As we age, where will we want to live?  And as importantly, how will we want to live? It’s a decision that faces many of us today, either directly for ourselves or indirectly for our elderly parents.

In a recent front-page Wall Street Journal article, Peter Grant drew attention to and rightfully addressed this question, as nearly 13 million older Americans face this decision today and as the massive wave of 72 million baby boomers born between 1946 and 1964 gradually approach the time where post-retirement lifestyle choices will once again need to be made.Many baby boomers will prefer to age at home, with technology helping to enable this choice. But many will also prefer to age in community with opportunities for companionship, friendship, engagement, involvement, socialization and easy-to-access meals, healthcare, assistance with day-to-day living activities, safety and security. Cognitive impairment, mobility limitations, multiple chronic conditions and functional restrictions may also cause older households to leave their homes for additional care. 

Today there are an estimated 1.6 million units of seniors housing in the United States—which equates to roughly 18% of households over the age of 80. Our recent analysis suggests that by 2030, 2.5 million units will be needed if that penetration and utilization rate of 18% of households over age 80 remains steady in the coming years. For seniors housing operators, this suggests that hundreds of thousands of new units will be needed to satisfy this demand. Even if the utilization rate were to fall below today’s 18%, additional inventory will be needed.

It’s evident that the baby boomers have never acted like their parents and always pave a new way forward. And, it’s likely that new forms of living patterns will emerge. Many of America’s elders will remain in their family homes, many will live in traditional seniors living properties, some will live in an evolving form of seniors living housing that is still emerging, some will live in co-operative living arrangements similar to how they lived during the 1960s, some will live intergenerationally with younger individuals who can help defray costs or help with household chores and maintenance, and some will live in choice-based group homes with their friends like the Golden Girls sitcom. The truth is that the sheer size of this burgeoning cohort will support many living preferences—home or in community. 

The ability for elderly baby boomers to remain at home and continue with support from family will be less likely than today as another recent NIC study showed that 48% of individuals age 75 and over will be divorced in 2029 compared with 39% today. Either due to widowhood or divorce, many will simply not have partners/spouses to care for them. Moreover, the sheer demographics of America are quickly changing the caregiver support ratio which will fall from seven adult children aged 45 to 64 to care for one parent over 80 years old today to four-to-one in 2030 and three-to-one in 2050. Additionally, fewer adult children will live in proximity to their parents.

Hence, the desire to live at home may not always be matched by the ability to do so. At the same time, the desire to live in a group setting may not always be matched by the financial ability to do so. As we consider the aging of our population, we need to think about what America’s elders can afford in terms of their care and housing choices. For example, NIC’s study on the Forgotten Middle, published in May 2019 in the public policy journal Health Affairs, showed that 46% of 75-plus middle-income households will not have sufficient financial resources to live in today’s senior housing.

With a spotlight now shining on the issues of choice, desire and affordability of care and housing options, we can collectively consider what public and private sector solutions exist today and what needs to be re-imagined, designed and created. It’s an opportunity for public/private partnerships, as well as for private sector solutions and innovative and creative public policies.

As the seniors housing and care industry’s leading data provider, NIC tracks occupancy, asking rents, demand, supply, and construction data for independent living, assisted living, memory care, skilled nursing properties—and both for-profit and nonprofit continuing care retirement communities (CCRCs, also known as life plan communities). The following narrative describes CCRC occupancy as of the third quarter 2019, supply and demand, asking rent growth, and construction trends in the combined primary and secondary markets, which represent the aggregate of the data collected from 99 of the nation’s largest core-based statistical areas (CBSAs) and breaks out the data further by payment type.

Key Takeaways

• CCRC occupancy has remained steady around 91% since the end of 2014.
• Rental occupancy is at an all-time low while entrance fee occupancy is at a recent high (89.1% vs. 92.6%).
• The occupancy gap between entrance fee and rental CCRCs is near the widest since NIC began collecting the data but has narrowed slightly from 3.4% in the prior quarter to 3.2%, currently.
• Overall, CCRC construction activity is down from a time series peak reached in 1Q 2018 (3.1% of existing inventory to 2.6%) primarily due to moderating construction of rental community units.
• Five markets represent more than one-third (36%) of the CCRC units currently under construction: Dallas, San Diego, Charlotte, Phoenix and Washington, DC.
• CCRC year-over-year, same store asking rent growth in the third quarter of 2019 was 3.9%, down from the time series high of 4.6% reached in the first quarter of 2019.

