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.

___

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. 

We are all well-aware of the demographic trends unfolding in the U.S. In 2025, the first Baby Boomers will turn 80. Are we prepared for the implications of the aging population and is there enough supply to meet the demand for senior housing & care in the years ahead? Calculations by NIC MAP Vision project the need for an additional 200,000 additional senior housing units by 2025.

To maintain the current market penetration rates in the senior housing sector, we will need significant near-term growth in the senior housing inventory. When looking at current penetration rates among the 80+ age group, NIC MAP data predicts a need for 156,000 additional senior housing units by 2025, 549,000 additional units by 2028, and 806,000 additional units by 2030. With record-low construction starts observed in 2023, the projected gap between available and needed senior housing units will be significant. Whether looking at the 75+ or 80+ population, this pattern emerges.  

When looking at the amount of capital that will be needed to support this population growth in inventory, by 2030, an industry-wide investment of $400 billion will be needed to complete the required new development to meet the anticipated demand. Given the current pace of new development, it is estimated that only 40% of that investment need is currently on-pace to be fulfilled.  

To read the full report and understand peak years for projected demand and specifics on anticipated inventory shortfalls, visit the NIC MAP Vision blog here.  

The tendency of stability is to breed stability. 

In the November 2023 NIC Insider newsletter, NIC Analytics published an in-depth analysis examining the length of time required to build a senior housing community, i.e., construction duration (in months), and explored the shifts taking place in construction timelines across different regions. 

The analysis showed a steady and consistent increase in the time it takes to construct a senior housing community from 2015 to 2023, suggesting that extended construction duration is not exclusively a post-pandemic trend. Notably, median construction durations have risen from 16 months in 2015 and 2016, to 19 months in 2019, to 25 and 24 months in 2022 and 2023, respectively. Additionally, the analysis suggests that heightened project deliveries and “oversupply” have played a role in the variability of construction durations and have contributed to a protracted construction process. Challenges stemming from the pandemic, high interest rates, higher financing construction costs, limited availability of debt, and increased development costs have all contributed to the prolonged construction duration. 

In this article, NIC Analytics explores the senior housing construction cycle across the 99 NIC MAP Primary and Secondary Markets, drawing comparisons between the trends observed during the Global Financial Crisis (GFC) and the recent pandemic. The analysis further explores units under construction and construction as a percent of inventory across all U.S. regions.  

Key Takeaways: 

• Fluctuations in the number of units under construction serve as a proxy for the overall confidence in new senior housing projects and capital environment, signaling periods of stabilization and unhindered growth when the pace of construction activity shifts towards positive, or green territory.  
• Consensus points toward mid- or late-2024 as the most likely period for senior housing construction starts to reach their lowest point. 
• Success in each region relies on aligning construction activity and new supply with market absorption, a balance made more delicate in the face of pandemic-induced disruptions and changing economic conditions.  
• Delays in construction deliveries, while challenging, have in some cases supported occupancy recovery and absorption-to-inventory velocity (AIV ratio) by preventing a rapid influx of new supply. 

Senior Housing Units Under Construction: Trends, Shifts, and Economic Drivers. 

GFC Downturn. The exhibit below shows the stark impact of the GFC in 2009 and 2010, with senior housing units under construction plummeting by -43% and -10%, respectively. These years saw significant economic challenges, including a severe liquidity crunch, plummeting property values, and a sharp decline in real estate investment. This crisis eroded confidence in new construction projects, as financial institutions faced substantial losses, and credit markets tightened, making funding for new developments challenging. 

Post-GFC Recovery. The period between 2010 and 2015 witnessed a notable growth in units under construction in the senior housing sector, signaling strong market fundamentals and recovery. This resurgence, although starting from a relatively lower base, was driven by regained market confidence and an improved capacity for new construction and expansion in senior housing. Key to this revival were favorable senior housing market conditions, characterized by a balance of supply and demand dynamics and increased occupancy, which encouraged new developments. 

