After nearly five years of uncertainty and headwinds in the seniors housing space, capital markets going into 2025 seem to come with the headline “Cautiously Optimistic”.

Over the past 18-24 months, in particular, unprecedented interest rate and cap rate pressure sidelined sponsors and capital providers, leading many in the industry to adopt a “wait-and-see” approach. Additionally, regulatory pressures on federally regulated financial institutions caused permanent financing refinance options to essentially vanish and banks to reduce new loan originations and adopt a more rigid approach to existing loan modifications and maturities, likely requiring additional cash collateral, loan curtailments, recourse, and increased loan pricing. All these factors created additional stress on senior housing assets, regardless of performance and cash-flow at the asset level.

However, as 2025 begins, the tides seem to be turning (albeit, more slowly than desired). The fourth quarter of 2024 saw declining interest rates for the first time in years, and asset values have been rebounding, providing some much-needed marginal relief – and hope – across the industry.

2025 will be interesting on many levels, with particular attention paid to inflation and interest rates. From an interest rate perspective, with the presidential election behind us, and so much policy uncertainty as we enter 2025, it is possible – and even likely – that the Fed will pause rate cuts at the January Federal Open Market Committee (FOMC) meeting, with the expectation there will be fewer cuts than previously thought in 2025. Despite this, interest rate stability is a welcomed change from the rising rate environment we have all been living in. 

With stable interest rates and asset values, coupled with the increasingly strong fundamentals of the industry, capital markets seem to be slowly and selectively reentering the space. From banks who have been able to recognize payoffs and are now able to deploy new loan dollars, to new equity groups and debt funds entering the space (or even reentering after sitting out the past few years), liquidity for new and existing inventory appears to be rising.

With that, an additional consideration is how new and existing inventory will continue to be capitalized throughout 2025. For existing inventory, traditional bank debt is increasingly available for assets with positive leasing momentum that need some additional time, while a rising number of debt funds are showing interest and available capital for assets with a different story wherein recapitalization or repositioning is needed. On the other side of the coin, new inventory is a rarity as annual inventory growth has been declining since 2019, and currently sits at approximately 1% as of 3Q24 NIC Map Data. However, for sponsors with patient and recurrent equity, along with efficiencies of development, banks are interested and willing to extend new loan dollars after experiencing payoffs throughout the latter half of 2024.

Regardless of what is to come in 2025, the ability to rely on patient and flexible partnerships between sponsors and capital providers continues to be a vital resource.

Since early 2020, the U.S. economy and labor markets have been on a bit of a roller coaster ride. We endured the “Great Resignation” with escalating wages and tight labor markets. At the same time, inflation surged in 2021 and didn’t start to decline until late 2022. NIC conducted analysis specifically comparing cumulative rent growth and cumulative wage growth within assisted living. This analysis reflects growth metrics from the first quarter of 2020 through the third quarter of 2024.

As displayed in the following graph, assisted living asking rent growth has generally lagged the pace of assisted living wage growth in recent years. As a reminder, the assisted living production, nonsupervisory staff make up roughly 80% of the wages within assisted living.

Interpretations and Implications

Does this data suggest that operators should respond and implement widespread, aggressive rent hikes? No, of course not. Rents have always been driven by a combination of factors. When operators face significant increases in operating costs, what is to be passed on to existing and future residents versus what can be absorbed by the organization needs to be determined. The sector did implement larger increases during the high-inflationary years and generally, the consumer accepted those increases knowing the backdrop of the overall economy.

What is to be seen is how rent growth will pace in the year or two ahead. In 2025, seniors will have the lowest social security cost of living adjustment in four years. How will this play into rent growth? Is there a ceiling with how much a senior is willing to pay? How does the overall affordability of the housing market play into comparative costs of senior housing?

If nothing else, this information provides insights into the dynamic between these two revenue and expense forces. NIC will continue to track and report rent statistics against measures such as wage growth, consumer price index (CPI), social security increases, and other helpful benchmarks. 

