SHN+ Report: The Bull and Bear Cases for Rapid Senior Living Recovery

It’s with great pleasure that I’ll be sharing these exclusive messages as part of your SHN+ membership, as well as regularly offering observations, analysis and opinions based on our reporting and conversations with industry leaders.

While senior living providers are again in the trenches as Covid-19 infection rates soar across the United States, industry leaders are largely confident in their ability to operate through the pandemic, and are pinning their hopes — and 2021 plans — on the arrival of an effective vaccine.

Those hopes appear to be well-founded, as each day seems to bring more good news, with the potential for Pfizer’s vaccine to be available by the end of December.

What happens next is less certain. There’s no question that a vaccine will turn the tide against Covid-19, but there are significant unanswered questions about how quickly the senior living industry will recover from the effects of the pandemic.

Bull and bear recovery scenarios

There are plausible arguments for a swift recovery but also many factors that could lead to a longer, more complicated bounceback to pre-pandemic occupancy levels.

Arguments behind the bull case for rapid industry recovery:

— Construction starts plummeted to the lowest level since 2014, easing oversupply issues.

— Move-in restrictions created pent-up demand, particularly for needs-based senior living.

— Senior living providers will be able to show they kept infection rates low, as demonstrated by stats from some of the largest owners and operators. Brookdale Senior Living’s resident infection rate was around 1% as of Oct. 31. In Welltower’s operating portfolio, 500 properties had zero positive Covid-19 cases and only 21 properties had three or more cases as of Nov. 13.

— Older adults who experienced isolation in the pandemic will embrace communal living.

Of these arguments, the slowdown in new construction and the low infection rates across senior living communities surely will help drive the industry’s recovery.

But the extent of pent-up demand is more debatable. Data supporting significant pent-up demand is sparse and counter-evidence exists:

— Google searches for the term “assisted living” plummeted in the spring and recently hit a new low, according to Google Trends data.

— Sales execs with two national providers recently told me that dramatic pent-up demand isn’t apparent. Stats like “community visits quadrupled month-over-month” look good but could mean they went from 3 visits to 12, and in a normal year there would have been 50.

— Occupancy does begin to improve in areas with low Covid-19 infection rates, but this pattern is “much more evident” for skilled nursing than senior housing so far, Sabra CEO Rick Matros said at NAREIT’s REITWorld event on Nov. 17.

It’s also worth noting that occupancy is at historically low levels and is continuing to decline, meaning that providers have a deepening hole to crawl out of. The national NIC MAP senior housing occupancy rate sat at 84.9% in Q3 and slid lower in October. Third-quarter occupancy for national providers Brookdale, Five Star and Capital Senior Living sat in the 74% to 76% range.

With the federal response to the pandemic hurt by the troubled transition of presidential administrations, and public health experts warning of worse days to come in the winter, I don’t believe occupancy has hit a bottom yet.

And, senior living providers and REITs report that deep discounting is occurring. So, even if occupancy recovers with the advent of a vaccine, NOI could be stubbornly anemic if providers have to compete too hard on rental rates and short-term concessions.

Consumer sentiment reality check

Finally, there is the argument that older adults will see more value in communal living due to their isolation during Covid-19.

I am doubtful of this argument. For one, consumer perceptions of senior living have taken a hit. About 35% of prospects and adult children have a more negative perception of IL/AL since the pandemic started, according to an ASHA/ProMatura survey.

There were positive takeaways from that survey as well, such as that active leads were still largely inclined to make the move to senior living. And to be fair, Google search data is also mixed.

Google searches for an array of senior living-related terms were at a three-year high in February 2020, plummeted in April, but could be nearly back to the previous high levels by next spring, according to data shared at the LeadingAge annual conference. Still, the results do not paint a clear picture that large numbers of older adults are seeing more value in senior living than they once did, due to the pandemic.

Furthermore, the pandemic could motivate more older adults to consider options such as co-housing rather than traditional independent living. Co-housing startup UpsideHōM has seen a “tremendous increase” in inquiries and reservations during the pandemic.

A call for change

The pace of recovery will likely fall somewhere between the bull and bear scenarios, and some providers will bounce back more quickly than others.

On an industry-wide basis, consumer education efforts from ASHA and groups like POSH will help the immediate pandemic recovery effort by touting the safety record and social benefits of senior living communities.

But as the industry touts its successes, providers must not lose sight of the fact that while the vaccine will inoculate staff and residents against the Covid-19 virus, it will not magically restore consumer confidence or increase the appeal of a product that former Welltower CEO Tom DeRosa called “the luxury good that no one aspires to own.”

With this in mind, senior living providers must simultaneously recover from the pandemic and take risks by exploring innovations and new models such as co-housing, small homes or even more creative alternatives to traditional communities.

Doing so will not be easy for operators that are cash-strapped and weary from battling Covid-19, but the big-picture issue remains that aging baby boomers do not find current models of senior living compelling. I believe providers are fooling themselves if they think that offering safety and socialization is enough of a value prop for the coming wave of older adults. After the pandemic, a tired product will not suddenly take on a new shine for consumers.

The good news is that forward-thinking organizations already are making strides to innovate, building on lessons learned and investments made in technology, people and physical infrastructure during the pandemic. The road ahead is not certain, but I am confident that the future remains bright for senior living.

Thank you for your support and keep up the great work.