Primary vs. Secondary Markets: Senior Living Occupancy on the Rise, Margins the ‘Real Story’

The pace of recovery has come at different speeds for senior living operators due to a variety of factors — but one that does not seem to be having a large effect on recovery in 2023 is whether they are in a primary or secondary market.

Demand for senior living services remains strong for the industry and occupancy is rising, 83% by the fourth quarter of 2022. Some of that has to do with the low rate of new construction, which equated to approximately 5% of the existing inventory in primary markets compared to 4% in secondary markets, according to the National Investment Center for Seniors Housing and Care (NIC).

Costs for a slate of goods and services are high for senior living operators in both larger primary and smaller secondary markets. Chief among those high costs is staffing.

With the cost of senior living operations rising, sometimes at a rate exceeding annual resident rate growth, operators in primary and secondary markets are now turning their focus to margins in 2023.

In response to those trends, senior living companies are shifting their growth and operational strategies in those markets. At NIC, Chief Economist Beth Mace said challenges around high construction costs and lending might change how and where new growth takes place in the coming years as banks balk at once-favorable agreements with operators.

“Some regional banks might still have some dry powder to lend with,” Mace told Senior Housing News. “So it’s yet-to-be-seen whether this is going to favor or disfavor secondary markets. But historically, it’s the primary markets that have been the favorite child of institutional investors.”

Occupancy recovery ahead, more to come on margins

In both primary and secondary senior living markets, demand for senior living seems to have largely recovered from the early days of the Covid-19 pandemic.

In 4Q22, senior living occupancy rates rose for the sixth-straight quarter, with 28 of the 31 primary markets tracked by NIC seeing occupancy gains. Along similarly positive lines, occupancy in secondary markets is just 3% down from its pre-pandemic levels, NIC data shows.

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“Primary and secondary markets have seen pretty remarkable improvements in occupancy rates during the pandemic,” Mace said. “The number of occupied units is the highest in both primary and secondary markets that we’ve ever seen so that speaks to the concept that demand has recovered.”

Primary markets have further to go with regard to regaining occupancy than secondary markets due to fewer communities in secondary markets in which to fill, NIC Senior Principal Caroline Clapp told SHN.

Operators in primary markets are still on average 4% behind 2019 occupancy levels. Secondary markets tracked by NIC have less than 2% left before reaching 2019 figures. While Mace sees continued inventory growth in markets across the country, the lack of new supply will help boost demand in the coming months and years.

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“That would suggest to me [recovery] would be early 2024 for primary markets and 2023 for secondary markets,” Mace said.

Fee Stubblefield, CEO of The McMinnville, Oregon-based Springs Living, noted slow and steady occupancy gains for the company’s 19 communities, which sit at an average of about 91% as of the start of 2023. The company has eight communities in and around the primary market of Portland, Oregon. Its other properties lie within rural markets in Oregon and Montana not tracked by NIC. 

“We’ve increased growth of our customer base and I think that’s driven occupancy back,” Stubblefield told SHN. “I think NOI margin, the size and scope of your portfolio, and the quality of what’s going on in communities from a customer perspective, results can vary significantly.”

But “margins are the real story,” Stubblefield stressed, noting that the company’s margins declined by 16%, which was a drop of 6% in total net operating income (NOI) margin. Despite two years of resident rate growth, high costs and other persistent pressures to the bottom line have kept margins from rising to pre-pandemic levels.

“The margin squeeze is a multiplier effect that I think really tells the story [of] why probably the only sales that are happening right now are the sales that have to happen,” Stubblefield said.

Fast-growing senior living operator Distinctive Living is experiencing similar occupancy trends. Occupancy for the Freehold, New Jersey-based company has come from the low 70th percentile to now somewhere in the mid-80s, according to CEO Joe Jedlowski.. The company’s 30 communities, at varying stages of development and stabilization, span primary and secondary markets in the Southeast, Midwest and Northeast.

“The rebound for the past 13 months has been positive overall in our portfolio,” Jedlowski said. “We’re excited about what’s ahead across all markets that we’re in from primary, secondary and tertiary markets, and we’ve seen rebounds across the board.”

