability an even more pressing issue to address, according to executives in the sector.
Though the economy has been in a prolonged boom, there are some indications — including a flattening yield curve — that a correction could be in the offing. But history has shown that senior living owners and operators should not necessarily fear tough conditions in the overall economy.
“What [investors] learned was, during the Great Recession, EBITDAs for assisted living and memory care communities kept chugging along, kept showing improvement, and others sectors didn’t,” Sarabeth Hanson, president and CEO of Harbor Retirement Associates (HRA), said last Thursday at the 2018 Senior Housing News Summit in Los Angeles.
Vero Beach, Florida-based HRA is a development and management company that currently operates 31 communities in seven states, with eight other communities under construction.
Assisted living and memory care, in particular, should be largely immune to another recession because they are needs-based offerings, Hanson said. Independent living, being more of a “luxury buy” that is often funded by seniors selling their homes, is more likely to take a hit.
Regardless of what level of care they offer, owners and operators should be ready to make adjustments — and seize on opportunities — should a recession occur, the panelists agreed.
Prepare to pivot
Investors were attracted to senior housing after seeing how well the industry performed during the Great Recession, and this fueled a building boom. With many new communities opening in certain markets across the country, competition for residents has grown fierce and occupancy has declined to historically low levels on an industry-wide basis.
Should a recession hit in the next 12 to 18 months, these occupancy challenges will be exacerbated, said Wendy Simpson, CEO of LTC Properties (NYSE: LTC), a real estate investment trust (REIT) based in Westlake Village, California.
“I think in terms of the need to lease-up empty units right at this moment, it will create, probably, a reduction in occupancy levels for a while,” she said.
She concurred with Hanson that independent living would probably feel the effects of a recession first, but thinks that assisted living will also encounter challenges. Compared with when the last recession occurred, though, there are a greater number of older adults in the age cohort for assisted living, which could lessen the blow for this part of the continuum, she observed.
Even if demand for assisted living and memory care remains high, a recession is likely to prompt changes in unit size and mix, to make senior living more accessible at a lower price point, the panelists agreed.
“There are a lot of properties that probably have to down-scale to a more modest-income resident,” Simpson said.
This could mean pivoting from selling large apartments and making these into more semi-private accommodations, Hanson said.
In the last recession, independent living providers began to lean more on home health for supportive services, keeping their occupancy up and costs down for consumers by preventing moves into more expensive care levels, said Talya Nevo-Hacohen, executive vice president, chief investment officer and treasurer with Irvine, California-based Sabra Health Care REIT (Nasdaq: SBRA).
Home health care could be a solution not only in independent living settings, but for seniors who are seeking to remain in their single-family homes and not sell into a down real estate market should a recession hit, she said. However, at-home care likely will not be an affordable option for those needing ongoing and high-touch services.
“It’ll all be a function of affordability,” she said.
Of course, creating a more affordable independent living or assisted living product has been a difficult challenge. One potential model is Illinois’ supportive living facility (SLF) program, said Simpson.
“Illinois figured out that people who would need public support were better taken care of by the assisted living model than end up in a nursing home, so they have a very robust program, and I don’t understand why more states don’t have supportive assisted living programs,” she said.
It should be an industry imperative to deliver a concerted message to the states, pressing them to implement solutions like the one in Illinois to take care of their aging populations, she believes.
Busted deals create opportunity
While investors may have targeted senior housing after seeing how it fared in the last recession, some of the new entrants in the space will find themselves in tough positions should the economy begin to falter, Simpson and Nevo-Hacohen said.
This is in large part because of the way senior living has evolved into a more operationally demanding medical model, according to Nevo-Hacohen. With acuity rising even in all levels of care, senior living communities today are offering robust health services in homelike settings, making the role of the operator more crucial than ever.
“I don’t think that a lot of the short-term capital that’s coming into the space recognizes, let alone understands, the critical importance of the operator as part of the value of this business,” she said. “I think they underwrite the real estate and they think about the real estate without really bifurcating and understanding that the operator is key.”
A senior living property with a good operator can thrive even if it’s not in the best location, she said. The opposite is also true: A community in a great location but with a poor operator will not do well.
A recession could therefore be the impetus for investors to sell off underperforming properties in attractive markets.
“A lot of the new capital is fueled by easy debt,” Simpson observed. “When and if a recession comes, I think that money is the first to leave, and so we’re going to have some opportunities to buy properties in busted deals.”
Written by Tim Mullaney