The 2024 capital markets outlook is that much remains the same. Credit is scarce and the capital markets remain unpredictable. Whether the Fed will cut rates in four months, six months, or even nine months, many investors believe that defense is the best offense. The preceding ten years created a fascinating environment with cap rate compression to historic lows and a substantial amount of newly issued debt. Today, the industry is entering a period of transition where cap rates are starting to progress upward, and historic levels of debt are being repriced in a higher cost of capital environment.

In the debt markets, loan to values are trending downward while the quality of assets and counterparties is going up. Spreads and base rates are providing investors with attractive unlevered returns, and many see credit as a good place to be active today. On the equity side, generally speaking, public real estate companies have traded off their highs, but there remains a lot of pricing uncertainty with respect to private real estate. Many private equity funds are waiting to see how the coming months unfold as repricing and price discovery occurs. Transaction volumes remain low. According to NIC MAP Vision, fourth quarter 2023 preliminary closed transaction volume was $465.8 million for senior housing, and $525.5 million for nursing care. Over the past four quarters ending fourth quarter 2023, senior housing transaction volume was $3.8 billion, down 59% year-over-year.

The senior housing market is showing signs of continued strength despite challenging capital markets. Annual inventory growth for the fourth quarter of 2023 was 1.4%, below its pre-pandemic average of 1.6%. New supply has been constrained by tighter credit conditions and increased construction material costs, which have outpaced CPI. Yet the slowdown in supply has been accompanied by persistent and accelerating demand, boosting fundamentals. Senior housing occupancy for the third quarter of 2023 was 85.1%, up 80 basis points from the previous quarter, which marks the tenth consecutive quarter of occupancy increases. Similarly, the fourth quarter of 2023 showed that all care segments maintained their near record high year-over-year rent growth.

In many ways it feels like it could be senior housing’s time to shine. From a demand perspective, the industry is at the beginning of an aging baby boomer population. Statistics show that that population grew five times faster than the overall US population from 2010 to 2020. New supply remains constrained, and this will continue throughout 2024. Rent growth has stayed elevated and investors are optimistic around the sector. As certainty in the treasury market returns, and capital forms around the sector, transaction activity should pick up. 2024 may represent an attractive entry point to senior housing as prices adjust lower and fundamentals remain attractive.

Sources:

1. 4Q23 NIC MAP® Market Fundamentals Data
2. U.S. Bureau of Labor Statistics Producer Price Index Producer Price Index Home: U.S. Bureau of Labor Statistics (bls.gov)
3. US Census Bureau https://www.census.gov/library/stories/2023/05/2020-census-united-states-older-population-grew.html#:~:text=The%20U.S.%20population%20age%2065,the%20United%20States%20in%202020

In the first week of March, NIC will host its 2024 NIC Spring Conference in Dallas, TX. This year’s conference programming has been led by co-chairs Colleen Blumenthal (HealthTrust) and Peter Longo (Cantex Continuing Care Network). Learn what they recommend at this year’s event and what attendees can look forward to.

NIC: The theme of the 2024 NIC Spring Conference is “Turning Insights into Action.” What do you see as key insights and actions that our industry needs to effectively position for the future?  

Longo: One of the great things about planning the NIC Spring Conference is bringing together industry leaders with a wealth of experience to harvest their insights. Conference sessions are curated to build on these insights and bring together experienced speakers who will discuss how to leverage insights to create value. This year’s key insights revolve around leveraging technology, pursuing healthcare partnerships, and enhancing enterprise value through ancillary services.

Blumenthal: The Spring Conference in March comes at the juncture of results coming out from many of the NIC research initiatives and an inflection point in the capital markets. The sessions the planning committee has developed leverage these results to identify solutions to the challenges of margin erosion, a changing consumer base, and the middle market. The key insights attendees will take from the conference will allow them to proactively position their businesses to improve and thrive.

NIC: You serve as Co-Chairs of the NIC Spring Conference Program Committee. What are you most looking forward to when we all convene in early March?

Blumenthal: First and foremost: seeing everyone. Secondly: learning – in the hallways, at sessions, in meetings and, of course, at the reception. Attending NIC is how I keep my finger on the pulse of the industry.

Longo: It’s always a tremendous rush arriving at the NIC Spring Conference as you know you’re going to hear from some of the most talented and experienced professionals in the industry and come away with new ideas to act on. It’s also a great place to network and I always look forward to reconnecting with old friends.

NIC: Do you have other comments or thoughts that you would like to share?

