Although capital will continue to flow into senior housing, developers and operators will face a challenging environment in 2019.
These challenges might be starkest in markets that have seen oversupply in recent years, but broader economic trends will create pressures across the board, according to Beth Mace, chief economist at the National Investment Center for Seniors Housing & Care (NIC).
Mace is slated to speak about these pressures — and opportunities — on Wednesday, as a panelist on Senior Housing News’ Finance & Investment Outlook for 2019 webinar. In advance of this event, Mace gave SHN a preview of her thoughts about the year to come.
New competition has been a theme in senior housing of late, taking a bite out of occupancy for some providers and raising doubts about the prospects for development. But oversupply has not been much of a problem in some metro areas, while being a major factor in others.
There are a handful of markets that are on Mace’s radar as potential trouble spots. These include Houston, San Antonio, Las Vegas, Dallas and Atlanta. Occupancy in all five cities was below 84% as of Q3 2018, according to the most recent NIC quarterly data.
“If I were breaking ground and opening my product in those markets in the next year, I probably had underwritten that as stabilized at 90% to 95% occupancy, [so] it’s going to be more difficult to meet my pro formas in my business plans,” Mace said. “As a result of that, we will see some of the equity in those projects compromised, possibly lost, as they wait for properties to get filled.”
These communities eventually will fill up, Mace emphasized, given the demographic wave of aging baby boomers as well as current development trends. New construction has slowed, which will allow the new product to meet existing demand and fill up. In San Antonio, for instance, construction as a share of existing inventory was 22% in the first quarter of 2015, but today very little new development is underway.
“Some warning signs have been paid heed,” Mace said.
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‘Help wanted’ signs abound
The broader economic climate should remain relatively unchanged in 2019, Mace believes. That means strong growth — largely spurred by fiscal stimulus policies — tempered by the Federal Reserve’s moves to gradually raise interest rates.
With higher interest rates, cost of capital will increase, so it may become more difficult to finance and recapitalize investment opportunities.
Low unemployment will also continue, meaning tight labor markets will persist.
“I think the labor issue is here to stay with us for some time,” Mace said. “It’s going to be difficult for businesses, not just seniors housing, to get the labor that they need. We’re seeing that in the building trades … really, everywhere you go, you can see a help wanted sign.”
Considering that wages, benefits and other labor-related costs account for about 60% of the standard senior housing operating budget, providers may find it difficult to control expenses in the year ahead.
Looking to 2020, the consensus among economists is that the economy might begin to slow down. Mace shares this view, although it worries her when economists are in broad agreement, she joked.
A new health care paradigm
The 2019 outlook is not entirely gloomy; attracted by the sector’s returns and longer-term demographics, investors will keep flocking to senior housing in the next year, Mace predicted.
“There’s a lot of interest in seniors housing, a lot of new equity funds being developed,” she said.
Additionally, opportunities will arise as senior housing becomes increasingly enmeshed with the larger health care system, Mace believes. The move to value-based care is creating a new paradigm for U.S. health care, and senior housing could play an increasingly prominent role, given that providers can help older adults maintain wellness and drive costs down system-wide.
Still, the labor-related expense growth, downward pressure on occupancy, and rising interest rates could deter senior housing stakeholders from taking risks in 2019.
“[These pressures] suggest you need to hunker down and try to grow NOI by trying to maintain strong product, and maintain and increase length of stay,” Mace said.
Written by Tim Mullaney
To hear more about what 2019 will bring, click here to register for the 2019 Senior Housing Finance & Investment Outlook Webinar.