Life plan communities will continue to face a challenging road in 2024 as real estate prices slow down and inflation continues to put pressure on operating budgets, even as demand remains high.

That’s according to the latest report from credit ratings company Fitch Ratings, which on Monday noted in a new report the life plan community sector’s “deteriorating” outlook for 2024. Fitch issued a similar warning for the life plan community sector in early December last year.

Among the factors leading into that negative outlook in the year ahead are the decelerating real estate price growth and cost inflation. Additionally, rising costs of sourcing capital and hiring new workers, high interest rates and volatility in the housing sector have continued to challenge the outlook over the past five years.

“This has been especially true for senior living facilities that are heavily concentrated in healthcare units,” Johnson said. “Those facilities are continuing to struggle under the weight of staffing shortages, higher wage costs and dependence on governmental payors for their revenues.”

In the new report, Johnson explains regulatory changes surrounding minimum staffing could prove to be an additional headwind in 2024.

Data from the U.S. Bureau of Labor Statistics and cited by Fitch Ratings indicates workforce recovery is struggling in life plan communities and skilled nursing facilities, while assisted living has a “more favorably recovery picture.” The average hourly earning growth (AHE) for LPC workers is above historical averages and the private sector year over year.

According to the report, AHE growth slowed to 5.6% as of July this year, down from a peak of 12.4% in 1Q22. These costs can be minimized through increasing resident fees and rates, which Fitch is anticipating to be above the average 3 to 5% in 2024.

Fitch expects that the sector’s recent history of consolidation will continue in 2024, with smaller providers seeking to partner with larger systems to “shore up the benefits of economies of scale.” The report states acquisitions have mostly been occurring outside of LPC’s obligated groups, with the “first step” goal of stabilizing and financially improving an acquired campus or community before adding it to the obligated group.

Capital spending has a mixed outlook. In the near-term, the report states capital investment is negative due to volatile interest rates and “uncertainty in the global macroeconomic outlook.” In the long-term, however, spending is anticipated to increase with investments in expansions and renovations for communities.

Deceleration in the home pricing growth, which was 3.8% in January, according to Fitch’s U.S. RMBS 2Q23 Sustainable Home Price report, could allow entrance fees for LPC’s to remain stable “as entrance fee growth still represents just a fraction of home price appreciation.”

“A sector outlook revision to neutral would require demonstrable improvement in labor availability, demonstrated efficacy of higher than average rate increases to counteract inflationary cost pressures and expectations for stable or improving real estate market performance,” the report states.

One bright spot for life plan communities in 2024 is demand, which is expected to remain high in the new year.

A recent life plan occupancy update from Ziegler Investment Banking indicates LPC average occupancy sat around 90.5% for the third quarter of 2023. The rates were maintained through limited construction activity and supply growth.

For the quarter, LPCs average occupancy was around 6.3% higher than non-LPC independent living communities, 4.4% higher than assisted living and 3.1% higher than memory care. The communities also did not see as much resident occupancy during the height of the Covid pandemic.