It’s the day after Christmas—a time when so many of us are taking a reprieve to enjoy family and friends. Some of us have loved ones who are living in the communities in which we operate, invest and provide services. We are all dedicated to providing an environment where residents, and often our family members, can thrive. In that spirit, this post is not about data, or industry news, or conferences. It’s a personal perspective about what it means to make lives more joyful, meaningful, and healthy for those living in our communities.

Four years ago this Spring, my mother, who is one of my best friends and my biggest inspiration for living a life with positivity and laughter, had a massive brain bleed. She was 83 years old. After weeks of rehab, her neurologist shared the news that she’d no longer be able to live at home—we needed to start looking at assisted living communities. I had no choice but to begin exploring options, accompanied by a lot of fear (will she hate it? Will they take good care of her?) and guilt (none of the five kids’ homes were options).  I was not yet working in the senior living sector, so I wasn’t armed with all the information and perspective I have today. But we kept an open mind, hoping to find a place where she would feel at home, and in which four siblings and I would feel confident that she’d be well cared for. After looking at six communities, we selected one that felt right—caring staff, a warm ambiance, nicely appointed apartment, quality dining, ample activities, and a gathering place for music and happy hour. As hopeful as we were, I’ll never forget her saying, as she sat in her new bedroom, “I know I’m going to die here”. My heart sank.  But we remained optimistic about the life she could have there and the loving care she’d receive.

Our expectations couldn’t begin to match what we watched unfold.

My mother quickly fell in love with the staff (who she fondly calls “the girls”), found a group of ladies to have lunch with, gradually started taking part in outings, and even found a “beau” who keeps her company an hour or two a day. She looks forward to her twice daily trips to get her medicines and eye drops because it gives her a chance to chat up the nursing staff. And, if she forgets, they bring the medicines to her and she’s delighted to see them. She makes her way downstairs every morning to get coffee and a danish, which she miraculously balances on the seat of her walker and brings back up to enjoy in her apartment. She does laps around the hallways to keep herself moving and makes her way back downstairs over the course of the day to socialize and chat with her new friends—she remembers few of their names, but greets them with compliments and takes a sincere interest in them.

As I walked into her community a few days ago after a long drive to Cincinnati from Annapolis, I felt, as I always do here, a warmth and kindness that does my heart good. I was welcomed by enthusiastic greetings from staff I’ve grown to know and love, hear my mother asked if she is planning to come to dinner, see the grand holiday decorations transform the lobby and each of the four levels, and residents offer to help me up with my bags of gifts. I’ll always remember the delight and pride she had the next morning when she brought back to her apartment the candies she had made in that morning’s activity.

Over the past 15 months working in the seniors housing and care sector, I have heard many speakers at  conferences talk about studies proving the importance of community and human connectivity and interactions on emotional, psychological and physical health. I see that first-hand in the life of my mother. Her life is full. Her life is better than if she lived in her old house or in the home of one of her children. During this holiday season, when we take a little extra time to focus on the love of family and friends, I recognize that although my mother may indeed die here, more importantly, she is living here. Living a good life, surrounded by caring people who love her, just as her children do. In these moments, I am so grateful and proud to work in this industry. We are helping residents live their best lives.

Wishing you and yours all the best for the holiday season and 2019.

• Occupancy Edged Up To 82.2% in Q3 2018
• Managed Medicare Revenue Mix Reached 10% 

NIC released its third quarter 2018 Skilled Nursing Data Report last week, which includes key monthly data points from January 2012 through September 2018.  The report also includes the latest urban vs. rural comparative data points as well as revenue mix trends. 

Here are some key takeaways from the report: 

1. Overall occupancy increased 14 basis points to 82.2% in the third quarter but was nearly a full percentage point below year-earlier levels.  The quarterly increase is notable because occupancy has declined or been flat between the second and third quarters for the past three years.  Occupancy trended up quarter-over-quarter in both urban and rural areas, but it was down in urban clusters.

2. Medicaid patient day mix increased to a time-series high of 66.7% in the third quarter. The combination of this and the relatively steady performance in private patient day mix help to explain the third quarter occupancy trend. The Medicaid patient day mix increase was driven by urban areas which rose to a time-series high of 67.9%.  Private patient day mix held relatively steady overall.   Private mix in rural areas was up from the prior quarter and year-earlier levels but still down by 188 basis points over the last five years. Urban areas showed a decrease from the prior quarter and from a year ago.