Blumenthal: The Spring NIC has evolved from being the “baby NIC” to a forward-thinking, “where does the industry need to be in five, ten years” event. Attending the sessions at Spring NIC is how to stay ahead of the curve.

Longo: Beyond bringing great people together, another wonderful thing about the NIC Spring Conference is the time and attention that goes into creating compelling and actionable content. The 2024 NIC Spring Conference is entirely focused on networking, learning and innovation, and puts less emphasis on vendor relationship development, making it highly productive and enjoyable to attend.

2024 will mark the end of a three-year pandemic occupancy recovery, paving the way for 2025 to be a year focused on proactive initiatives, efficiency developments, and a forward-looking approach.

This article is a segment of NIC Analytics’ construction deep dive series, featuring (1) an analysis that highlights the increasing construction durations in senior housing, and (2) an exploration of construction cycles and regional dynamics within the senior housing sector.

In this concluding segment of the series, NIC Analytics examines key takeaways from the distribution of units (independent living, assisted living, memory care, and nursing care) under construction in senior housing across U.S. regions. The focus is on analyzing fundamentals and select performance metrics in two sets of regions, each employing distinct construction strategies, particularly from a unit type mix perspective.

As we wrap up this series, we invite your perspective on the future trajectory of senior housing construction. Please share your insights by participating in the poll question at the end of this article.

The goal of this construction-focused series is to offer a forward-looking perspective, highlighting opportunities and challenges, indicating areas where the industry anticipates future demand for senior housing unit types, and providing roadmaps to guide future developments.

Distribution of units under construction, market fundamentals, and select performance metrics by region and unit type.

Optimal growth involves striking a harmonious balance in unit types. The exhibit below illustrates the diversity in regional construction strategies, with some regions prioritizing independent living, while others place more focus on assisted living to meet higher acuity care needs of older adults.

The prominence of memory care units across various regions highlights the importance of specialized care and units for older adults with cognitive impairments. Addressing the needs of this growing demographic will not only be a necessity, but also a strategic differentiator.

The data also reveals a notable scarcity of new nursing care units within senior housing properties in all regions. This persistent trend in recent years highlights the growing recognition of senior housing and nursing care as distinct product types, each with unique fundamentals, operations, and investment strategies.

Regions with greater focus on independent living units:

The Mid-Atlantic, Southwest, Northeast, and the Mountain regions share a common trend with more focus on independent living units. The Mid-Atlantic region stands out with a notable concentration in independent living units, accounting for 64% of the total units under construction in the region.

Regions with greater focus on assisted living units:

With 47% of units under construction dedicated to assisted living, the Pacific and the Southeast demonstrate more focus on assisted living units, followed by the East North Central and the West North Central with 45% of units under construction allocated to assisted living.

While each of these distinct regional groups anticipates different projected needs based on the current construction pipeline, the fundamentals and select performance metrics revealed a similar pattern.

In 2023, independent living units within both groups showed relatively higher inventory growth compared to assisted living units. However, assisted living units demonstrated a higher annual absorption rate than independent living units. As a result, the AIV (absorption-to-inventory) ratio for independent living units was lower than that of assisted living, indicating a relatively higher velocity of turning new assisted living units into occupied units.

In terms of occupancy gains in 2023, assisted living units within both regional groups experienced higher growth compared to independent living units. Additionally, occupancy rates for assisted living units are approaching recovery. In fact, the occupancy rate for assisted living units within the select regions with a greater focus on independent units under construction has returned to pre-pandemic first quarter 2020 levels, although independent living units still maintain relatively higher occupancy rates.

The recent surge in demand for assisted living, consistently higher in recent years, is likely indicative of a new normal rather than a pent-up demand. Given this sustained pace of demand growth and relatively moderate inventory growth, assisted living is expected to continue closing the occupancy gap with independent living throughout 2024 and likely beyond.

Looking at these trends across both regional groups prompts a key question: which regions are poised to strike a balanced mix of unit types for optimal growth, effectively meeting the needs of both current residents within the continuum and prospective residents? While in some circumstances, units can be converted, efficiency developments are important for achieving optimal growth needed to maximize performance.

In the context of senior housing construction, efficiency developments are measured by how well the senior housing sector delivers the right product to the right prospective residents when they need it, and involves streamlining construction processes and timelines, optimizing resource allocation, and finding the right unit mix balance to enhance outcomes in terms of cost-effectiveness, quality vs. affordability, and supply vs. demand in senior housing.

In conclusion, 2024 will mark the end of the pandemic recovery at least from an overall occupancy standpoint and construction pace perspective. However, achieving a uniform recovery is unlikely, with some properties, markets, and regions expected to continue facing challenges.

