The senior living industry is on track for recovery in the near-term — as long as there are no more setbacks like Covid-19.
Despite all of the current complexities of caring for older adults, senior living operators have learned much about combatting outbreaks in the last two years and change. And that, along with recent gains in occupancy, tells AEW Capital Management Director of Research Mike Acton that the industry “is poised for a good recovery.”
“It’s going to take a while to repair the margins, but I think we’re on the way,” Acton said during a National Investment Center for Seniors Housing and Care (NIC) panel Wednesday. “Knock on wood, if we don’t have some other big setback, in terms of public health or something else, it should be a pretty good near-term recovery story.”
In the wake of the Covid-19 pandemic and subsequent economic headwinds, the number of distressed assets in senior living was lower than some expected. But Acton said there may be more distress down the road if current conditions last, and that in these sorts of conditions, “the strong get stronger, and the weak get weaker.”
“Remember, these things take a long time to play out,” Acton said. “There will be opportunities to recapitalize properties and operating partners.”
Risk and reward
One big trend in the senior living industry today is that success is not guaranteed for all operators. While a little less than a third of the senior living properties in the NIC MAP primary markets carried an occupancy rate above 90% in the first quarter of 2022, another 40% have an occupancy rate that is below 80%.
At the same time, more than half (60%) of the senior housing properties in the U.S. are older than 17 years, according to NIC Chief Economist Beth Mace.
“It’s really an exciting time in senior housing, because you’re seeing a lot of change,” Mace said during the webinar Wednesday.
As it has been for years, the middle market — or “workforce housing for seniors,” as Mace called it — is still a big opportunity for senior living operators, even if it is among the toughest nuts to crack.
“There’s been a huge push from NIC for the last several years to get the messaging out that there’s a huge opportunity to invest in the middle market,” said Mace.
Lower price-point products are not the only opportunity in senior living. Mace also sees the rise of ultra-luxury properties, usually in major metropolitan markets.
“Compared to when I first started doing senior housing, we’ve seen a maturation in the sector almost like hotels,” said Mace. “We have a Motel Six all the way to the Ritz.”
While the U.S. economy may be headed for an outcome resting between “stagflation” and recession, investors still see senior living as a good bet so long as the moves are smart, according to Mary Ludgin, managing director and head of global research at Heitman.
Ludgin said that investors who are worried about a period of stagnant inflation, or “stagflation,” can make debt investments instead of riskier equity investments. Unlike real estate investments in industrial, retail, office and apartments, senior housing provides an opportunity to go long because the bottom line is impacted by demographics, not GDP.
For many investors, in senior living or at large, the current landscape is alien, according to Acton, who has clients “who’ve never been through a Fed tightening cycle — they just don’t even know what that means,” he said.
Senior living properties can only be as healthy as the operators who are managing them, which is why AEW has experimented with various wellness enhancement programs aimed at improving resident experience, length of stay and staff turnover.
“Anything you can do to improve the lives of your tenants is probably to your self-interest.”
Acton credits operators for working closely with developers and lenders to navigate the pandemic’s challenges.
“Nothing was fundamentally wrong with the properties or the tenants or the lenders or the documents,” he said. “It was truly an exogenous event.”
Senior living underwriters are now also taking climate change into account. But Ludgin said, “we’re focused on places that are seeing strong job growth and strong population growth.”
Texas is on pace for its most 90-degree days on record, according to Ludgin, “but for the moment they’re a draw with people and with corporations,” she said.
Along with Florida, and Arizona, Texas is a literal and figurative hotbed for economic growth, especially senior living.
Currently, Heitman looks at the range of climate change-related outcomes when underwriting, including a range of insurance costs.
“Our assumption is that the federal government is not going to be in a position to pay for all of the climate mitigation,” she said. “It’s going to come either through state taxes or local taxes.”
If a potential acquisition in the works is in a high-risk area prone to events like hurricanes, sea-level rise, or tornadoes, Heitman may walk away altogether, according to Ludgin.
“That doesn’t mean we haven’t invested in places that have vulnerability to climate change,” said Ludgin. “We’re just trying to constrain them as a share of total investor portfolio to make certain we’re not foolishly overburdening on risk.”
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