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This economic cycle is going to feel like a “slow-moving train wreck.”
Shankh Mitra, CEO of Welltower (NYSE: WELL), said that last week at the National Investment Center for Seniors Housing & Care (NIC) Fall Conference in Chicago. And his comments were reinforced the next day at the conference by former Speaker of the House Paul Ryan, who predicted a long, grinding effort from the Fed to bring inflation down to its 2% target.
“That’s the world we’re going into — more expensive capital for a longer period of time,” Ryan said.
In light of this bearish outlook, I came away from NIC with the distinct impression that senior living is entering a period of retrenchment, and it’s critical for owners and operators to use this time as wisely as they can to position themselves for success when the cycle turns, and the demand for senior living surges.
In this week’s exclusive, members-only SHN+ Update, I offer analysis and key takeaways from the NIC conference, including:
- Why the industry is facing a painful slog in 2024, and likely beyond
- How improving senior living’s value prop to both employees and consumers must guide strategic plans and priorities for “a new world”
- Reasons for optimism, such as improving operating fundamentals and constrained supply
Feeling the pain
As the NIC conference was getting underway, the rate on the 10-year Treasury exceeded 5% for the first time in 23 years, adding fuel to speculation that the Federal Reserve is going to maintain higher rates for a longer period of time to fight inflation amid an economy that is proving surprisingly difficult to cool. Today, the central bank announced no change to interest rates following the latest Open Market Committee meeting and “signaled rates would remain elevated well into next year,” The Wall Street Journal reported.
This latest move aligns with the take that Ryan shared at NIC, which was that Fed Chairman Jay Powell is almost surely going to take a gradualist approach to inflation reduction for two reasons.
First, Powell is by nature a consensus-builder, and so he will strike a course that the various factions on the Fed board can agree upon. Second, moving too aggressively on the 2% inflation target risks triggering a banking crisis, given the large amount of unrealized losses currently on banks’ balance sheets — particularly regional banks.
At the same time, jobs numbers remain “pretty good,” with the unemployment rate around 3.7%. So, fears of a recession have receded, and Ryan views that more as a “back half of 2024 problem.” And unless the economy enters a recession, he does not believe the Fed will cut rates next year.
Other factors also are contributing to his outlook, including global conflicts, which have an inflationary effect.
“I think the Fed is going to take it slow,” he said. “They’re never going to take their eye off that target … they’re just going to walk really slowly to get there.”
Mitra similarly predicted slowly unfolding pain, saying that this cycle is likely to feel more like a savings and loan crisis rather than the financial crises that occurred in 2008 and during the Covid-19 pandemic. He said the cycle probably will not have a “sharp end” after a year of pain.
Even six months ago, Mitra was more bullish on the state of the debt markets. The last 1% to 1.5% increase in the 10-year Treasury is “all real rates,” he observed.
Debra Cafaro, CEO of Ventas (NYSE: VTR), pointed out the roughly $1.5 trillion in real estate debt coming due in the next few years, with the senior living space contributing to that large number. With net operating income still lagging pre-Covid levels, and interest rates no longer at zero — as they were in other recent financial downturns — “extend and pretend” has ceased to be a viable strategy.
“What’s different now is the cash flow projections and the amount necessary to carry the loan for that period of time,” she said. “And so that’s going to require either significant equity pay downs or there are going to be other actions taken.”
The messaging at NIC was not all doom-and-gloom, however. Operating fundamentals are improving — as demonstrated by the Q3 2023 earnings results from Welltower this week — and demographics remain a “big, secular tailwind” for the industry, Ryan noted. In fact, he shared that his own mother is moving onto a senior living campus in Wisconsin, and higher rates will benefit her and other prospective senior living consumers who live on fixed incomes.
The supply-demand outlook also appears favorable because new construction has all but ceased. Considering current occupancy levels and construction-related costs, Cafaro said it is “nearly impossible to justify” new development — and she predicted this will remain true for a “minimum” three- to five-year period.
Mitra used some vivid metaphors to describe the development landscape.
“If you’re a lender today, and you want to lend to senior housing construction, I think you’ll have better luck going to Vegas,” Mitra said. “Equity, I personally think the probability of success is higher if you buy lottery tickets.”
I heard some rumblings at NIC that the REIT leaders might have been somewhat self-serving in warning off new development, given their own interests in keeping supply in check. Still, even if supply does remain extremely constrained, it’s clear that owners and operators cannot simply play a waiting game through this cycle. As Cafaro noted, some will be forced into action by the interest rate squeeze, and not every organization will have the staying power to get through the pain. But the larger message at NIC was that operators and owners that do have staying power must use this period wisely, to prepare for the next generation of consumers and what Ryan called the “new world” of the post-pandemic economy.
The new employee experience
The post-pandemic economy is being shaped by new labor market dynamics. Senior living providers already are well aware of changes to workforce participation and employee expectations that have taken place in the wake of Covid-19; some of these changes will fade, but others will solidify and require operator adjustments. Meanwhile, the demographics that are so favorable from a consumer demand perspective are much less favorable from a labor standpoint, with the imbalance in younger workers versus older consumers.
In good news, participation in the labor force is on the upswing, with Cafaro noting to SHN that women’s participation has returned to pre-Covid levels.
Labor costs also are moderating. For Welltower’s senior housing operating portfolio, wages increased 5.4% over the last 12 months, and thanks in part to this expense control, operating margin increased 330 basis points to reach 25.6%. But at NIC, Mitra posited that market rents need to increase by 30% relative to wage increases in order for new developments to pencil.
He also said that wage growth in senior living has been running at 2x-plus of inflation for the last decade, but now other industries have caught up. And his most forceful comments on labor were on the employee experience.
“I personally believe we have to double-down on the employee experience,” he said.
