The demographics and demand for memory care communities have set the product type up for long-term success and growth — now, the sector just has to overcome everything else.
The memory care sector endured some harrowing challenges in 2020 and 2021.Staffing challenges, high expenses and negative perceptions from society at large have hamstrung some senior living operators’ ability to recover. For memory care operators, those challenges were even more intense due to the high-acuity nature of the product type.
But in 2023, there is a palpable sense that a memory care demand wave greater than any other before it is just around the corner. As the baby boomers age, a sizable number of them will no doubt need memory care services. Given the lower rate of new supply in the senior living industry in recent years, logic dictates that operators with memory care units will have an easier time filling them — as long as they can solve their current challenges.
“The demographics would tell you that there is no way, in our current state of supply, that we’re going to be able to manage that upcoming demand,” Anthem Memory Care CEO Isaac Scott said last Thursday at the annual Senior Housing News BRAIN conference in Washington, D.C. “We just have to fix all the other things.”
To get there, memory care operators must navigate a minefield of current challenges related to staffing and expenses. And they must adopt new and creative business models and strategies to cope with the shifting nature of memory care and its payment structures.
Doing so is possible, but not easy, according to Pegasus Senior Living CEO Chris Hollister, who also spoke on the panel.
“The demand is there,” Hollister said. “It’s really about execution.”
Occupancy stable and growing
Among the memory care sector’s bright spots in 2023 is that, for the most part, occupancy rates are on a continuous upward trend. According to data collected by NIC MAP Vision, assisted living and memory care communities have seen the sharpest upticks in occupancy since the pandemic started.
In September, Anthem expects to officially return to pre-pandemic occupancy levels across its communities — a significant milestone given the company’s previous occupancy struggles in 2020 and 2021, according to Scott.
“Beyond that, we’re in pretty good shape,” he said.
Isaac Scott; photo for Aging MediaJust under 40% of the companies that responded to a recent NIC poll said they were back to pre-pandemic occupancy levels. Looking ahead, Scott expects that number only to grow.
Sage Oak, a boutique assisted living and memory care operator with four small-home communities in Dallas, also has rebounded from occupancy lows during the pandemic. CEO Loe Hornbuckle noted that the company went from occupancy rates in the low 70s before climbing back to percentiles in the mid-90s.
“Occupancy is rebounding and is going to continue to rebound,” Hornbuckle said during the panel.
Hollister (left) and Hornbuckle; photo for Aging MediaPegasus came to be in 2018 after real estate investment trust Welltower (NYSE: WELL) transitioned management of 36 underperforming Brookdale (NYSE: BKD) properties to the operator.
As part of the company’s turnaround efforts, Pegasus took assisted living wings and converted them to memory care units, typically adding between 12 and 20 units of memory care in any given community.
Thanks to those efforts, Hollister said Pegasus is now back to an 85% occupancy rate in the communities that have been open for longer than a year.
On the M&A front, Hollister said there has been a precipitous rise in the number of “broken deals” in recent months. But he is also optimistic that “when it’s done, right, I think there’s huge demand for [memory care].”
He estimated that demand would “really take off” for the sector in 2025 and beyond, given the lack of new supply being created today for the space.
“By 2026 or 2027, virtually every memory care unit in the country will be full,” he said. “Nobody is putting spades in the ground and they can’t build under $400,000 a unit.”
Staffing, expense challenges linger
It would not come as a surprise to anyone in senior living that staffing and expenses remain the top challenge in memory care, even as the industry has made a great deal of progress eliminating the use of agency labor and slashing costs.
For Pegasus, the greatest challenge is still finding good leadership for its communities and keeping them on the job, Hollister said. Part of the problem is that the industry’s experienced executive directors have spent the last three years and more dealing with among the hardest challenges of their careers.
“There’s still a hangover effect on our leadership and their personal lives,” Hollister said.
He added that, in the 1990s, it was not uncommon for senior living executive directors to stick around for as much as a decade. Now, that tenure is much shorter, according to Hollister.
“I’ve never seen anything like it,” he said.
To Hornbuckle, there is a solution for the problem, albeit not an easy one to achieve. He believes that the creation of a special health care worker immigrant visa for workers would help alleviate staffing woes by opening up the tap for eligible workers.
“There still are a lot of people that would love to live in America out in the world, and a lot of them would probably be interested in being caregivers,” he said.
Like many others in the industry, Anthem is grappling with the dual costs of insurance and labor, which together make up between 64% and 68% of a typical community’s budget. There is no simple way to overcome those challenges given that senior living communities need both to function.
Sage Oak is also grappling with a higher cost of doing business, but Hornbuckle bucked the notion that operators should do everything in their power to reduce expenses. Instead, he believes memory care operators should “blindly pursue quality” and “not care about expenses.”
His point was not that expenses don’t matter on the P&L, but rather that there are simply some expenses, like insurance, that can’t be reduced. And he believes that the market for memory care has such elastic pricing that residents and their families will simply pay more for better services in a good community.
“As long as your buildings are not obsolete, and you’re just blindly pursuing quality, I think the revenue can offset the expenses,” he said.
Still, current challenges in expenses have pushed some memory care operators to consider new and radical ideas for keeping margins afloat in the post-pandemic era, such as federal reimbursements for assisted living and membership-driven payment models.
Most memory care operators still charge all-inclusive rates, but those rates have climbed steadily over the years with expenses. That will push more memory care operators away from all-inclusive rent models and toward more service-oriented models with tiered pricing structures.
“You’re going to see a shift in revenue from rent to service,” Scott said.
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