Supply and Demand Fundamentals

A review of the third quarter 2019 CCRC data for the combined 99 Primary and Secondary metropolitan markets tracked by NIC MAP® shows that both “all” and “stabilized” occupancy rates were essentially flat year-over year, fluctuating only as much as 20 basis points during the four quarters (4Q 2018 to 3Q 2019). Current “all” occupancy is equal to the recent high of 91.4% reached in 1Q 2019, which registered the highest rate achieved since 4Q 2008. Current “stabilized” occupancy (defined by NIC as properties that have been open for at least two years or, if open for less than two years, have already reached a 95% occupancy level) is 10 basis points higher (91.5%). For context, the seniors housing all occupancy rate for the 99 Primary and Secondary metropolitan markets also fluctuated 20 basis points over the same period and averaged 87.8% in the third quarter of 2019.

Over the past four quarters, CCRC net absorption outpaced net inventory growth by nearly 1,200 units. This quarter reported the most units absorbed in a single quarter since 3Q 2016 (1,333 units).

Entrance Fee vs. Rental CCRCs

Rental occupancy is at an all-time low while entrance fee occupancy is at a recent high

While rental occupancy is 89.4%—up 30 basis points over the prior quarter when it matched the lowest rate in the time series (89.1%), entrance fee occupancy peaked at 92.6%—a level not reached since mid-2008.

Entrance fee occupancy has been on an upward trajectory, growing approximately three percentage points since the middle of 2012. Rental occupancy, on the other hand, has been trending lower since its recent peak reached in late 2014, declining about one percentage point.

The spread between entrance fee and rental occupancy in the combined Primary and Secondary markets is near the time series high reached in the second quarter of 2019 (3.4%). The occupancy gap is currently 3.2%, down 20 basis points from the prior quarter.

Construction Activity

Overall, CCRC construction activity is down from the time series peak of 11,544 units reached in 1Q 2018 (3.1% of existing inventory). Currently, 9,480 units are under construction (2.6% of existing inventory). As of 3Q 2019, rental CCRC construction is 3.6% of existing inventory compared to 1.9% for entrance CCRCs. Seniors housing construction as a share of inventory across the Primary and Secondary markets was considerably higher at 6.3%.

Units under construction in rental CCRCs exceeded units under construction in entrance fee CCRCs in all but three quarters over the past 6 years. Although the difference in units under construction has moderated recently, since the end of 2016, rental units under construction exceeded entrance fee units on a quarterly basis by an average of 1,500 units. Rental units currently comprise 37.3% of total CCRC inventory.

Source: NIC MAP® Data Service

CCRC units under construction are concentrated in a few markets

The map below illustrates where CCRC construction has been strongest as indicated by the size of the circles. In addition to absolute growth in units, the color of each circle represents the percentage of units under construction in relation to total supply.

As of 3Q 2019, the highest number of CCRC units under construction was in Dallas (722), San Diego (510), Charlotte (446), Phoenix (446) and Washington, D.C. (437). The highest percentage of units under construction as a share of inventory was reported for Memphis (22%), Riverside (18%), Raleigh, (16%), Hartford (13%), Omaha, and San Diego (11% each). Half of the Primary and Secondary markets (51 out of 99) had no CCRC units under construction.

Annual, same-store year-over-year asking rent growth rates trending lower from recent highs

CCRC year-over-year, same store asking rent growth in the third quarter of 2019 was 3.9%, down from the time series high of 4.6% reached in the first quarter of 2019. While rental CCRC rent growth was 4.5%, down from the time series high of 5.1% in 4Q 2018, entrance fee CCRC rent growth was 3.7%, down from a recent high of 4.5% in 1Q 2019.

Source: NIC MAP® Data Service

In a future edition of NIC Notes, we’ll offer a new analysis considering the market fundamentals of care segments within CCRCs compared to non-CCRC segments in freestanding/combined communities. Also referred to as life plan communities, CCRCs offer multiple care segments (including, at a minimum, independent living and nursing care) typically by a single provider on one campus, and our future analysis will separate the segments  from the CCRC community type that NIC includes under the main category of Seniors Housing.

