After two consecutive years of widespread rate increases at or above historic levels, one question hangs on the mind of senior living executives: Will there be another one?
The senior living industry is waiting to see how a number of factors play out in the second half of 2023 before answering that question.
Operators have so far mostly relied on transparency and simple math to justify rate increases. The Covid-19 pandemic has done a number on the industry and on the general economy, with cost inflation in labor, food and other places putting a damper on margins, and operators over the last two years have said residents have largely been accepting of rate increases when that is explained.
But with summer approaching and budget season to follow, public sentiment surrounding the economy could be changing. And operators know it.
As the senior living industry moves farther away from the darkest days of the pandemic and more normal operations take hold, it could become harder for operators to justify rate increases without at least boosting the value of their services or offering something new. And with the traditional selling season here for senior living, the impact of increased rates on prospective residents is looming large.
There is a sense among senior living executives that the industry can likely push through another year of sizable resident rate increases, but to what extent is still unclear. That is why leaders with companies including LCS, Arrow Senior Living and Commonwealth Senior Living are watching how broader economics affect costs and waiting to make a more specific plan.
Many leaders, including LCS CEO Joel Nelson, believe the key to enacting necessary rate increases in 2024 will again be explaining them to residents.
“When the costs are transparent, broken down and explained well to residents and families, they understand it,” LCS CEO Joel Nelson told Senior Housing News.
‘Not sustainable long-term’
Higher costs in recent years have necessitated higher-than-average rate increases. Late last year, operators told SHN they planned average expected rate increases in the range of 7% to 13% for 2023.
For big companies like Brookdale Senior Living (NYSE: BKD), rate increases of more than 10% played a key role in first-quarter success and set the stage for a sustained period of growth. According to public comments made by CEO Cindy Baier, Brookdale has made clear its shift into sales-minded operations at the community level for its portfolio of more than 600 communities.
Monthly rates increased in senior living by about 8% to 10% last year, according to data from the Berkadia 2023 Spring Commentary Report. But looking ahead, that may not be a pace operators can keep up.
“While these higher-than-historical rate increases are justifiable given the labor markets, increases in insurance costs, utilities, and pandemic-related expenses, this trend is not sustainable long-term,” Berkadia Senior Director of Investment Sales Simona Wilson said in the report.
Wilson wrote that she expects annual rate increases to temper in 2024 and return to historical levels by 2025 for all unit types.
For the industry’s non-profit companies, there is a sense of worry that increased rates could create financial burdens for new residents — but that not increasing rates will also create financial burdens for operations..
In general, if senior living operators raise rates to meet rising expenses, current residents may be priced out of their community or move to a lower-cost setting. But if operators don’t raise rates to cover their expenses, they risk being underwater at a time when financial markets are already stressed and accessing new capital is harder.
According to Ziegler’s most recent CFO Hotline Survey, many non-profit operators also feel they underestimated the level of monthly rate increases by more than a full percentage point in the past, and are playing catch-up to some extent.
Rate increases are a hot topic in that sector of the industry. Ziegler had previously released a CFO Hotline survey about once per year.
“Now, we’re doing it every six months,” Lisa McCracken, director of senior living research for Ziegler told SHN. ”If we go too long without some recent data, we start to get providers that say ‘Hey, this is our fiscal year, do you have any updated information?’”
McCracken pointed out that one driver of senior living rate increases is how they lagged behind larger economic forces.
“If you compare where expense pressures have been year-over-year and month-over-month to when the industry started bumping rate increases, it really lagged,” McCracken said. “Frankly, the industry is in a bit of a catch-up mode now.”
Arrow Senior Living and Commonwealth Senior Living both increased rates within that 7%-10% window this year.
Commonwealth President and CEO Earl Parker predicted last October that two consecutive years of rate increases could trouble some residents. But he also sees an expense landscape that is still too prohibitive to make pre-pandemic margins.
“It’s predominantly labor,” Commonwealth CEO Earl Parker told Senior Housing News.
But, the cost of food, utilities and insurance are also both higher than they have been in the past, and are sometimes raising at unpredictable rates, making it particularly difficult to know how much to raise resident fees in the year ahead
Arrow Senior Living CEO Stephanie Harris echoed Parker, but she noted that non-labor costs are stabilizing in 2023.
“That creates a more workable solution,” she told SHN.
Arrow Senior Living saw the economic pressures of 2022 coming and in 2021, chose to increase rates at a higher-than-normal rate with the aim of spreading the increases out over two years rather than implement a normal increase in 2022 and an “extraordinarily higher rate this year,” Harris said.
St. Louis-based Arrow Senior Living raised rates an average of 7.5% to 10% across its 29-community portfolio of middle-market senior living communities. But Harris thinks that raising rates at that pace over the long term could be an issue, and she is worried that another year of increases near 7% could impact the rate at which resident tours are converted into move-ins.
