When the coronavirus pandemic first hit the United States, it inflicted swift and dramatic damage on the U.S. economy as a whole and the senior living industry specifically — but there were hopes of a similarly quick, sharp recovery. Now, those hopes for a “V-shaped” dip and rise have dimmed, and economists and senior living professionals are debating various other recovery scenarios.
“A ‘V’ would suggest that by the third or fourth quarter, you pop back up — I don’t think that’s very likely, given what’s happened with Covid and how it’s systematically moved through the economy,” National Investment Center for Seniors Housing & Care (NIC) Chief Economist Beth Mace told Senior Housing News.
Determining a more likely shape for the recovery is difficult for several reasons.
For one, history may not help much when it comes to predicting the shape of a Covid-19 recovery for the overall economy or the senior living sector. Previous recessions and depressions have been caused mainly by economic disruptions, such as the banking and real estate collapses of 2008 or the oil crisis of the 1970s. The current crisis has its roots in a very different cause: a virus. Therefore, recovery is contingent on how the virus behaves in the future and when an effective treatment or vaccine is accessible, and there is still a lot of uncertainty around these variables, Mace noted.
Not only is the Covid-19 situation fluid, but real-time senior housing data is hard to come by, Fitch Ratings Senior Director Britton Costa told SHN.
Still, based on the data that is available as well as anecdotal information, Costa, Mace and others in the industry are doing their best to anticipate what shape a senior living recovery will take.
W versus swoosh
After abandoning their optimistic calls for a V-shaped recovery, economists earlier this month began to rally around the “swoosh.”
“Named after the Nike logo, it predicts a large drop followed by a painfully slow recovery, with many Western economies, including the U.S. and Europe, not back to 2019 levels of output until late next year — or beyond,” Wall Street Journal reporters Paul Hannon and Saabira Chaudhuri wrote earlier this month.
That “painfully slow” recovery is due to the fact that the economy cannot restart quickly and easily, given the extraordinarily severe effects of Covid-19. To take just one indicator, the U.S. unemployment rate was at a 50-year low of 3.5% shortly before Covid-19 struck but now is at 14.7% and climbing, Mace noted. All the job gains of the last decade have been wiped out.
With every facet of the economy affected by Covid-19, major sectors such as hospitality and retail all but shut down, and economists such as Mark Zandi of Moody’s calling for a weak unemployment rate through mid-2023, Mace believes any recovery will likely take two years or longer.
Mace also does not want to venture a guess as to when senior living occupancy might return to pre-pandemic levels, but if Covid-19 does not resurface in a notable way after being brought under control, Mace believes that a swoosh-shaped recovery is possible for the general economy and senior living.
However, based on what has happened in Asia and other parts of the world, she thinks it is prudent to prepare for some level of resurgence in the fall or beyond — and that would transform a swoosh-shaped recovery to a W-shaped recovery, where gains made during periods of virus containment are followed by downward slides when Covid-19 comes back.
Mace is hopeful that future shocks to the economy and to senior living will not be as severe as these first few months of the pandemic. In senior living, for instance, owners and operators have faced a steep learning curve but now have protocols in place that could be adjusted rapidly in relation to how severe the Covid-19 threat is at a given moment. This would result in what she describes as an “elongated W” recovery.
Fitch’s Costa has a similar point of view, believing that senior living communities will experience a modified-W recovery.
“Would it be a perfect W, or the W that my toddler would draw, where it’s not necessarily perfect, but you know what they’re getting at? It’s probably the latter,” he said.
The speed with which the W rises will depend on factors such as how quickly senior living communities are able to re-open and accept new move-ins in larger numbers, as well as on how much pent-up demand there is and how well senior living operators maintain consumer confidence, he said. Earnings season comments from executives with publicly traded senior housing owners and operators do give him reason to believe that demand is holding, as indicated by deposits and limited occupancy growth.
Demand should indeed fuel senior living’s recovery, with a “swoosh” possible, according to Steve Fleming, President and CEO of The Well-Spring Group, which runs a life plan community and offers other housing and services in the Greensboro, North Carolina area.
“Unlike 2008 and 2009, the demographics are in our favor this time,” he told SHN.
Mace and Costa are also aware of the favorable demographic trends, but emphasize that to capitalize, providers must prove the senior living value proposition to consumers by performing well in this crisis.
“We do think there will be an increased onus on the sector as a whole to prove their value proposition,” Costa said.
To help in this effort, NIC is planning a research study comparing the incidence of the Covid-19 virus and mortality for senior living residents versus a similar group living in the community at large, Mace said. The idea is that if senior living communities do a better job at keeping this age cohort safe through the pandemic, they will need the data to make that case to the public.
Different shapes across the continuum
The swoosh and the W are not the only potential shapes for a recovery, and at this point, Fitch is proposing another possibility: the U.
More specifically, the firm believes that individual senior living communities will experience W-shaped recoveries; however, taken as a whole, the senior housing portfolios of real estate investment trusts (REITs) will go through a U-shaped recovery, Costa said.
Covid-19 is peaking at different rates across various states, regions and metropolitan areas. And, different locations are re-opening their economies on different timetables. The net result could be that while senior living communities in some places are in a recovery phase, communities in other places will be on a downward part of the W. So, REIT portfolio performance will drag along a bottom until some game-changing event like an effective therapy or vaccine leads to a dramatic upsurge.
Further complicating the effort to predict the shape of a recovery, certain parts of the senior living continuum likely will recover differently than others.
This is due in part to the fact that the Covid-19 crisis is two-fold — there is the health crisis caused by the virus itself and the economic crisis caused by all the efforts to contain it, which has resulted in the mass closure of businesses and a huge slowdown in consumer spending, among other outcomes, Mace said.
In many regards, the economic crisis is just beginning, as the ripple effects of mass unemployment, stock market losses and other financial shocks are felt. For example, listings of home for sale have already dropped sharply, and the unemployment rate suggests foreclosures will pick up, Mace observed. This could be bad news for independent living, if potential residents delay moves because they’re waiting for the housing market to improve, or because they’ve lost too much wealth in the stock market to finance a move to senior living. Assisted living and memory care might see a swifter recovery once the virus abates, as people with those needs are less likely to delay a move.
So, for a senior living portfolio dominated by independent living, the recovery might be more of a swoosh than a U, as consumers return the market more gradually as their finances improve and they can sell their homes, Costa acknowledged.
Adding another layer of complication, and a reason for optimism, it’s possible that lessons learned during the Great Recession will shorten the recovery this time around, at least from a real estate investment standpoint, Mace said. There is research to support this idea, from Jeff Fisher of the National Council of Real Estate Investment Fiduciaries. The economy as a whole took more than 10 years to recover from the recession in the 1990s, but only six years to recover from the Great Recession — Fisher attributes this to the fact that many people who went through the recession in the 90s became familiar with the process of shock, distress, workouts and resolution.
Many of today’s senior living investors, operators and other stakeholders have gone through previous market cycles, including the Great Recession.
“They’ve been to this dance before, so they know what to anticipate in a real estate cycle,” Mace said. “What proved out in the 2008 crisis is that lessons were learned, so the market snapped back faster, so you could see that happening again.”
Thinking about the shape of a Covid-19 recovery may be helpful for senior living owners and operators as they try to plan for the future in the midst of tremendous ongoing uncertainty, but as the alphabet soup of predictions makes clear, there are likely to be more revised timelines and altered outlooks ahead.
“I do view this to be a quick-moving and iterative story,” Costa said.