First-quarter data showed continued downward pressure on occupancy rates, with assisted living occupancy falling to its lowest level since NIC began reporting data in 2006—85.7%.  A broader measure, the occupancy rate for all of seniors housing (independent and assisted living) for the 99 Primary and Secondary markets tracked by the NIC MAP^® Data Service, had a first quarter occupancy rate of 88.1%, not the lowest on record, but a nadir since mid-2011 and down from 90.0% as recently as Q4 2015.  During the nine quarters since then, inventory growth has exceeded demand by 23,000 units (70,000 units of inventory growth versus 47,000 units of net absorption).

Occupied Penetration Rates. Based on this data, the occupied penetration rate for seniors housing in the 99 Primary and Secondary markets was 9.9% in the first quarter, defined as occupied units divided by the number of households over 75.  If the occupied penetration rate increased by 20 basis points to 10.1%, the occupancy rate would be 90.0% based on first quarter inventory levels.  For this to happen, an additional 17,000 units would need to be absorbed, an achievable number since this number of units was more than absorbed on a net basis in the past four quarters.

For an occupancy rate of 95%, a rate that is often underwritten as a stabilized occupancy rate for a property recently opened, today’s penetration rate would need to increase by 70 basis points to 10.6%, the equivalent of 64,000 units of additional net absorption.  This is equal to the number of units that have been absorbed in the 99 Primary and Secondary markets on a net basis since the third quarter of 2014 through the first quarter of 2018.

Its notable, however, that a 95% average occupancy rate has never been achieved for the aggregated 99 Primary and Secondary markets; since the fourth quarter of 2009, the average occupancy rate has been 88.9% and only in four of the thirty-four quarters that NIC has reported this data has the aggregated occupancy rate reached 90% or more. That said, this is not the case for individual metropolitan markets (such as San Jose, Baltimore, Portland, Sacramento, Pittsburgh, Seattle, New York, Boston, Los Angeles, Sand Diego, San Francisco and Philadelphia which all had first quarter 2018 seniors housing occupancy rates that were 90% or higher.)

Seniors Housing Inventory versus Multifamily Inventory.  For another perspective on recent market fundamentals, it may be helpful to look at the multifamily sector, where completions (inventory growth) as a share of total inventory equaled 1.8% in 2017 according to estimates by CBRE, the equivalent of 266,000 units.  For seniors housing, inventory grew by 30,000 units from year-earlier levels in the first quarter for the 99 Primary and Secondary markets.   While seemingly small on the surface, for seniors housing this equals a 3.3% increase in inventory.  A comparable estimated increase for the nation would be roughly 45,000 units (under the assumption that the 99 Primary and Secondary markets represent approximately two-thirds of the national inventory which equals the share of 75-plus households for this geographic aggregate relative to the nation).

Further, a comparable increase of 3.3% in apartment stock equals 490,000 units or 41,000 units per month.  The sizeable differences of course are due to orders of magnitudes of differences in the stock of multifamily units versus seniors housing.  Indeed, the multifamily sector is significantly larger than seniors housing (14.7 million units versus an estimated 1.4 million seniors housing units at the national level or 927,000 for the 99 markets).

And How Do Demographics Fit In?  Another way to gain perspective on recent market fundamentals for seniors housing is to compare the estimated 45,000 units of new supply delivered nationally in the past year against the demographic growth in the number of Americans in the 83-plus year cohort for the comparable period. The selection of 83-plus may be viewed as a proxy for those individuals who could be potential residents in seniors housing.  Based on recently updated estimates from the Census Bureau, in 2017 this equated to 8.5 million individuals. In 2018, an additional 138,000 people are projected to age into the 83-plus cohort and by 2025, the Census Bureau estimates that there will be 10.2 million people in this cohort for an increase of 1.6 million people over the eight-year period from 2017 to 2025.  With a penetration rate of roughly 10%, this suggests the need for 164,000 additional units of seniors housing supply over this eight-year period. Using the numbers cited above for the current national run-rate of 45,000 units of stock added in the past 12 months, 164,000 additional units could be added in 3.7 years, outpacing the potential eight-year demand requirement.