Cafaro agreed, as did former Vi Living CEO Randy Richardson.
“You can’t run this business with 50% turnover, at any quality,” said Richardson.
In terms of what it will take to improve the employee experience, Mitra focused on the role that technology must play. He described harnessing tech so that a worker does not have to devote hours to chasing checks or trying to determine the status of deliveries.
“We’ve got to think about a complete business process reengineering and think, what needs to be done by people, what can be done better by software and technology and systems and infrastructure, so that we can have our precious human capital focus on what they signed up to do,” he said.
Ventas has worked closely with operators to streamline hiring through a mixture of better technology and processes, Cafaro said. And in conversations with SHN, both she and Mitra emphasized the importance of having a high-quality break room in communities.
None of these ideas seem particularly groundbreaking to me, but this is not to say they are easy to implement. Particularly in an environment when NOI is still recovering and inflation is so persistent, shortchanging labor can be all too easy — for example, this might seem like the wrong time to sacrifice any potentially revenue-generating space for a nicer break room.
But such decisions are financially shortsighted, as Mitra pointed out, saying that elevating the employee experience will benefit operators and increase investor returns.
Technology also can be leveraged to create a more rational immigration system in the United States, by creating targeted visa programs that increase the flow of foreign workers without taking jobs away from people already living in the country, Ryan said.
In fact, he believes that opponents of immigration reform are not taking into account the ways that tech can be used, and they are making a “20th century argument” to block new policies.
Ryan said he believes that immigration reform and entitlement reform will occur because they “have to get done” — but he also called them the two most difficult issues to address from a political perspective, and he painted a bleak picture of “unserious politics” pervading in D.C. (Hardly a controversial position, considering that he spoke while the House still was scrambling to name a Speaker.) His comments left me thinking that immigration changes might help address the worker shortage facing senior living providers, but not any time soon.
So, similarly to the interest rate situation, providers should expect a long and rough runway before any really helpful public policies on worker shortages — meaning now is the time to act, with urgency, to make communities more appealing places for prospective workers and more rewarding places for existing employees to grow in their careers.
Defining, marketing and selling senior living’s value prop
If attracting and retaining workers is one major strategic priority to focus on during this period of retrenchment, it seemed to me that the other major focus at NIC was — naturally enough — attracting and retaining residents.
I would say it’s now well established that the typical senior living sales process must improve, and this came up again, repeatedly, at the conference. Mitra and Cafaro both bemoaned the persistently high percentage of incoming calls from prospects that go unreturned. Brett Robinson of Headwaters Consulting — who until recently was a managing director of sales with Greystar’s active adult business — proposed that providers will need to elevate the sales advisor role. Rather than being “zealous ambassadors” for communities, sales pros in senior living will have to “go deep” with prospects to understand their finances, and will have to be deeply familiar with the local real estate market, in order to serve a more valuable consultative role.
Improving sales practices is no doubt important, but there was a more existential topic under discussion at NIC: What exactly should senior living providers be selling in the future, and who is the future customer?
Copious research has created a profile of the baby boomer consumer, and these findings will be familiar to most if not all senior living professionals. For instance, the research indicates that baby boomers are more independent and diverse than previous generations; they are more technologically savvy; and coming out of Covid-19, they likely are more attuned to the socialization benefits offered by congregate living.
Such consumer profiling is important and already is informing some interesting senior living projects. But as the baby boomers are on the verge of entering senior living in much greater numbers, providers also seem to have a more acute appreciation of the fact that research only goes so far.
“I think research is absolutely critically important … but then, at the same time, I often find that when we’re asking consumers for their opinions, it’s reflective, and it’s based on their own experiences that they’ve had so far — so, it’s very hard to look forward with that,” said Helen Foster, principal at Foster Strategy.
Arrow Senior Living CEO Stephanie Harris is concerned that research could lead providers astray.
“We get a little concerned around the research, that it could lead us in the wrong direction,” she said. “We don’t really quite know who we’re going to serve. We don’t understand how a baby boomer is going to translate.”
Her point was that the boomers of today still have not aged into needs-based senior living in large numbers, and while they are moving into active adult communities, the lessons being learned about what the boomers want at this earlier stage might not apply when they move into, say, assisted living — a move that she believes will continue to be precipitated primarily by a health-related incident.
So while the research can be helpful, the most important step for senior living providers might be shifting their mindset toward how they relate to consumers. The paradigm has been for providers to tell consumers what they need, even telling them “what they can and can’t do,” Harris pointed out. Now, she argued, providers must trust their customers more and even consider them collaborators in devising “a more cooperative business model,” opening up new channels to communicate with them to facilitate this more symbiotic relationship.
“I think the core movement we have to do in finding and listening to the next generation is really opening our ears and those lines of communication,” she said.
Arrow is not the only provider that is striving to find new ways of connecting with residents and crafting operational models that are more responsive to their goals and preferences. Juniper’s Catalyst program, Mather’s new wellness model, and the “Senior Living Transformation Center” in development all come to my mind as examples, and I’m sure there are others.
Harris emphasized that listening and collaborating with consumers should result in senior living providers having a strong value proposition to offer — and the sector must also get better about articulating that value prop through effective marketing.
“Five to ten years from now, the core consumer is more age appropriate, but they’re also not understanding quite what we can offer,” she said. “ … It’s going to be our style of marketing and our operational excellence that will differentiate [providers].”
The message that I took away is that providers need a more humble approach to how they interact with customers and develop their real estate and operating models, but they need more swagger in telling their story and selling their value to the market.
And I think this message is timely. That’s because owners and operators see baby boomer demand as the light at the end of the long, dark tunnel of this economic cycle, but if organizations take it for granted that they will benefit from future demand rather than making the necessary adjustments and investments, they just might see consumers walking right past their doors in a few years’ time.