Construction Peak and Delivery Boom. Between 2015 and the onset of the pandemic in 2020, the senior housing sector experienced a consistent positive growth in units under construction. However, this period also witnessed a deceleration in the pace of new construction, suggesting that many units reached completion and were delivered to the market. This trend indicates a typical cycle in housing markets in general, where a construction boom is often followed by a phase of heightened deliveries, as depicted by the deceleration in the pace of units under construction. 

Pandemic Disruption and Economic Headwinds. The COVID-19 pandemic ushered in significant disruptions, starting in 2020 with a -13% decline and continuing with -4% in 2021 and -8% in 2022. This downturn reflects the uncertainty and challenges faced by the senior housing sector amid the global health crisis. The relative stabilization in 2021 indicates the market’s resilience, managing to level off after the initial shock, despite not returning to positive growth. However, the further decline of -8% in 2022 and -15% in 2023 can be largely attributed to an increasingly challenging lending environment, exacerbated by high interest rates, inflation, and volatile capital market conditions. These factors have impacted the financial viability and the overall feasibility of new construction projects within the senior housing sector. 

Overall, these trends reflect the sensitivity of the senior housing construction pipeline to broader economic conditions and market dynamics. Additionally, the fluctuations in the number of units under construction serve as a proxy for the overall confidence in new senior housing projects and capital environment. These changing trends can also act as indicators of different phases within the senior housing market cycle, notably signaling periods of stabilization when the pace of construction activity shifts towards positive, or green territory.  

Crises, inherent in the nature of capitalism, impact the senior housing sector. Following the GFC, the sector experienced an extended period of stability, exemplifying the principle that “the tendency of stability is to breed stability.” There remains a reason for tempered optimism, the sector’s strong fundamentals, along with favorable long-term demographic trends, suggest a positive outlook for the future. In the short term, a healthy equilibrium between supply and demand will serve the sector’s ongoing recovery for achieving sustained and positive growth. 

As Mark Twain aptly noted, “History doesn’t repeat itself, but it often rhymes.” This adage resonates with the pattern identified in the interconnectedness of economic health, investor confidence, and senior housing construction activity in signaling periods of stabilization and unhindered growth. In light of this, an important question arises: 

When do industry stakeholders expect senior housing construction starts to bottom out?  

NIC MAP Vision has been conducting a poll during its last three data release webinars (1Q23-2Q23-3Q23), seeking industry expectations on when senior housing construction starts are likely to bottom out. 

The results indicated that a sizable proportion of respondents, approximately 40% across all three quarters, anticipate the bottoming out of senior housing construction starts in the first half of 2024. However, there is a slight shift in sentiment over time, with a gradual increase in the number of respondents who expect the nadir to occur beyond 2024 – rising from 15% in the first quarter of 2023 to 17%, and then to 20% in subsequent polls. This shift suggests a trend of diminishing confidence in a quick construction market correction amid challenging capital market conditions and lending environment. Despite this, the consensus in all three polls points towards mid- or late-2024 as the most likely period for senior housing construction starts to reach their lowest point.  

As background, a separate occupancy poll conducted by NIC MAP Vision indicated that senior housing occupancy is expected to fully recover and return to pre-pandemic levels by the second half of 2024. These results somewhat align with the construction poll question results and occupancy outlook analysis conducted by NIC Analytics. These forward-looking insights provide combined perspectives on both construction trends and occupancy rates in the near future – fundamentals of the senior housing market. 

Regional Construction Trends and Recovery Patterns in Senior Housing 

The regional distribution of senior housing units under construction shows that the West Coast and the Eastern part of the country are more active in developing senior housing projects. “This could be indicative of factors such as demographic shifts, development-friendly regulations, or well-balanced supply and demand dynamics in these areas.” However, a cross-check of this distribution with the absorption–to–inventory velocity (AIV) ratio analysis reveals several insights: 

The Pacific region is at the forefront of senior housing construction, representing 19% of the total units under construction across the 99 NIC MAP Primary and Secondary Markets, which is 5.3% of the region’s existing inventory. The Pacific region experienced the most notable impact during the peak of the pandemic, with the lowest AIV ratio and the highest occupancy decline among all regions, and as of the third quarter of 2023, its recovery in terms of occupancy is still trailing behind other regions.  