3. Managed Medicare patient day mix increased 7 basis points from the second quarter of 2018 to 6.5%.  However, the increase appears to be moderating because it was only up 13 basis points compared to one year ago.  The relatively small increase from last year was driven by urban areas, up 22 basis points, as rural areas were slightly down.  At 10%, managed Medicare revenue mix was up quarter-over-quarter and year-over-year.  Managed Medicare now represents 12% of revenue in urban areas, but only 4.7% in rural areas.  However, it has grown over the past few years in rural areas, albeit slowly.

4. Medicaid revenue mix reached a time-series high of 50.5% in the third quarter 2018, up 88 basis points from the second quarter of 2018 and up 162 basis points from a year ago.  The quarterly revenue trend is driven by the urban areas, just like the Medicaid patient day mix, as rural area Medicaid revenue mix was down from the prior quarter.  Although the lowest payor, in terms of revenue per patient day (RPPD), Medicaid RPPD grew at the fastest pace over the past year relative to the other payor types in this data set, rising by 2.0%.

As in all real estate, “its local” for seniors housing as well.  Indeed, while the seniors housing occupancy rate remained at a six-year low rate of 87.9% in the third quarter, not all markets were weak. There was a very wide disparity between the best and poorest performing markets with a 13.8 percentage point variance between the most occupied market (San Jose: 94.6%) and the least occupied market (Houston: 80.8%) in the third quarter. Every market performs differently as unique conditions and factors contribute to disparate development and demand patterns at the local and metropolitan market level.

The chart below provides details of the supply and demand dynamics for the NIC MAP 31 Primary Markets in the past three years. The vertical axis shows annual inventory growth in percentage terms, while the horizontal axis shows annual net absorption growth for the past three years. The color of the circle depicts the movement of the occupancy rate over the past year: red for a deteriorating occupancy rate and green for an improving occupancy rate. The size of the circle shows how many absolute units were added to inventory in the past three years.

In the past three years, Houston, Atlanta, San Antonio and Dallas have all seen inventory grow by 20%, while Minneapolis, Kansas City, Denver and Orlando have seen a 15% increase in stock. In all these metropolitan markets, occupancy has fallen between two and six percentage points as the pace of new inventory growth has exceeded that of demand.

The strongest net absorption occurred in many of the markets that experienced the fastest growth in inventory. In the chart, this can be identified by the markets furthest to the right. This includes San Antonio, Dallas, Atlanta, Minneapolis, Houston and Kansas City. The fact that these circles are also red, however, shows that occupancy declined in these markets over the past three years and that, while demand was strong, it simply was not “strong enough.” However, there is a good chance that demand will start to catch up in some of these markets because projects currently under construction have declined significantly. This is particularly the case in San Antonio, which had less than 100 units under construction as of the third quarter.

The flip side is metropolitan areas that have not seen very much inventory growth and have seen occupancy rate improvement in the past three years. This includes Riverside, Sacramento, Philadelphia, Baltimore, San Diego and New York.

In terms of absolute unit growth over the past three years, the most unit inventory gains occurred in Dallas, Chicago, Minneapolis, Atlanta and Houston–those markets with the largest red circles in the chart. These five geographies accounted for 40% of the 54,000 units of inventory growth in the NIC MAP Primary Markets in the past three years. Behind this top five group are Washington DC, New York City, Detroit, Phoenix, and Boston. The top 10 markets for inventory growth accounted for 63% of inventory growth in the past three years. Offsetting these trends are markets with relatively little inventory growth over the past three years which include San Jose, Baltimore, Las Vegas, San Diego, Riverside, and Pittsburgh.

Taken together, this analysis supports the maxim that all real estate is local and that broad aggregate trends can obscure opportunities. It would appear that the much-ballyhooed supply story of San Antonio has been paid heed and units under construction currently have slowed dramatically, providing a pause in inventory growth to allow demand to catch up and occupancy to rise above 81%. Meanwhile, Phoenix currently has the most absolute number of units under construction at 3,524 units or 13.9% of its inventory, dwarfing the 2,368 units completed in the past three years. Eight other markets have greater amounts of units under construction today than what was completed in the past three years. Other than Phoenix, this includes Baltimore, San Diego, Riverside, Sacramento, Los Angeles, Philadelphia, New York, and Miami. These markets bear watching and deserve further examination to determine if demand in these markets will in fact be “strong enough.”

The unemployment rate remained low at 3.7% in November, which is the lowest rate since December 1969. The jobless rate remains well below the rate of what is generally believed to be the “natural rate of unemployment” of 4.5%, which suggests that upward pressure on wage rates will continue. Further indications that this is in fact starting to occur were released in the report. Average hourly earnings for all employees on private nonfarm payrolls rose in November by six cents to $27.35. Over the past 12 months, average hourly earnings have increased by 81 cents, or 3.1%. This was the same as last month and the strongest pace since 2009. Last year, they rose by 2.6%.

