Earlier this year, there were signs that the senior housing industry was on its way to a recovery, following a period of oversupply and other headwinds. Then came Covid-19, the disease caused by the so-called novel coronavirus that has sickened at least 100,000 people, roiled economic markets and has disrupted daily life across the globe.
While a wider senior housing comeback may still take place as some expected, how Covid-19 could affect such a recovery, and whether it might be delayed, is a big unknown, according to Beth Mace, chief economist for the National Investment Center for Seniors Housing & Care (NIC).
“I think it’s too soon to say what the impact is going to be on the senior housing industry, honestly, because it’s just starting to play out now,” Mace told Senior Housing News.
Still, potential worst-case scenarios could be dire. While demand for senior housing was strong last year, the industry is still on the mend and recovering from historically low occupancy rates. It doesn’t help that the sector has experienced headwinds related to oversupply and elevated cost pressure, according to Green Street Advisors Analyst Lukas Hartwich.
“[Senior housing operating portfolios] appear to be the most vulnerable sub-sector, given the age of its residents (mid-80s median age), month-to-month leases and high operating leverage,” Hartwich wrote in a March 4 investor note. “While triple-net senior housing offers some protection from these issues in the form of long-term leases, rent coverage levels are in an even worse position than those for SNFs, which reduces the ‘insurance’ factor.”
If Covid-19 outbreaks are severe enough, they could impact the viability of some smaller senior living operators, according to Dr. Kevin O’Neil, chief medical officer for Hickory, North Carolina-based Affinity Living Group.
“I think the effects could be devastating,” O’Neil told SHN in late February. “And that’s why I think it’s so important that we be really aggressive right now about these infection control measures.”
The fact that this is a disease that more severely affects older adults may give consumers pause when considering senior housing for their loved ones. But even that is too early to call.
“The idea of even inquiring or moving a parent into a senior housing property may be delayed,” Mace said. “On the flip side … if you have [a loved one] who’s ill, or somebody who has high-acuity needs, you might feel better having [them] in a place that’s well-equipped and trained, with the appropriate staff.”
Michael Carroll, an analyst at RBC Capital Markets, shares Mace’s uncertainty regarding how Covid-19 would affect the senior housing industry. He imagines a scenario where widespread coronavirus outbreaks could push back a decision to move parents into senior housing.
“Do you have weakening near-term demand as people are delaying those [move-in] decisions?” Carroll told SHN. “It remains to be seen.”
But even that notion is just a “thought exercise” at this point, given the early nature of the ongoing crisis, he added.
Senior living providers, worried about Covid-19’s effects on the industry, have prepared for outbreaks by beefing up their infection control protocols. That includes Brookdale Senior Living (NYSE: BKD). The nation’s largest provider has been “very proactive” in preparing for a potential outbreak, Mace said.
“Operators that I’ve spoken to are really taking this very seriously,” Mace said. “They’re really focusing on prevention and in the end, containment, if it should get that far.”
Economic turmoil raises recession fears
One thing that seems more certain now is the prospect of a recession in 2020, in Mace’s view. The Dow Jones Industrial Average plunged nearly 8% Monday, its worst showing since the 2008 financial crisis. Shares of oil and bank companies slid particularly far, as the latest sell-off was spurred by a new oil price war between Saudi Arabia and Russia, catalyzed by weakening demand related to the virus.
Senior housing stocks weren’t spared. By the time the markets closed Monday, shares of the “big 3” health care real estate investment trusts (REITs) — Welltower (NYSE: WELL) Healthpeak Properties (NYSE: PEAK) and Ventas (NYSE: VTR) — were down about 12%, 7% and 10%, respectively.
Although the prospect of a recession seemed in the rear-view mirror before, recent disruptions surrounding Covid-19 have caused those fears to come roaring back. In particular, slowdowns in consumer spending, new changes in the bond market and the ongoing stock sell-off have convinced Mace that a recession is in the cards this year.
“I think that we’re going to end up in a recession this year,” Mace said. “I haven’t actually seen a lot of other people necessarily saying that, but that would be my take.”
The good news is that the U.S. economy is in a “place of strength” from which to weather a potential recession, Mace said. And, interest rates are still very low, both on the residential and nonresidential side.
“As rates drop lower, people are going to be more and more enticed to want to sell their house,” Mace said. “And people often use their home equity toward senior housing.”
The bad news is that uncertainty will persist for the foreseeable future.
“We don’t know how severe the crisis is going to be,” Mace said.