After years of oversupply, recent data suggests a turnaround could be taking hold for assisted living. Some of the nation’s largest providers expect to gain further momentum in the months ahead, although some areas of the country have yet to benefit from improved market dynamics.
Fourth quarter 2019 data from the National Investment Center for Seniors Housing & Care (NIC) posits that the supply-demand imbalance that had a detrimental impact on assisted living occupancy in recent years is beginning to right itself, and will eventually favor demand as the baby boomers enter the senior housing space and age into assisted living.
Some of the largest senior living operators in the nation, including Brookdale (NYSE: BKD) and Watermark Retirement, endorse the idea that assisted living is back on the upswing. Meanwhile, investor demand has remained steady for AL but could also increase given improved fundamentals.
However, the picture is somewhat mixed, as certain markets still struggle with oversupply and there is a question as to how when boomer demand will hit, given consumer preferences for living independently.
Occupancy, supply have bottomed out
What is becoming clear is that new assisted living growth slowed considerably from its 2018 peak, NIC Chief Economist Beth Burnham Mace told SHN.
Total assisted living inventory in the 31 major metropolitan markets NIC tracks totaled 9,175 units in 2019, compared to 14,625 units in 2018 and 11,909 units in 2017. That is the fewest number of units reported since 2014.
Demand for assisted living has picked up as inventory growth has slowed. Net absorption for 2019 totaled 9,661 units — the most units absorbed in a year since NIC began reporting the data in 2006.
Moreover, the occupancy rate for majority assisted living communities increased 30 basis points in the fourth quarter of 2019 to 85.7%. This also marks a 60 basis point increase from the recent record low of 85.1% in the second quarter of 2019.
Assuming broader economic conditions hold and barring any sudden shock to macro-economic trends, demand for assisted living should continue to grow, Mace said.
Operators see signs
Operators such as Brookdale Senior Living (NYSE: BKD) and Watermark Retirement Communities are seeing improvement in their segment occupancy rates. Brookdale, in particular, is betting that the two-year process of revamping its portfolio will lead to long-term, sustainable growth.
Assisted living is a linchpin of Brookdale’s five-year growth plan. Same-store revenue in its assisted living and memory care portfolio grew 2.9% sequentially in the fourth quarter, and 2% annually, driven by rate increases.
“With the changes happening in health care moving from fee-based services to pay for performance, there are better opportunities to partner with health systems to make assisted living a part of the care continuum,” Baier said.
The Brentwood, Tennessee-based operator’s portfolio consists of 763 communities in 45 states. It is the largest assisted living provider in the nation with over 41,000 units, according to industry association Argentum’s 2019 list of the largest senior housing providers.
Brookdale has spent significant time and resources restructuring its portfolio so that it owns a majority of the assets and now owns 60% of its consolidated portfolio as of February 1, Brookdale CEO Cindy Baier told SHN.
The operator is starting to see the results of that restructuring. Brookdale’s AL portfolio posted an 83.6% occupancy rate in Q4 2019 and 82.6% for the full year. The quarterly occupancy is a 90 basis point improvement year-over-year and has improved sequentially since the second quarter.
Performance targets include an average same-community occupancy of 89.5% by 2024, with a 7% net operating income (NOI) compound annual growth rate through that period.
Boomer demand will play an important role in that growth. Boomers currently account 9% of its total resident population, and 15% of its move-ins, Baier noted during Brookdale’s Q4 earnings call last week.
Watermark’s portfolio of 58 communities includes 54 that offer assisted living and memory care — 35 of which have stabilized occupancy. The assisted living occupancy rate in the stabilized communities is 91%, 94% for memory care and a total AL/MC occupancy rate of 94%. Overall, Watermark’s assisted living occupancy rate is 86%, 84% for memory care and 85% combined AL and MC.
Schachter cited Dallas, Denver and some of Watermark’s Florida and California markets as examples of improved assisted living occupancy within the past 12 months. What is most significant for this improvement is that it has been able to boost occupancy while holding the line on rates.
“We approach concessions on a case-by-case basis. We’re more-inclined to do [temporary concessions] versus partial discounts, like waiving part or all of an entrance fee. We might get creative to drive quick [occupancy] movement, but we don’t do permanent concessions,” Schachter said.
Markets with excessive supply are more inclined to offer deep concessions in order to drive occupancy, Mace told SHN. NIC tracks concessions through its “Actual Rates” certification program. The program, in which actual rates data are aggregated across operators, allows investors and operators to understand the relationship between “asking rate” or “rate card” pricing and the actual rate being paid by residents.
Of the 31 primary markets NIC tracks, the deepest assisted living discounts are in Atlanta, which had an overall occupancy rate of 82.7% in the fourth quarter. The delta between pricing and actual rate in assisted living in the Big Peach is equivalent to two months of free rent, compared to one month nationally.
Solana Beach, California-based operator SRG Senior Living similarly is seeing assisted living fare better in some markets than others. Headwinds are still blowing strongly in its California markets, but Arizona is a bright spot, SRG CEO Michael Grust told SHN.
“Arizona, in our opinion, the bottom in behind us,” he said. “We’ve actually started out the first quarter very, very strongly in all our assets in Arizona, and we’re very encouraged there. It is a market-to-market situation, and I know NIC has identified maybe a bottom, but perhaps that has to be identified in each market.”
No growing investor demand … yet
The improved supply-demand dynamics in assisted living will translate into a corresponding increase in demand for the product, Cushman & Wakefield Executive Managing Director Rick Swartz told Senior Housing News. Based in Boston, he leads C&W’s Senior Housing Capital Markets Group.
It’s a point of view also reflected in results of the 2020 Senior Housing Outlook survey conducted by Senior Housing News and Hunt Real Estate Capital, where respondents listed assisted living as second only to independent living as the most popular senior housing investment opportunity. This is a dramatic improvement from 2019, when assisted living ranked behind IL, active adult and memory care
Investor interest in assisted living has mirrored the overall interest in senior housing: quality opportunities are becoming fewer after a two-year rush on portfolio mega-deals; and all investors — REITs, private equity, and institutional capital — are looking to deploy capital.
Swartz believes that boomers’ interest in wanting to live independently will prolong when an inflection point for assisted living will happen, although he agrees that the declining pipeline and growing absorption are good signs.
“It may be a little early to [suggest a turnaround] from boomer demand,” he said.
The steady investor interest in assisted living is being driven by a steady appetite for the product, rather than the belief that an inflection point is on the horizon. Assisted living, ultimately, is a solid investment because of need, and can be resistant to pressures stemming from economic downturns, Swartz told SHN.
“In the long run, [assisted living] will be a great asset class and [investors] want to get involved before the tidal wave [of demand] arrives,” he said.