Senior Living Industry Faces Demand, M&A ‘Recalibration’ in 2024

The past few years have brought plenty of challenges for senior living operators. But the year ahead could present a “recalibration” of some of the forces keeping the industry in a tough spot.

Financial conditions, development and the state of senior living demand all are in flux in 2024, as evident in a new survey from Senior Housing News and Lument. Many of the industry’s biggest challenges, including staffing, are expected to vex operators in the year ahead. But there is a sense that the upcoming year could be one of inflection.

Last week, Senior Housing News held a webinar to reveal those results and give a glimpse into the year ahead.

 “2024 could be this great reset and position us for a really positive future,” said Lisa McCracken, head of research and analytics at NIC, during the recent SHN outlook webinar

From capitalizing on demand to rebuilding occupancy and margin, many of the same troupes seen in 2023 could guide the industry’s hand in 2024.

“We have to optimize our operations,” said Arrow Senior Living Management CEO Stephanie Harris. “We’ve learned how to become resourceful.”

Recovery, demand and transaction ‘recalibration’ in ’24

Sixty-five percent of respondents to SHN’s annual survey said they hold a “somewhat positive” outlook for the industry, followed by 22% being “very positive” on the future while 10% were “somewhat negative” and 3% “very negative” in regards to the sector’s future. That’s according to the latest results from an annual survey from Senior Housing News and Lument.

While the industry reported record numbers of occupied units with 10 consecutive quarters of census growth industry wide, according to data tracked by the National Investment Center for Seniors Housing and Care (NIC). A low rate of construction starts could dampen the ability for operators to fully capitalize on market demand, especially if the future of sourcing capital and financing remains murky for long.

Nearly 40% of respondents said they believed construction starts would decrease in 2024 while 39% said they believed construction starts would remain the same and 22% said they estimated that construction would ramp back up this year.

Among operators in the primary markets tracked by NIC MAP Vision, assisted living communities are the closest to returning to pre-pandemic occupancy rates, and could be the first to do so later this year. But there is still a contingent of operators, regardless of geography, that are struggling to reach above 80% occupancy, NIC primary market data shows.

“We have some markets that are beyond from a pre-pandemic standpoint, some are very close and others have further to go,” McCracken said. “You have to know your market and the dynamics there.”

Last week, NIC issued data that showed senior living occupancy exceeded 85% in the fourth quarter of last year, marking the 10th consecutive quarter of census growth since the Covid-19 pandemic. In the SHN survey, 72% of operators expected an increase in occupancy, followed by 21% believing occupancy would remain stable and 7% foretelling a fall in occupancy figures.

While transactions have continued and have been driven by distress and necessity in the last 12 months, McCracken said she anticipated a year ahead that could result in some “recalibration” of the bid-ask spread that could lead to increased transaction activity.

“We’re going to see inflationary pressures and a lot of questions of what 2024 is going to look like and what the [U.S. Federal Reserve] is going to do with rates and the general consensus is that rates will come down, it’s a matter of when.”

Challenges on construction costs and interest rates could continue to starve out new development, but McCracken said she believes inflationary challenges could moderate in the “second half of 2024.”

Bucking the tough development trend, Arrow Senior Living Management is focusing largely on new development and continues to grow with 10% of its total inventory representing new development, Harris said. She added that demand remained elevated across markets as inquiries from prospects remained elevated.

The survey also asked respondents to respond to the following prompt: “In 2024, my company plans to buy, sell or hold senior housing assets.” Answers were mixed and 36% of respondents said they would buy assets compared to 27% who would hold assets and 3% said they would sell. A total of 36% of respondents said that private equity would be the largest buyer of senior living assets in 2024, followed by publicly-traded real estate investment trusts (REITs) at 28% and 16% to be purchased by regional operators.

A total of 30% of respondents said they would renovate or reposition assets as a primary growth strategy in 2024 followed by 27% looking to affiliate or initiate a merger or acquisition.

Another important growth vector will be the middle-market and the millions of Americans who are projected to need senior living but won’t be able to afford it in the years to come. A total of 42% of respondents said they believed in order to reach middle market providers, operators must reposition existing market rate communities to serve a wider clientele.

“It’s about finding scale and helping people live longer and be better stewards of resources in a healthier way at a lower cost,” Harris said.

New reality for margins

With elevated expenses and increased wages for workers the new normal, operators have faced exceedingly difficult challenges in recouping margin.

Harris added that she felt that operators that are thriving have been conditioned to handle the new senior living environment with efficiency on hiring, leadership development and prioritizing essential functions to operations.

Harris noted that operators must simultaneously balance occupancy gains and margin growth. That will force the industry to “rethink how we deliver our services,” she added. To address that, Harris said that operators will be under pressure in the coming 12 months to capitalize on demand.

“Our definition of stabilization as an industry is going to have to change in order to hit the margins that everyone is going to be expecting,” Harris said.

While occupancy continues to recover and inquiries from prospects up, Brandywine Living Founder Brenda Bacon said margin was the sole facet that is taking longer to recover. She added that she worries if the “product we’re developing now is going to be appealing to the customer of the future.”

Brandywine Living recently was acquired by RUI, as previously reported by SHN, a deal that Bacon said would yield a combined organization that is equipped to expand and evolve . She also noted that creating regional footprints in established markets will help operators create brand recognition and further growth.

Operators have wielded data and looked for insights allowing them to better operations in the last few years. In many cases, they have done so with a tech partner. George Netscher, CEO of senior living technology company SafelyYou, said operators saw expenses rise, which shifts the focus to increasing margin.

“Artificial intelligence is going to continue to be the theme of 2024,” Netscher said. “Things will go from being interesting ideas to us really seeing them be put into practice.”

That will result in a proliferation of software that will be available to operators at lower price points to improve operations, Netscher added, who noted that some tech startups were deploying AI to aid engineering development of smaller, more nimble teams.

Emphasis on improving quality resident health outcomes could help margins, and Harris believes there is room to get margins beyond their current industry average, which according to the latest State of Seniors Housing report from ASHA currently stand around 23%.

But that must come as operators “start to get more zeroed in on quality.” By examining length of stay and evaluating turnover, operators can start to improve margins in 2024 while also creating additional ancillary revenue streams, Harris added.

“I think it all starts with how we change our sales process,” Harris said. “We’re trying to be better at the services we’re providing and holding ourselves to a higher standard.”

With regard to the largest challenges facing the industry ahead this year, Bacon said staffing would remain tough, despite reports of it moderating across the industry last year, citing issues with a changing workforce and high competition to retain employees.

A total of 34% of respondents said they believed staffing issues would improve beyond 2025, while 33% said they expected staffing issues to improve in 2025 and 22% expected staffing to improve in the second half of 2024.

Since the industry is dependent on staffing, Harris said operators focus on middle-management workflow to improve operations.

“Our optimization will come from looking at staffing not as just finding people but getting those people doing the right thing at the right time,” Harris said, who added that workflow and training would be the biggest areas to solve staffing issues.

The worry on staffing stems from a “general numbers challenge” in terms of available future workers needed to meet demand, McCracken said. That’s where technology providers can step in to help operators create efficiency, she added.