The U.S. seniors housing and care transactions market saw a slight drop in dollar volume in the third quarter of 2019 from the previous quarter. However, measured by the number of transactions closed year-to-date in 2019, the market seems to be very active on a relative basis. Judging by interest from investors, especially from the private buyers (discussed further below), this trend is likely to continue in the short-term barring any liquidity or economic shocks.

When comparing the number of transactions closed, the first three quarters of 2018 lagged that of the same period in 2019, with 391 and 441 transactions closed, respectively. That represents a 13% increase year-over-year. Given that transaction volume is relatively strong, in terms of the number of deals closed, the activity is another testament of the continued plentiful liquidity in the seniors housing and care market. Nearing the close of 2019, we should expect strong activity in the fourth quarter, barring any capital market disruptions, as there is typically a push to close deals that have been in the pipeline before year-end.

The number of closed transactions in the third quarter alone was 140, up slightly from the third quarter of 2018 when 138 transactions closed. Private buyers are driving this activity, providing a relatively significant amount of liquidity to the market. Private buyers represented $1.6 billion of the $3.2 billion total of closed transactions in the third quarter of 2019,  or 49% of the total volume. This has been a consistent theme throughout 2019 as private buyers have represented 47% of volume through the third quarter 2019, registering $4.8 billion of the $10.3 billion closed so far in 2019. The consistency has been notable as the private buyers continue to register over $1 billion in closed transaction volume each quarter with only  one quarter dipping below $1 billion since the third quarter of 2013. More recently, since the beginning of 2016, the first year public buyers started to slow down with their activity, private buyers have averaged $1.5 billion in volume per quarter. This compares to institutional and public buyers which averaged $947 million and $1 billion, respectively.

Public buyers represented $2.5 billion of the $10.3 billion of total dollar volume thus far in 2019, or 25% of total volume. Institutional buyers only represented $1.9 billion of the total dollar volume through the third quarter of 2019. The institutional buyers which include many of the private equity companies that manage institutional funds such as pension and endowment money, have raised lots of capital but anecdotal evidence suggests they are having a hard time putting the capital to work in a meaningful way due to competition and high property prices, in addition to lower expected returns.

As activity overall has been strong, so has the price per unit in seniors housing. In fact, the price per unit increased in the third quarter, and interestingly enough, the seniors housing rolling four-quarter price per unit has reached a time-series high going back to 2008. It currently stands at $185,600  per unit, an increase of 10% from the second quarter which had a price per unit of $168,800. The price per unit in the third quarter of 2019 is up 18% from the third quarter of 2018 when it averaged 156,800.   

Nursing care pricing also increased in the third quarter of 2019. It now stands at $78,000 per bed, which represents a 13.5% increase from the prior quarter. The price per bed in the third quarter 2019 is up 7.4% from the third quarter of 2018 when it was $72,600. 

As a closing note, when analyzing this pricing data, it should be  pointed out that some higher priced, or lower priced, outliers can skew the averages. In the third quarter, for example, Riverview SNF Realty LLC bought from Eastern Blvd Real Estate LLC at a price per bed of $140,000, which  represents a much higher price per bed than the rolling four-quarter average. The same holds true for seniors housing. In a third quarter 2019 deal, GFH Financial Group bought from Harbert Management Corp. at a price per unit of more than $300,000, again representing a much higher figure than the average. 

A mop and a café might not sound innovative to most seniors housing operators. But when presented with the product development strategy that conceived the successful Swiffer® cleaning tool and the Capital One® banking cafés, attendees at the 2019 NIC Fall Conference learned that the process for true innovation applies across all industries.

Maria Nadelstumph, vice president of organizational development and program excellence at Brandywine Living, moderated the session “Activating Consumer Insights: Lessons from Other Industries,” while Heather Reavey, head of innovation delivery, EPAM Continuum, and Jennifer Windbeck, managing vice president, market experience, Capital One Cafés and Branches, described the processes used at their companies to generate breakout innovations.

Reavey and Windbeck work in different industries, on very different products, yet the product innovation process they employed to launch the successful Swiffer WetJet™ mop and Capital One Cafés, respectively, involved a common thread—consumer insight. They shared thoughts on how consumer insights can, and should, be used in the seniors housing industry to develop fresh ideas that go beyond iterating current offerings.

