Demand Outlook Improves for CCRCs as Recession, Housing Market Fears Ease

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A recession and a steep slowdown in home sales have yet to come to pass despite recent warnings, and senior living operators and finance experts believe that the CCRC sector’s demand outlook is brighter as a result.

Trading in home equity is a common way older adults are able to move into larger communities, specifically CCRCs and life plan communities. While these communities often carry steep entrance fees, residents can use proceeds from a home sale to fund their move.

In 2022 and 2023, myriad headlines warned that a recession was right around the corner, with potential implications for the U.S. economy and by extension senior living communities. But as of July, the U.S. Federal Reserve had called off its prediction that a recession would occur.

That economic strength has been seen in the sales and marketing departments of companies like Watermark Retirement, which operates over 60 communities nationwide.

“Our high-end products are leasing up and generating strong margins as they go through lease-up,” Watermark Retirement Communities Chief Investment Officer Bryan Schachter told Senior Housing News. “We’ve been able to overcome some of the inflationary impact and continue to see a demand for our products.”

Ratings agency Fitch, which had previously warned of turbulence ahead for life plan communities in the U.S., now sees demand remaining “pretty strong” in the near-term for life plan communities with overall demand increasing in the coming years, according to Fitch Ratings Senior Director Margaret Johnson.

“Life plan operators are sitting in a pretty good position and I think the housing market is supportive,” Johnson told SHN. “As we entered the beginning of the year there was some concern, but that really hasn’t seemed to be the case.”

Home sales not a concern

The National Association of Realtors (NAR) reported last month that the median existing-home price jumped to $410,200, the second-highest price all-time. That total was less than 1% lower than the record median home price of $413,800 seen in June 2022. The NAR also reported that over a one-third of homes on the market had multiple offers.

Senior living operators and finance experts monitoring the health of CCRCs and life plan communities believe that while turbulence in the housing market could bring future pain, all indicators point to strong demand continuing and the pace of move-ins to communities continuing across the country.

Johnson noted that Fitch has observed operators allowing prospects to temporarily move into a community during the process of selling their home in order to speed up move-ins. While home prices increased, entry fees remained relatively stable, Johnson said, giving operators wiggle room to raise rates to cover staffing costs and elevated expenses.

Low construction starts have helped operators get residents into communities, which has spurred occupancy gains. Low inventory of homes being built is forcing buyers to get competitive in their bids, placing sellers at an extreme advantage to net high asking prices.

Single-family home inventory, at 960,000 homes in June, was the lowest level of home inventory since the organization began tracking data in 1982, NAR reports.

“We’re not in the situation that we were a couple of years ago,” said Ziegler Director of Senior Living Research and Development Lisa McCracken. “Homes have appreciated greatly among seniors who are homeowners.”

She added, “We’re not seeing any big red flags from the housing side.”

But even as demand remains high for home sales, transaction activity in the housing market slowed considerably in June, NAR reported, dropping 19% compared to the same time last year and down 23% from the first-half of 2022 to the first-half of this year.

Even so, challenges remain, and the outlook for the housing market remains mixed. Morgan Stanley issued guidance earlier this month that estimates that home prices will fall by 2% next year as “affordability continues to adjust slowly back to long-run averages and inventories begin a slow climb off multi-decade lows,” the company wrote.

In another positive sign, the U.S. Federal Reserve dropped its forecast of an economic recession at the end of July, with a “shot” for inflation to return to target levels without steep job losses, according to Federal Reserve Chair Jerome Powell. And for the housing market, which is dramatically impacted by steep interest rates implemented by the Fed since early last year, there are signals the sector has “successfully turned a corner.”

Sales capitalize on demand

Buoyed by strong performance across the portfolio this year, Chief Marketing Officer (CMO) Rick Westermann said that Des Moines, Iowa-based Life Care Services (LCS) was realizing a “record year” for customers coming into communities, which in-turn is driving steady move-in growth.

LCS is the nation’s largest operator of life plan communities, with over 90 nationwide. Prospects considering a move into a life plan community typically wait longer to make the jump, with average move-in times ranging between 30 to 90 days.

“We’re really excited about the sales coming out of our life plan division right now, and the top of the funnel metrics are going to mean that we have a healthy business in the months to come,” Westermann told SHN.