In terms of margins, Jedlowski said Distinctive’s margins were at 16%, with some acquired properties reporting negative margins at the onset. In terms of stabilized assets, Jedlowski reported margins pushing 24% with a goal of reaching 30% margins in 2023—a 12-month period that Jedlowski termed as a “year of refinement” across the company’s portfolio.

‘We’re pushing for pre-pandemic levels and we think that’s achievable,” Jedlowski continued. “That means we have to get strategic on our care pricing and strategic on ancillary revenue and rent increases.

Occupancy for the senior living arm of Chicago, Illinois-based Anthology has resembled a “distinct Nike-shape” swoosh, CEO Justin Dickenson told SHN. The company operates 46 communities across 16 states in various primary and secondary market areas, including Detroit, Michigan, St. Louis, Missouri, Indianapolis, Indiana, Louisville, Kentucky and Richmond, Virginia.

Due to rising labor and food costs, Anthology has seen significant market margin compression recently. The company stabilized senior living portfolio typically ranges between 25% and 30% margins.

“We’re doing everything we can to optimize operations and continuing to press on margin is certainly at the forefront of what we’re focused on,” Dickenson said.

St. Louis, Missouri-based Allegro Senior Living operates over 14 communities across three states in varying market areas including 10 communities within primary and secondary markets as defined by NIC.

After a pandemic-induced low of 76% occupancy, the company has rebounded to 90% in its stabilized portfolio, according to President Doug Schiffer, pushing the operator above its 2019 levels.

Communities in lease-up during the pandemic are at an average of 97% occupancy, with “healthy margins,” he wrote in an email to Senior Housing News.

Margins and their recoveries vary based on unit mix, brand and location, Schiffer said, having dropped 15% in 2020 and have rebounded 7% since then.

“Based on our budgets and three-year outlook, we expect our top line revenue growth to surpass operating expense growth over the next two to three years as we work to further regain margin,” Schiffer wrote to SHN.

Operators shifting growth philosophies

With construction costs and interest rates slowing down the pace of new development across the country, many operators are shifting their philosophies on how to grow and whether to focus on primary or secondary markets while doing so.

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Anthology, for example, has started to take a closer look at acquisitions despite the fact that new development is “part of our DNA,” Dickenson said. The company has consistently grown with between four to six new sites annually, but that’s shifting temporarily due to market-level challenges in senior living development.

“I firmly believe that we are in a buy versus build environment,” Dickenson added.

Similarly, Jedlowski said Distinctive is currently passing on the vast majority of opportunities brought to Distinctive Development, the company’s development wing.

“We’re not afraid to muscle-up,” Jedlowski said. “But the opportunity has to be right, the capital relationship has to be right and it’s got to be a market we feel we can win.”

From a development perspective, Anthology has a number of shovel-ready sites across California, Virginia, Pennsylvania, and New Jersey that are at varying stages of due diligence, with the company focused on “smaller footprint assets” in primary markets for the time being.

“We base our site selection around a higher-barrier-to-entry market,” Dickenson said. “Specific locations are chosen based on their location being on the seam of commercial and residential uses.”

In the coming years, growth for The Springs Living could look much like its past evolution with an emphasis on local markets in the Northwest with an established operational footprint, Stubblefield said. Markets are chosen based on an identified need and not “leap-frogging states.”

“We pay attention to where our gaps are and we will grow opportunistically and organically,” Stubblefield continued, adding that a growing regulatory environment in Oregon could influence where the company grows in the future.

Growth in the Distinctive Living platform will be a “slow and steady process” in 2023, Jedlowski said. The company will choose markets based on market penetration and its available talent pool.

“We’re market agnostic as it relates to the type of market we’re in and we’re really opportunistic.”

Schiffer said that new opportunities have arisen for Allegro in some secondary markets, particularly with regard to renovation and acquisition of distressed assets. Adding to new growth, Schiffer said Allegro would continue to build out “regional clusters” to grow its portfolio in high barrier-to-entry markets.

“One thing we’re working on differently than before is adding active adult to our development plans,” Schiffer said.