Consumer insight research often guides product development in industries like hospitality and consumer products. Yet it is not as prevalent today in seniors housing. While there is consensus that the baby boomer generation desires a different seniors housing experience than their parents have, there is no consensus on what they want. And that’s where innovation comes in. 

Reavey and Windbeck shared the business success achieved at their companies by investing in consumer research as a first step in the product development process. The research allowed them to better anticipate consumer needs, and allowed insights to drive innovative ideas.

According to Reavey, generating ideas is easy. “The real challenge of innovation is getting things out into peoples’ homes,” she said. She advised that the first step in successful product innovation is to define and deeply understand the problem your product will solve. 

“The only way that we really have confidence in our ideas, is if we know the problem that they’re solving. And we feel confident that the problem is really relevant to people. If we can solve that problem, people are going to buy our product instead of the competitive products. It’s going to be differentiated.”

EPAM Continuum, a global innovation, design, and development firm, practices human-centered design. They spend time with people in order to really understand what they care about and what the meaningful challenges are in their lives. In their consumer insight framework, they focus on a person’s emotional side rather than functional needs.

“Usually when people tell us about their functional needs, it will give us clues on how to iterate something that exists today,” noted Reavey. “What we like to focus on is the emotional side, because that’s what drives innovation.”

Reavey used the example of asking a person about a blender. She described how a person will default to talking about their functional needs for a blender—a quieter motor or a blade that is easier to clean, for example. But she maintains that if the conversation starts at a broader level—talking about what the person cares about in life—it may lead to answers that indicate the person cares about preparing healthy food, or even that they don’t want to use a blender at all and prefer to eat out.

“That’s where the innovation comes from. It’s really understanding what your audience cares about in life and not in the category that you’re exploring. Your job is to then connect what they care about in life to your category.”

Windbeck’s experience at Capital One followed a similar process—speaking to consumers about personal preferences.

“We decided to start from scratch in reimagining the in-person banking experience. We threw out everything we ever knew about branch banking,” she said. They started with a “what if” perspective in their consumer research, rather than a focus on what already existed.

Capital One also knew that not every customer would be drawn to the café concept. “We were okay that this would not be the bank for everyone. We were designing for a very specific persona and a very specific behavioral identity group.”

In both cases, the teams at EPAM and Capital One designed successful products that the consumers didn’t necessarily know they wanted.

Reavey suggested that to apply these methods in seniors housing, companies should start by speaking to consumers who aren’t involved with seniors housing now. We should talk to potential future users, with no preconceived ideas. She noted that employees can provide thoughtful insights as well.

The panelists then offered advice on the potential time and expense involved with consumer insight research. “When you think about things like innovation and user experience, it can feel a little bit fluffy. That’s not the case here. We are doing [this] to differentiate ourselves from competitors,” said Windbeck. “We are a for-profit company and so we are doing this in order to drive profits.”

Reavey also noted that there are ways to innovate without huge expense, “Sometimes we make innovation much bigger in our heads than it needs to be. We think that it’s going to take years and we’re going to need millions of dollars in investment. You can do a lot of iteration really fast and cheap just by being creative about figuring out how to fake it before you make it.”

She applied that thinking to seniors housing and suggested that instead of believing you need to innovate a whole complex or building, start with a pamphlet and get feedback on your ideas on that scale. Windbeck also suggested allowing workforce teams to go beyond surfacing ideas, and give them parameters within which they can innovate and test ideas on site.

“Do inexpensive, quick prototyping and use data and hard results to be able to say, ‘Here’s what we tried, here’s how it worked. Here’s what this could look like at scale’,” advised Reavey.

Nadelstumph closed the session by reminding attendees of the value of innovation in seniors housing, “There’s a lot of opportunity here. So let’s stop building on best practices and let’s get a little bit more creative to drive the business.”

Seniors housing properties are aging, and senior consumer tastes are changing. Strong inventory growth in recent years has brought to market new competition for existing buildings—most built prior to the Great Recession. Which markets have the oldest and newest seniors housing stock? Is there a “sweet spot” in terms of building age and occupancy performance? And, what are some of the factors that contribute to strong occupancy in older buildings? To provide food for thought and possible answers to these questions, this commentary dives into the NIC MAP® data for the 31 Primary Markets to explore potential relationships between age and occupancy by geography.[1]

Which markets have the oldest seniors housing properties?