The NIC Analytics team presented findings during a webinar with NIC MAP Vision clients on January 23rd to review key senior housing data trends during the fourth quarter and full year 2024. Additionally, Chris Bird, CEO of LCS, joined Lisa McCracken, NIC’s Head of Research, for a conversation on outlook, growth, and strategy for owners and operators in the senior housing industry in the year ahead.

Key takeaways included: 

Takeaway #1: Occupancy Rate Continued Climbing 

• The occupancy rate for the 31 NIC MAP Primary Markets rose 0.7 percentage points to 87.2% in the fourth quarter, gaining 2.2 percentage points for the full year 2024.
• Occupancy increases were driven by another year of robust demand as 2024 net absorption was roughly in line with 2022 and 2023 levels.
• Inventory growth in 2024 was slightly higher than 2023 but overall remained low and near levels last seen in 2013.

Takeaway #2: Occupied Units Reached New Record High

• The total number of occupied senior housing units hit another record high in 2024, rising to more than 618,000 units for the 31 Primary Markets in the fourth quarter.
• The Secondary Markets had a similar trend, reaching a record high of more than 335,000 units.
• These record highs speak to the robust consumer demand for senior housing units.

Takeaway #3: Senior Housing Units Under Construction Least Since 2014  

• In construction trends, for both Majority Independent Living and Majority Assisted Living properties, the number of units under construction in 2024 continued to decline, falling to levels last seen in 2014.
• This decline may reflect ongoing headwinds to development such as access to capital, cost of capital, and construction costs.

Takeaway #4: Construction Starts Declined for Third Consecutive Year 

• Senior housing construction starts also remained depressed in 2024, with the fewest units breaking ground in the 31 Primary Markets since 2009 during the depths of the Global Financial Crisis.

Takeaway #5: Increasing Number of Markets with No Projects Under Construction

• By metro area each quarter, this heat map shows which markets had the most construction activity shaded in red, and the least construction activity shaded in blue.
• In 2024, an increasing number of the 31 Primary Markets reported no projects underway, rising from one to four during the year.

Investors considering an acquisition always ask about the cap rate, the estimated rate of return on the property. But that calculation has never varied so much, according to Colleen Blumenthal, chief operating officer at HealthTrust LLC, a Sarasota-based firm that provides property appraisals and valuations.

“There’s a wide spectrum of risk right now,” said Blumenthal, who will lead a panel of industry pros in a discussion at the 2025 NIC Spring Conference on the complicated dynamics impacting today’s cap rates. “We’ve never had a market before where the cap rate is determined by so many different factors.”

While cap rates traditionally have been fairly predictable, brokers and investors say cap rates, especially those on less desirable projects, don’t make sense anymore. Cap rates today depend on who’s buying the property, the lender, the property’s age and location, and performance assumptions. “Every deal is different,” said Blumenthal. “There is no one answer.”

Blumenthal recently previewed what attendees can expect to take away from the wide-ranging, in-depth session in San Diego. Here are some of the factors impacting cap rates that will be explored:

Obsolete buildings. Communities built 25 years ago typically have several challenges. One example is too many studio apartments. The assumption has been that those properties can fill the needs of middle-income seniors, the so-called “Forgotten Middle,” first identified by NIC in 2019. “I’m not sure that’s true,” said Blumenthal. “Studio apartments are not popular.” She’s noticed in some markets that people still won’t lease the units even with very low rents.

Submarket trouble. Certain submarkets have specific problems. For example, New York City has had seven buildings open over the last few years. For a variety of reasons, mostly related to the pandemic, the buildings that opened more recently have had a better initial lease-up than the older buildings. But none of the buildings are doing as well as expected. “That will be cured with time,” said Blumenthal. “But no one is coming out as well off as they had hoped.”