A broader measure of unemployment, which includes those who are working part time but would prefer full-time jobs and those that they have given up searching—the U-6 unemployment rate—rose by 0.2 percentage points to 7.6% in November, but it was still below its rate of 8.0% one year ago.

The Labor Department also reported that there were 155,000 jobs created in the U.S. economy in November, below the consensus expectation of 198,000. This was the 98th consecutive month of job growth. However, October was revised down from 250,000 to 237,000 and September was revised up to 119,000 from 118,000. With these revisions, employment gains in September and October combined were 12,000 less than previously reported. The September figure may have been negatively affected by Hurricane Florence, while the November figure may have been affected by snowstorms in the Midwest and wildfires in California.

Payrolls have averaged 170,000 per month for the last three months and 206,000 for the past eleven months, up from 182,000 last year. It is important to note that the jobless rate is calculated from a different survey than the survey used to calculate the number of new jobs (the household versus the establishment survey, respectively).

In November, employment in health care rose by 32,000. In the past year, health care has added 328,000 jobs.

The labor force participation rate, which is a measure of the share of working age people who are employed or looking for work was unchanged at 62.9% in November, still very low and near its cyclical low of 62.3% in 2015. The low rate at least partially reflecting the effects of an aging population.

Despite the weaker-than-expected gain in jobs, the recent acceleration in the wage data will provide further support for the Federal Reserve to increase the fed funds rate by 25 basis points at its December 18th and 19th FOMC meeting. Already this year, the Fed has increased the fed funds rate by 25 basis points three times and most recently in September it increased the fed funds rate to a range between 2.00% and 2.25%. The Fed has raised rates by a quarter percentage point eight times since late 2015, after keeping them near zero for seven years.

For consumers who save, higher rates are good news as their returns on CDs and money market accounts will grow at a faster pace. But for borrowers—both consumers and businesses–higher rates are not good news as their borrowing costs will be higher.

Penetration rates vary across markets and across time.  Some of the variation may be due to differing demand factors such as population and household growth and size, consumer preferences, familiarity and comfort with the product, changes in the composition of inventory, and cultural influences. This blog post explores some of this variation.

The chart above shows the ordinal ranking of occupancy rates and penetration rates for the Primary 31 markets for Majority Independent Living (IL) properties as of 2Q2018 from the NIC MAP® client portal. Although one might expect areas with high occupancy to also have high penetration, the data show that is not always the case and that there is variation in the relationship between occupancy rates and penetration rates.

Penetration rates over time: Some have risen, some have fallen.  An analysis of metropolitan market penetration rates across time that uses NIC MAP seniors housing inventory and occupancy data and time series household demographic data from the U.S. Census and Moody’s Analytics reveals interesting results¹ This analysis calculates two types of penetration time series: occupied penetration (calculated as the number of occupied units divided by households age 75+) and supply penetration (open inventory divided by households age 75+). After calculating the supply penetration rate and occupied penetration rate time series for the Primary 31 Markets, we also calculated the respective changes from 4Q2006 to 4Q2016 for each metropolitan market.

The data show wide differences in penetration rates by geography, with high penetration rates for Majority IL, Portland, Oregon; Philadelphia; Kansas City; and Seattle ranked high, while Los Angeles; Riverside; New York; and Las Vegas ranked low.

The analysis also examined changes in occupied penetration rates across time by metropolitan market. For Majority IL, 17 out of the 31 Primary Markets saw decreases in occupied penetration rates in the 10 years ending in 2016, while the other 14 showed increases. For the aggregate Primary 31 Markets, occupied penetration remained flat at 5.6% for Majority IL.

Why have some markets experienced rising penetration rates, while others have not?  The answer reflects underlying supply and demand factors, such as a comparison of growth in inventory compared with growth in households over age 75, demand-related factors such as familiarity with the product, demographic patterns of both seniors and their adult children, and in some cases idiosyncratic factors unique to each metropolitan area such as cultural comfort with the product offerings.  Operator reputation in a market may also help explain penetration rates.  This variability reinforces how important it is to evaluate conditions at a local market level.

Conclusion.  Penetration rates and occupancy rates do not have a clear-cut relationship across markets.  Penetration rates can increase when inventory growth outpaces household growth. In some instances, this may result in falling occupancy rates; but in others, occupancy rates remain steady.  Factors such as familiarity with the product type, marketing and education efforts, operator reputation, growth in the number of seniors and their adult children, variation in population health needs, local cost of living, affordability of product, and perhaps climate, can also influence penetration rates. 

¹ The Moody’s Analytics time series data for Households over age 75 based on the U.S. Census at this time is currently only available through 2016.