However, it is notable that a similar analysis done for a younger cohort–those 80 and older–yields a different conclusion.  In 2017, there were an estimated 12.4 million individuals aged 80 and older versus the 8.5 million figures cited above for those over 83.  By 2025, the Census Bureau estimates that there will be 15.6 million people in this cohort for an increase of 3.2 million people over the eight-year period from 2017 to 2025.  This compares with the growth of 1.6 million for the 83 and over cohort.  With a penetration rate of roughly 10%, the 80-plus cohort growth suggests the need for 316,000 additional units of seniors housing supply over this eight-year period.  Using the numbers cited above for the national run-rate of 45,000 units of stock added in the past 12 months, today’s supply pace of 45,000 units per year would be shy of the demand by roughly one year’s worth of today’s inventory growth or 45,000 units.

So, where does this leave us?  An estimate of demand using the 80-plus cohort suggests that today’s supply run-rate will leave us short of inventory by 2025, ceteris paribus, while the 83-plus cohort analysis suggests excess inventory by 2025.  The answer is probably somewhere in the middle of these two results and points out how sensitive the analysis is to the age-cohort assumption used.

From a practical point of view, there are two ways to prevent today’s occupancy rate of 88.1% from falling lower. The first would be to slow the rate of new supply delivery to below today’s pace especially in markets where occupancy rates are below the national averages due to excessive inventory growth. The second would be to boost demand by growing today’s occupied penetration rate.  And one way to do this would be to attract younger residents because today’s greatest demographic growth is oriented toward the younger old.  (For more thoughts on growing penetration rates see:  http://www.nic.org/blog/boost-market-performance-penetration-rates/)

Benchmark data can inform project projections

By Lana Peck, Anne Standish and Beth Mace

Among the many factors that determine the profitability of a project is the pace of initial move-ins or leasing momentum. A well-located and rapidly leased-up project can build forward momentum for steady demand, high occupancy and solid revenue growth, and build a strong reputation in the trade area among potential residents and their adult child influencers. This Blog explores the topic of leasing and provides occupancy rate benchmarks by segment type on the median time it takes to lease units at newly opened properties based on a 12-year plus time series of leasing patterns collected by the NIC MAP Data Service.

Broadly, data on range of lease-ups and national trend data for seniors housing and care properties can be used in setting proforma occupancy in new development, studies to support financing, and benchmarking occupancy for non-stabilized communities as they fill up. This can help determine, for example, whether a marketing budget will be sufficient during the fill period or how new assisted living units with 45% occupancy four-quarters post-opening stacks up against others.

Some of the factors that affect lease-up rates include: depth of target market demographics, supply penetration, age and size of the property, quality of and proximity to competition, condition of the residential real estate market, consumer familiarity and acceptance, levels of presales before opening, and operator quality.

The table below provides the median occupancy rate achieved by newly opened distinct care segments by the number of quarters the property has been open. The data blends together properties in the NIC MAP 31 primary metropolitan markets since 4Q2005 and properties in the secondary markets since 1Q2008. To help assess upside and downside probabilities, the exhibits outline the realized range for the 25th and 75th percentiles as well.

As the table shows, eight quarters after opening, assisted living units and memory care units had the highest median occupancy rates of 89%, while independent living was lowest at 84%. After 16 quarters, the median occupancy for assisted living was 95%. Nursing care was lowest at 92%. It is worth noting that median occupancy rates are typically higher than the more frequently cited average occupancy rates.

More detail can also be ascertained from the NIC MAP Data Service data by segment type.  For example, for newly opened independent living care segments during this period, the median reached 84% occupancy eight quarters following the property opening. At the same time, the lowest-performing quartile of these segments had less than 66% occupancy and the highest quartile had above 97% occupancy. By the end of 16 quarters after opening, median occupancy was 93%. The lowest quartile had 82% occupancy or less, and the highest quartile had reached 99% occupancy or more. (Note: The lowest quartile is not always made up of the same units, as low-performers improve and previously strong performers slip.) The median size of an independent living segment at a property opened during this period was 100 units.