When trends apply broadly, they tend to normalize. Challenges stemming from capital market conditions, higher interest rates, and demanding lending environments are likely to persist, although these are not exclusive to the senior housing sector. Senior housing providers who adeptly navigate these general macro trends and focus on the industry’s specific micro trends will achieve outlier performance in the future – an attainable feat within this transitioning sector from a “value sector” to a “growth sector.”

As background, with anticipating trends and needs becoming the standard for success in the industry, NIC Analytics is embracing more of a forward-looking approach. In future publications, NIC Analytics will introduce its forward-looking AIV ratio alongside the actual AIV ratio, providing an additional metric for assessing the future dynamics of supply and demand.

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Polling Question:

Considering the greater focus on independent living unit construction in certain regions, do you think this trend will continue or shift in 2024?

Click Here to Respond

Since the 2019 “Forgotten Middle” study, NIC has recognized the need to move towards actionable solutions for housing and care for the middle-market older adult. In early 2023, NIC joined with CVS Health to sponsor an in-depth study by Milken Institute’s Financial Innovations Lab® and Center for the Future of Aging to identify viable, actionable solutions for financing and scaling middle market senior housing & care. The culmination of this work is captured in a newly released report called, “Innovative Financing and Care Models to Scale Affordable Housing Solutions for Middle-Income Older Adults.” Four potential strategies for both senior housing and housing with care are outlined in this report. 

1. Repurpose distressed senior living properties to serve the middle market through a pilot refinancing/restructuring program. 
2. Design a revolving loan fund to provide a sustainable source of capital long-term for middle market development, acquisitions or cap ex. 
3. Implement a Pay-for-Performance model to provide new revenue streams that offset the ongoing costs of providing supportive care services to chronically ill middle market older adults.  
4. Launch a regional pilot to generate data to provide evidence-based outcomes to judge performance and determine how best to scale.

With the projected loan maturities in 2024 and 2025 and assessments of the level of distress in the market, NIC sees this is as an opportunity to bring down price points and repurpose distressed assets to bring forth reasonable housing and care options for middle-market older adults. The senior housing and care sector has been working to scale housing & care options for the “Forgotten Middle” and there is a potential that the current headwinds can be turned into a real opportunity to make a meaningful impact for this cohort of older adults. This is one of several potential scenarios. Innovative strategies that encompass select aspects of the four scenarios may yield the most viable alternatives. 

On February 1st, NIC will host a webinar to discuss these findings and implications for our sector. Additionally, the middle market older adult will be another focus of educational content at the NIC Spring Conference. To read the full report from the Milken Financial Innovations Lab, please click here.  

In 2022 NIC released its five-year strategic plan and revised its committee structure to align with the five focus areas and needed implementation teams. In early 2024, NIC will launch a new Research Committee, led by Chairperson MJ Ritschel of Kisco Senior Living. We had a chance to talk with MJ and hear his thoughts about this important committee.   

NIC: What is the value of pulling together a research committee representing various constituent groups within the NIC ecosystem? 

Ritschel: While we have lots of talent within our industry, sometimes diversity of thought/representation from varied life and professional backgrounds is lacking but deserves a seat at the table (so to speak). I view it as unlocking that “secret sauce” that sometimes we don’t know that we need but when it shows up with a group of people called to action you realize its presence and usually it generates superior outcomes.  

NIC: Why did you agree to serve in the chairperson role?  

Ritschel: A fellow West Coast industry colleague and good friend Fee Stubblefield reached out to me about my level of interest to do more for NIC, beyond serving on the Operator Advisory Board (OAB). In raising my hand, I expressed an interest to become more involved in research initiatives, especially around seniors living in our communities. So, here I am!  

NIC: What are you hoping that the research committee can accomplish during your tenure as chairperson? 

Ritschel: Source, vet and move forward with another “grand research initiative” on the order of the Milken Institute collaboration announced in early November 2023. 

NIC: Is there any specific issue that you are particularly passionate about where the Research Committee can make an impact?  

Ritschel: I would like to see focus on more research wherein facts and data support the thesis that seniors from all economic segments can thrive and live longer and safer in a senior living congregate environment versus other living arrangements available to them.  

NIC: How will you define success of the Research Committee at the end of your tenure as chairperson? 

Ritschel: I grew up in a family contracting business, so I learned the importance of laying and building a strong foundation. As such, success for our committee will be how well we lay the foundation for the NIC research agenda (in alignment with the current strategic plan) so the next set of committee members and leaders can take this to the next level.