Interest rates. The capital markets have been rocky since the Federal Reserve started increasing rates in early 2022. Deals began to fall apart later that year because not all the interest rate hikes had been factored into the pricing. Blumenthal doesn’t expect interest rates to go much lower than they are now. But cap rates will decline on stabilized, new properties with good operators. “The supply of desirable product is smaller than the demand,” she said. 

Failure to thrive. Newer buildings that haven’t filled are subject to high cap rates. One newer building traded at a cap rate close to 15%. The lender pushed the sale because the buyer had the ability to close the deal. “Buyers with cash are doing fine,” said Blumenthal.

Cap rate creep. For 30 years, skilled nursing cap rates were 12-14%. But cap rates are creeping up for skilled nursing properties. Mom and pop operators, exhausted from the pandemic, are cashing out. Operators need command of healthcare data to show they can provide good outcomes. Sophisticated operators with cash are buying skilled properties.

Blumenthal noted that the panelists in the upcoming 2025 NIC Spring Conference session represent a broad perspective of private, public and workout firms as well as a broker. “The session will be very spontaneous and worth your time,” said Blumenthal. “It won’t be your grandfather’s valuation panel discussion.”

Learn more and register.

As we look ahead in 2025, the senior living industry is poised for significant transformation, with value-based care (VBC) at the forefront of this evolution. The Centers for Medicare & Medicaid Services (CMS) has set an ambitious goal to have all Medicare beneficiaries in some form of value-based care arrangement by 2030, and the industry is making strides toward this objective.  

The transition to value-based care has been gaining momentum, particularly within the Medicare population. In 2024, KFF reported that 54% of eligible Medicare beneficiaries were enrolled in a Medicare Advantage (MA) plan as opposed to the traditional fee-for-service plan. Enrollment in MA plans has been rising steadily each year and CMS projects increased enrollment numbers again in 2025. As an alternative, several operators have entered into risk-bearing arrangements where they either own their own plan or participate in a joint venture with an existing payer. We anticipate continued growth in these provider-led plans in 2025 as operators aim to have greater control over reimbursement and quality decisions for those they care for.  

Growing Revenue Streams 

The recently announced CMS GUIDE Model (Guiding an Improved Dementia Experience)  presents a promising opportunity for senior living operators to participate in value-based care while generating additional revenue. GUIDE is not a shared savings or capitated model but is a condition-specific care model designed to be compatible with other models and programs like ACOs that aim to provide opportunities to improve care and reduce overall healthcare spend. Specifically, this model aims to help older adults with dementia stay healthy at home longer and introduces a new payment structure for participating providers. 

Key aspects of the GUIDE model include: 

• Reimbursement for care assessments 

• Compensation for care planning 

• Payments for educating caregivers 

Many senior living operators are already performing these tasks, making the GUIDE model a natural fit for their existing operations. As the CMS Innovation Center continues to explore alternative payment models, it is anticipated that there may be additional opportunities for senior living organizations to be reimbursed for value provided.  

Enhancing Data Sophistication 

As an industry, we need to become more sophisticated in our data tracking, reporting, and implementation. This is an imperative for the industry and something that is absolutely critical in making progress towards not only value-based care arrangements, but in improving outcomes and communicating the evidence of value provided. The adoption of platforms that enable operators to accurately track key metrics on residents, to access information in real-time, and to support proactive interventions are paramount. We are optimistic that the sector will continue to improve in its data collection and reporting efforts in 2025 and will move toward greater standardization of key performance metrics.     

As we enter the new year, the senior living industry is at a critical juncture in its journey toward value-based care. While progress has been made, there is still considerable work to do. The transition to value-based care represents not just a change in payment models, but a fundamental shift in how we approach senior care. By focusing on outcomes rather than services rendered, the industry has the potential to significantly improve the quality of life for seniors while also enhancing operational efficiency and financial sustainability. With innovative models like GUIDE and increasing awareness of value-based care benefits, we can expect more senior living operators to explore and adopt value-based care arrangements in the coming year.