Once awash in a torrent of development activity, the senior living industry saw construction starts plummet last year. Now, there are signs that activity is resuming, but high material prices and other factors are complicating the outlook on how quickly senior housing development activity will ramp back up.
In the first quarter of 2021, independent living construction starts were at low levels not seen since 2012; assisted living construction starts are also lower now than in recent years, according to recent data from the National Investment Center for Seniors Housing & Care (NIC).
A small number of trends fueled by Covid-19 are largely to blame for that slowdown, according to NIC Chief Economist Beth Mace.
“Like other residential and commercial real estate sectors, [senior living construction] starts are also being affected by rising prices and shortages of labor, lumber and other key materials, as well as higher general costs,” Mace told SHN. “The bottom line is it all traces back to the impact of supply disruptions from the pandemic.”
At the same time, many senior living developers are reporting that capital markets have thawed, and that deals are again moving down the pipeline. Proposal activity for senior and assisted living was up substantially in Q1 2021, according to architecture, engineering and construction firms surveyed by PSMJ Resources.
The firm’s net-plus/-minus index, which expresses the difference between the percentage of firms reporting an increase in proposal activity and those reporting a decrease, went up 32 percentage points on a sequential basis, reaching 59%.
That is true for Boise, Idaho-based Wellness Enhanced Lifestyle Living, which has multiple deals in the works for its new “Varcity” brand; and for Ryan Cos., a developer headquartered in Minneapolis. Ryan Cos., which currently has seven projects in its pipeline in 2021 — more than the average number of senior living projects the developer and builder undertakes in a typical year.
“I think we are slow right now, and I anticipate it continuing to be slow for the next six months or so — maybe nine — because people held off on moving things forward last year at this time,” Ryan Cos. Senior Vice President of Senior Living Julie Ferguson told SHN. “There’s so much capital in the space that wants to invest in the sector, and now that the debt markets are really coming back, it’s inevitable that the construction will start picking up again.”
Perhaps the biggest external force pressuring senior living development and construction is the rising cost of building materials, such as lumber and steel.
Softwood lumber prices nearly doubled last year after a four-month surge, and now sit at record highs, according to the National Association of Home Builders (NAHB). At the same time, the price of steel mill products is reaching record highs, and price volatility is greater than it was at any point during the Great Recession.
And skilled construction labor has become more challenging to find. A 2021 construction outlook survey from the Associated General Contractors of America (AGC) found that 65% of respondents thought worker shortages was among their biggest concerns for the year ahead, behind inadequate infrastructure funding (69%); increase competition for projects (85%); and the ongoing impact of the pandemic (88%).
Recent events have also complicated senior living development projects, according to Larry Graeve, senior vice president of construction firm The Weitz Company. Those pressures have included freight and shipping lines that slowed thanks in part to the ship backup in the Suez Canal in March, and the ice storm in Texas that killed nearly 200 people and disrupted petroleum manufacturing, distribution and production.
NIC’s data illustrates the extent of the slowdown. On a four-quarter aggregate basis, independent living construction starts amounted to a little more than 3,800 units in the first quarter of 2021, or 1.1% of overall inventory. That’s down from a peak of 3.8% of overall inventory in early 2018.
Assisted living construction starts totaled about 4,900 units in the first quarter of 2021 on a four-quarter aggregate basis, or roughly 1.5% of overall inventory — a far cry from the 6% of total inventory that the sector saw in 2015.
“We have seen that slowdown in starts, and we’re also seeing a delay in project completions,” Mace said. “Projects are being delayed because of shortages in materials and cost increases, and some of those cost increases are now translating into contracts that have to get renegotiated.”
As disruptive as they are, those trends are not always contributing to cost increases across the board. For example, a more competitive market for subcontractor bids is helping to offset some of rising costs to a degree.
“We’re seeing five bidders on projects in each trade where typically you might see just three bidders per trade package,” Graeve said. “That’s helping offset some of the inflation.”
He also believes that the cost of building materials will fall as the pandemic recedes and lumber and steel mills get back to more normal production, and that senior living construction and development will pick back up. The only question for Graeve is when it will happen.
“I think people will start pulling things back off the shelf and opening up … [in] the third and fourth quarter,” Graeve said.
In 2018, NIC warned that overbuilding could result in excess senior housing inventory by 2025. Combined with a drop in occupancy that resulted in 42,000 newly unoccupied units of senior housing, a construction pause may not be a bad thing in the end, according to Mace.
“That, theoretically should allow demand to catch up to supply,” Mace added.
Major senior housing real estate investment trusts (REITs) have noted in recent months that a slowdown in supply could help drive the industry’s recovery from Covid-19.
For example, Toledo, Ohio-based Welltower (NYSE: WELL) noted in its April business update that that new construction starts had fallen sharply from their peak in 2018, and said in the first quarter of 2021 that this, coupled with demographic-driven occupancy recovery, should drive “significant NOI growth.” Another REIT, Chicago-based Ventas (NYSE: VTR), noted similar trends during its first-quarter earnings period.
But, as with anything in the senior housing industry, that is a tale that changes from market to market. For instance, construction starts in Miami amounted to about 10% of total inventory in the first quarter of 2021. And markets including New York City, Chicago, Atlanta, Houston and Washington, D.C. are all still seeing fairly steady levels of senior living construction starts, according to NIC.
Conditions on the ground
From his vantage point at Wellness Enhanced Lifestyle Living, Haller has seen a general slowdown in construction for all the reasons mentioned earlier in this article.
“There’s never been a time in the history of senior living development where the guaranteed maximum price — the GMP contract — has been more valuable,” Haller said.
But in recent months, Haller has also noticed an ongoing thaw in capital markets.
“The pregnant pause of both debt and equity has started to lessen,” Haller said. “Many of the large institutions that paused or lessened their capital deployment during the pandemic are starting to reemerge.”
To that end, Haller’s company is moving steadily ahead with two of its four planned senior living projects with Big Ten universities.
And Ryan Cos., which also offers third-party construction services, has noted an uptick in the number of clients who are ready to resume projects that were paused during the pandemic.
“Our list of potential projects that we’re working on from a third-party construction perspective, is probably one-and-a half times what it was last year at this time, maybe even two times what it was,” Ferguson said. “We’re certainly starting to see a lot of other people come off the sidelines and start talking to us about getting their project started in 2021.”
When the pandemic hit last year, Ryan Cos. began building more flexibility into its development deals, and as such hasn’t had anything “die on the vine,” Ferguson said. But in some cases the company had to go back and find cost savings in project designs.
“For example, in a parking garage where we may have finishes on the underside of the garage to hide the sprinklers … we may make the decision that we’re just going to leave it exposed,” Ferguson said. “Because we can… save ourselves some money to help offset the wood costs in the building above it.”
And like Graeve, Ferguson believes that senior living construction is poised to ramp up again in the not-too-distant future, and that it will hinge on the cost of labor and materials.
“Will people move forward at these higher prices because they found other ways to make up for those costs? Or will they say, ‘Hey, I’m gonna pump the brakes for another six months,’ hoping that the price of wood comes back down?” Ferguson said. “I do believe it will come back to pre-pandemic levels. The question is when.”