There are indications of a slowdown in the progress of existing senior housing construction projects. The Pacific region stands out with a notable increase in median construction duration, rising by 8 months from 16 to 24 months when comparing the pre-pandemic and post-pandemic periods. This increase suggests that many projects have stalled or are taking longer to complete than initially planned. Looking ahead, this trend could lead to a potential risk of oversupply in the region. If these projects contribute to a sudden increase in new supply without an equivalent rise in demand, the Pacific region may be challenged to effectively absorb newly added units. 

The Mid-Atlantic and Southeast regions are both experiencing a robust construction environment, accounting for 19% and 17% of the total units under construction, respectively. Both regions also experienced notable occupancy declines during the pandemic, however, they are nearing recovery with positive AIV ratios (above the AIV threshold) and noteworthy occupancy increases. while the construction as percent of inventory is relatively high in these regions, at 7.5% for the Mid-Atlantic and 4.7% for the Southeast, it has not led to a situation of new supply outpacing demand and negatively affecting the recovering occupancy in recent years. 

Additionally, the median construction duration in both regions has seen relatively small increases, suggesting that projects are still being completed in a timeframe comparable to the pre-pandemic era. This indicates an efficient delivery of new units, aligning well with the current demand without causing an imbalance in the market. 

The Southwest region presents a more balanced scenario, accounting for 11% of total construction activity, which is equivalent to 4.9% of the region’s existing inventory. Having achieved pre-pandemic occupancy levels, the Southwest region exemplified a balanced market with the highest positive AIV ratio across all regions, indicating that the rate of construction and subsequent deliveries (new supply) are well-aligned with the market absorption.  

In the Mountain region, which accounts for 7% of construction activity and represents 4.2% of the region’s existing inventory, there has also been a successful recovery in occupancy rates. This suggests that the pace of construction and new supply are well-aligned with market absorption. However, delays in project deliveries are likely more common in the Mountain region, with the median construction duration increasing by 10 months – from 19 to 29 when comparing the periods before and after the pandemic. This slowdown in construction completion may have supported the occupancy recovery in the Mountain region, by preventing more new deliveries/supply during a critical recovery time. 

The Northeast, East North Central, and West North Central regions have relatively lower construction activity in comparison to their existing inventory. Additionally, these regions are in varying stages of occupancy recovery. A key factor to their continued recovery will be maintaining a market equilibrium where the pace of new deliveries aligns closely with demand.  

In terms of construction duration, the Northeast exhibited some of the shortest median construction durations in the pre-pandemic era. However, in the post-pandemic period, its median construction duration ranked among the highest in the country, like the Pacific and Mountain regions. 

In conclusion, this regional analysis of senior housing construction cycles, constructions durations, AIV ratios, and occupancy recovery across the U.S. regions reveals different trends and patterns. From the busy construction environment in the Pacific and Mid-Atlantic to the strong recovery in the Southwest and the Mountain regions, to the more measured pace in the Southeast region, each region presents its unique set of challenges and opportunities. Key to the success in each region is aligning construction activity and new supply with market absorption, a balance made more delicate in the face of pandemic-induced disruptions and changing economic conditions. Delays in construction deliveries, while posing challenges, have in some cases supported occupancy recovery by preventing a rapid influx of new supply. 

As the senior housing market continues to navigate post-pandemic recovery and economic fluctuations, regional nuances and market focused analyses using NIC MAP Vision data will be valuable in providing the actionable insights needed to effectively drive and sustain growth in senior housing.                                                                       

Look for future blog posts from NIC to delve deep into senior housing construction.