Coming out of the pandemic, prospective move-in candidates for life plan communities were reporting getting double-digit home offers within being listed for one month, and Westermann said he felt the housing market was beginning to normalize.

“We’re not seeing issues with home sales and I think it’s because of that low inventory across the markets we’re in,” Westermann said. “In terms of inventory level, I think it’s definitely saving the day right now.”

Across the company, Westermann said he wasn’t aware of any instances where LCS lost a resident due to being unable to sell their home.

“We’re seeing 20-to-90-day sales really consistently there,” Westermann added. “We haven’t experienced any issues, so I think from our side, either the doom and gloom hasn’t happened yet, or it’s over-exaggerated.”

Compared to last year, LCS reported an increase of visits by 25%, with the summer months historically being when providers can capitalize most on demand.

Pivot yields results, new communities in demand

To capture new demand in senior living, providers have considered redevelopment and expansion projects of lower-acuity services, specifically IL and active adult, to bring people into their communities sooner.

Tucson, Arizona-based Watermark Retirement Communities, once one of the nation’s largest CCRC providers, has kept just a handful of its entrance fee-based communities and pivoted to large-scale, IL, AL and memory care communities, Schachter said.

While Schachter said while the company “still very much believes” in the CCRC model, he noted that new development was happening elsewhere in the portfolio.

“We position ourselves as a value play to the high-end, dominant entrance fee communities that have been in these markets for a number of years,” Schachter said.

Watermark has reported a consistent 50-to 75-basis-point increase in occupancy growth portfolio-wide for the last 18 months, Schachter noted, adding that he had “no reason to believe” a change in that momentum was coming.

In late January, Watermark opened a community in Texas that saw 50% occupancy in six months, a sign that demand remains strong for new development due to the low starts seen across the industry.

“We’re seeing a lot of reasons for optimism,” Schachter said. “Albeit with being aware of continued challenges in some of our markets and being realistic about what it’s going to take to push for overall portfolio stabilization.”

Watermark also recently opened communities in Georgetown, Texas, Coral Gables, Florida and West Palm Beach, Florida, and the company recently took over management of a community in San Jose, California. Projects under construction include Oceanside and San Gabriel, California, Portland, Oregon and Bellevue, Washington. That influx of new growth was only possible with getting financing pre-interest rate hikes and Schachter noted that the roster of projects would be lighter if started in today’s climate.

LCS is also active with its redevelopment and expansion pipeline, with over two-dozen projects underway or planned over the next 18 months, Westermann said.

At its Trillium Woods life plan community in Minnesota, LCS is adding 52 IL residences to capitalize on lower-acuity demand. This comes on the heels of a 2021 expansion of a 4-story, 101-unit IL building with various units to its Sagewood life plan community in Phoenix, Arizona, with more work planned there.

While construction costs have caused a bit of “down-throttling” on the development front, Westermann noted that if conditions improved, LCS could “be doing even more than we have planned right now.”

Outlook remains favorable

Despite pressure on expenses and labor, providers and those monitoring the sector’s market health all agree: senior living demand is here to stay. That’s based on widely-reported, favorable demographics in the decades to come as the U.S. population ages.

While Fitch rated the LPC and CCRC sector with a deteriorating outlook to start the year, Johnson said it was plausible that the sector was showing signs that lend towards stability.

“I think probably the next step would be a stabilizing, stable outlook at some point. Whether that happens next year or the year after it really is going to depend on sort of what we see coming up,” Johnson said.

McCracken said operators must weigh their options and right-size their care service lines to better capitalize on future demand.

“Operators are optimistic and there are headwinds but they’re not defining them and choice and demand will be driven by what the reality of the demographics are,” she said.

At Watermark, Schachter said sales teams and management are in contact and monitor changes in the housing market.

“If something were to change, I’m hopeful that I would hear that pretty quickly,” he said. “We feel pretty good about where things are, even if everyone wants things to move faster, but it’s a steady clip.”

LCS qualitative survey data for the year shows negative sentiment for senior housing improving, Westermann said. If inventory levels of new homes come up, that could affect the pace of home sales and ultimately impact operators.

“Hopefully we’re in the Goldilocks phase of the housing market right now and hopefully that continues next year,” Westermann said.