This month, NIC, in a strategic alliance with PointRight, is announcing the launch of quality metrics for the skilled nursing sector. This major expansion and enhancement within the NIC MAP^® Data Service platform reflects NIC’s commitment to the skilled nursing sector and builds upon NIC’s present Skilled Nursing Data Report, which focuses on financial data.

Being in-network and having visibility into healthcare outcomes is becoming increasingly important in a value-based world. Providers and investors alike must understand how their skilled properties benchmark within their respective markets.

Some of the benchmarking that this data makes possible is not available anywhere else. It will enable operators and investors to better understand the performance of properties and markets when underwriting new deals, managing portfolios, developing strategies, competitive benchmarking, and gathering market intelligence.

New Solutions

NIC MAP users will now be able to include quality metrics data in their analysis, alongside NIC MAP data, such as market performance data, demographics, wage and employment data, hospital locations, and more.

CMS and its Five-Star rating system, while not the only source of quality measures, is an important source of data for determining eligibility for certain referrals. In addition to CMS, pioneering companies are accessing publicly-available data sets and applying their own proprietary algorithms to estimate various additional outcome metrics.

The following Quality Metrics reports are now available, according to subscription level, at the national, metropolitan, and property levels.  The metro level data is available exclusively through NIC MAP:

• PointRight Pro 30^® Adjusted Rehospitalization Rate
• PointRight^®Pro Long Stay^™ Adjusted Hospitalization Rate
• CMS Overall Five-Star Rating
• CMS Survey Deficiencies (Property level only)

Why PointRight?

PointRight is an industry leader in analytics for post-acute and long-term care, specializing in data-driven quality metrics solutions. The PointRight Pro 30 scores are certified by the National Quality Forum, which means they have undergone considerable examination by a panel of experts. Furthermore, the metrics are endorsed by the American Health Care Association (AHCA).

Serving over 8,000 skilled nursing facilities, PointRight data provides investors, operators and payers the data they need to understand these facilities in terms of quality and performance. Data such as rehospitalization rates, CMS quality measures, and CMS Five-Star ratings, will now be seamlessly integrated into our NIC MAP product.

Supply and demand more balanced; occupancy sustained above 90%

In the first quarter of 2018, among the 31 primary markets tracked by NIC MAP, independent living had an occupancy rate of 90.3%, which was about 70 basis points less than stabilized occupancy. Comparatively, assisted living had a differential of 230 basis points, more than three times as large since there are many more units that have opened but are still in lease up for assisted living than for independent living.

The most recent cycle of independent living inventory growth began in the middle of 2015. Despite a 5% increase in stock, occupancy rates have been sustained above 90% since early 2014 as demand has held up reasonably well. Metropolitan markets such as Atlanta, Houston, Kansas City, and San Antonio, have increased their independent living stock, but other markets such as Washington, D.C., Denver, Detroit, Los Angeles, New York, and Philadelphia, among others, have maintained relatively low-to-moderate supply growth.

Of additional note, the data show a 30-basis point quarterly decline in the independent living occupancy rate to 90.3%, which stemmed from a marked slowdown in first quarter absorption and somewhat weaker inventory growth. Reasons for the slower pace of activity could be related to seasonality patterns typically seen in the seniors housing data including influenza and influenza-like illnesses and winter weather, which tend to subdue both inventory growth and demand. Anecdotally, many properties lost marketing days in January and February due to the weather and flu-related property-level quarantines. Given that these factors were especially harsh during 4Q2017 and 1Q2018, there may potentially be a corresponding bounce back in in the second quarter as delayed move-ins from the winter months take place.

Inventory growth largely concentrated in a few markets

The map below shows the parts of the country that have seen the most change in independent living inventory in the past year. During the past year, there have been more than 11,000 independent living units added to inventory among the primary and secondary markets.

About one third of this growth in inventory occurred in seven metro areas: Dallas, Philadelphia, Columbus, Fort Myers, Houston, Detroit and Austin. While Minneapolis and Miami also saw strong independent living inventory growth over the past year, Baton Rouge, Charleston and Syracuse were geographies that experienced the greatest percentage gains in inventory.