“The sensitivity around rates moves so quickly, even by $100, that long-term sustained rent increases could be a negative for the industry,” Harris said.
Nelson told SHN that he thinks the industry will need to be careful in the coming year not to “price ourselves too aggressively.” He thinks it will be a “delicate walk” between fee increases and occupancy, but he is optimistic, assuming there is transparency between operators, residents and their families.
Demand also remains high for senior living, and that could bode well for the prospect of future rate increases.
“This continues to be a demand story,” NIC Associate Principal Zahroui told SHN. “Inflation is sticky because of demand. Occupancy has been recovering for seven consecutive quarters… that’s the reason why inflation is tricky and that’s the reason why rate increases continue to be high.”
During the Covid-19 pandemic, after negative mainstream press coverage around the industry subsided, prospective senior living residents seemed to understand that senior living communities were well-equipped to keep them safe and provide the level of care needed when aging at home wasn’t possible.
“It was very difficult to meet their needs in their home as their needs increased,” Harris said. “They needed to find a solution that has all the benefits that we offer in senior living.”
Rates and occupancy linked
Data from the National Investment Center for Seniors Housing & Care (NIC) seemed to show a correlation between operators enacting too-high rate increases and downward pressure on occupancy in the fourth quarter of 2022.
NIC Chief Economist Beth Mace co-authored a report with Zahroui that broke down rate increases into quintiles based on how much rates increased. In the memory care segment, the highest quintile raised rates by 12% in 2022, while the lowest quintile raised rates by less than 1.1%.
The segment of memory care communities that raised rates by the highest amount experienced negative annual absorption of 0.1% and improved occupancy by just 0.4% from the previous year.The next-lowest quintile raised rates between 8% and 10%, and saw just a 1.9% uptick in occupancy and a 1.2% absorption rate in 2022.
By comparison, the other three groups of memory care communities – those raising rates by 7.9% or less – experienced occupancy increases between 2.2% and 6.3% in the year. Assisted living data told a similar story with the slowest occupancy and absorption rates recorded by the communities that raised rates the most.
However, the NIC’s data showed that the independent living communities that raised rates the most – 8.2% or higher – saw more occupancy and absorption gains than communities that raised rates by less than that. This could point to a difference in the decision-making process for needs-based residents and lifestyle-based residents or a difference in how operators are able to maintain luxury standards with rate increases that match or beat inflation.
Regardless of care segment and the rate type, “they’re all pretty high,” Mace told SHN.
Changing sentiment
Harris and her Arrow Senior Living executive leadership got ahead of the upcoming rate increases toward the end of 2022 by communicating with residents early. But, they also made it clear that rate increases would not improve margins – they would simply cover the costs of operations, namely increased wages for employees.
“At that time, the inflationary impact was a headline story,” Harris said. “So, we empowered them with articles.”
Commonwealth did the same. The company’s leaders made it clear to residents that rates were going up to cover the cost of increased wages. That transparency played a role in acceptance among residents, Parker said.
Last year, “there was a lot of press last year about inflation,” Mace said.
“People were really sensitized to the experience and the workloads of staff,” she added.
But today, the articles residents and prospects are seeing tell a different story entirely. Inflation, while not solved, has slowed for the last consecutive 10 months. The end of the Covid-19 public health emergency declaration in May is yet another sign that normalcy is returning to the U.S. economy.
Furthermore, trends that helped operators pass resident rate increases last year may not be in play in the coming one. The federal government increased social security payouts by 8.7% in 2023, something Mace thinks won’t happen again this year.
Social security increases are based on the consumer price index (CPI) whichgrew by 4.9% in April, a drop from 5% growth in March. That is still much higher than the U.S. Federal Reserve would like, according to Mace. That said, the producer price index (PPI), thought by many economists to be a precursor to the CPI, grew by just 2.3% in April. It’s slowest rate of growth in more than two years, according to Mace.
“The Federal Reserve is looking for month-over-month inflation growth of 2%,” Mace said. “The question becomes, will the Fed continue to increase interest rates? The sentiment out there is that they’re taking a pause and will not raise rates in the June meeting.”
There are other broader economic forces that could throw turmoil into operators’ plans to raise rates in the coming year. With all the uncertainty surrounding the second half of 2023, senior living operators are letting the pieces fall where they may before speculating on rate increases in 2024.
“At a certain point you just become resistant, and even if I can afford it, I’ll think it’s too much,” Zahroui said. “We don’t know what that threshold is and what it will happen.”
Even so, operators are hopeful that they won’t need to raise rates by such a high degree as conditions improve.
“My hope is that with inflationary pressures somewhat decreasing and the pressure on wages continues to ease, we can get back to what I would consider more normal increases in 2024,” Parker said. “But I’m not sure that I’m confident enough about that yet to predict it.”
Companies featured in this article:
Arrow Senior Living, Berkadia, Brookdale Senior Living, Commonwealth Senior Living, NIC, Ziegler