Are construction starts plateauing or rising?

After peaking in mid-2016, construction starts in the secondary markets have been falling on a four-quarter moving-sum basis. In the primary markets, however, the peak was earlier (mid-2015) and the trend for the primary markets appears to be flat or rising.

Of note, anecdotal reports of delays in starts due to the weather and interruptions in starts due to delays in financing and funding may have caused some groundbreaking dates to be pushed back. And while construction starts data are subject to revision for these reasons, the numbers provide insight into what is in the pipeline. Interestingly, while the data shows a potential increase in independent living starts in the 99 primary and secondary metropolitan areas tracked by NIC MAP, it also shows a slowdown in starts for assisted living, which may signal increasing interest in independent living from investors and developers.

Seniors housing and care updated transactions figures show a total of $2.6 billion closed deals in the first quarter of 2018. That includes $1.7 billion of seniors housing, and $900 million in nursing care transactions. The total volume was down 5% from the previous quarter’s $2.7 billion, and down 45% from the first quarter of 2017 when volume totaled $4.7 billion.

The central theme of the first quarter of 2018 is that activity by private buyers—which include any company that is not publicly traded, e.g. a private REIT or single owner or partnership, family offices, etc.—continues to be very consistent. The first quarter of 2018 represented the 19^th consecutive quarter of more than $1 billion in closed transaction volume by private buyers, totaling $1.3 billion.  With only $2.6 billion closing in the first quarter overall, private buyers represented half of all closed volume. Private buyer volume was up 9% from the fourth quarter of 2017. However, it was down 8% from a year ago in the first quarter of 2017 when volume registered $1.4 billion.

As far as the other buyer types, both public and institutional buyers each closed on about $600 million worth of transactions in the first quarter. Public buyers registered $547 million in transactions and institutional buyers totaled $606 million. The public buyer represented 21% of total volume in the first quarter, an increase from a year ago in the first quarter of 2017 when it represented only 9% of volume. The institutional buyer represented 23% of the total volume in the first quarter of 2018, which was down from 55% a year ago.

Institutional buyer volume was down 41% from the last quarter when volume registered $1.0 billion. Volume was down 76% from a year ago in the first quarter of 2017 when institutional buyers registered an unusually high amount of volume for a first quarter at $2.6 billion. The first quarter of 2017 was the highest closed volume for the institutional buyer going back to 2008, primarily because of several large Blackstone transactions.

Public buyer volume was up 36% from last quarter, although from a relatively small base of only $403 million, and up 26% from a year ago, again from a relatively small base of only $433 million. The public buyers have had a harder time competing for deals as their cost of capital has significantly increased over the past year. Below is a graphic which is a good measure of the cost of capital within the sector for the public markets. The orange line represents skilled nursing and includes the cost of capital of Sabra Health Care REIT and Omega Healthcare Investors. The blue line represents seniors housing and includes the “Big 3” healthcare REITs: HCP, Ventas and Welltower.

This graphic shows the premium at which the stocks are trading relative to their gross asset value. That means when the REITs trade at a premium to asset value (asset value is based on the private market capitalization rates and the REIT’s portfolio holdings) then the REITs can go out and buy properties by raising equity and realize an instant increase in value because the private market value is lower than their publicly traded equity value. In other words, their cost of capital is low when the premium is high. This can basically be an arbitrage play when these stocks are trading at high premiums. As seen here starting in 2013, the premium began to trend down, which in turn effectively raised their cost of capital making it harder to pay higher prices for properties. This premium took another leg down in 2015, which is reflected in closed transaction volume as public REIT activity decreased dramatically after the second quarter of 2015 and continued to decline through 2017. Now, well into 2018, we see a significant decrease in the premium and, in fact, it turned negative for seniors housing at nearly -10% in the first quarter 2018.

As private equity is still relatively active in the markets and pricing still remains strong, many public REITs are finding it harder to compete for properties, especially larger portfolios. Anecdotally, many deals closed by public REITs include existing operator relationships.