The chart below ranks the average age of seniors housing properties by geography for the 31 Primary Markets as of the third quarter of 2019. The youngest markets, as measured by the average age of the properties in the CBSA, are indicated by blue bars (Minneapolis to Boston), and the oldest are indicated by gold bars (Los Angeles to Tampa).

Source: NIC MAP^® Data Service

In the third quarter, the average age of seniors housing properties in the Primary Markets (denoted by the orange bar) was 21 years old. Minneapolis, Atlanta and Houston had the lowest average age (15 years). Not surprisingly, the markets with the youngest properties also had the most recent inventory growth. Indeed, of the eleven markets with the lowest average age, nine had net inventory growth of 15% or more over the past three years. Two of these markets, Atlanta and Las Vegas, had net inventory growth of 26% and 21%, respectively. This compares with 10% for the Primary Markets.

Los Angeles had the oldest seniors housing properties (averaging 32 years old), followed by Philadelphia, San Francisco, San Diego, San Jose and Pittsburgh (ranging from an average of 28 years to 25 years old). Older markets reported lower rates of net inventory growth, and each of these markets saw growth of 4% or less over the past three years.

Source: NIC MAP^® Data Service

Is there a relationship between a market’s average property age and occupancy?

Conventional wisdom suggests that senior living consumers are attracted to move into new construction with fresh finishes and amenities, and contemporary design. But are these assumptions consistent with the data? The chart below explores the relationship between the average occupancy of seniors housing properties and average age by geography. The Primary Market average age for seniors housing properties was 21 years old as of the third quarter of 2019, and the overall average occupancy rate was 88.0%. The youngest eleven markets are shown to the left of the Primary Market average, and the oldest twelve are shown to the right.

Source: NIC MAP^® Data Service

Contrary to a prevailing assumption that newer properties should garner higher occupancy rates than older properties, there is a notable link between older average age and higher average occupancy—in fact, some of the oldest markets—including San Jose, San Francisco, Portland, New York City, and Philadelphia—had among the highest average seniors housing occupancy rates across the Primary Markets. Compared to markets with newer properties, which showed a weaker connection between average age and average occupancy, older markets had higher than average stabilized occupancy, lower than average rates of annual net absorption (i.e., less change in occupied stock), and lower than average rates of annual net inventory growth.

Is there an occupancy “Sweet Spot?”

Seniors housing has weathered an acceleration of inventory growth over the past several years, which has put downward pressure on occupancy in many metropolitan areas. But, do seniors housing buildings have a “sweet spot” in terms of occupancy performance?

Across the 31 Primary Markets, nineteen reported the highest average occupancy in the 10- to 17-year age grouping, and five in the 25-years or more age grouping. The chart below displays the average seniors housing “all” occupancy rate by age group in the third quarter for the Primary Markets in aggregate, Philadelphia—which exemplifies an older market with above-average occupancy—and Houston, which exemplifies a younger market with below-average occupancy.

As illustrated, in all three instances, the 10- to 17-year age grouping, followed by properties over 25 years old, outperformed the other age groupings in terms of average occupancy. For the Primary Markets, those occupancy rates were 91.6% and 90.6%, respectively. For Philadelphia, those occupancy rates were 93.9% and 91.9%, and for Houston, 85.1% and 85.1%.

Considering the proportion of units by age for each of the three examples, Philadelphia’s overall occupancy rate (90.9%) was buoyed by properties between 10 to 17 and 25+ years old, which represented just under three-quarters of all existing units. Houston’s overall occupancy rate (81.5%), on the other hand, was dragged down by properties less than 10 years old, which represented nearly a third of all existing units.

Source: NIC MAP^® Data Service

Why does it appear that the “sweet spot” for building occupancy is in the 10- to 17-year age range? Is it possible that by this time in a property’s life, operators had built strong reputations in and around the neighborhoods they serve? Had they mastered staffing and other operational efficiencies translating into high levels of resident satisfaction that augment word-of-mouth marketing power? Or had they perhaps begun to spend earmarked maintenance and revenue-enhancing capital expenditure dollars to improve, refurbish, or reposition units or common spaces within buildings for higher and better use—all of which may allow them to build or maintain market share, and effectively compete with the latest offerings?

As the NIC MAP data indicate, on one hand, markets with the youngest seniors housing stock generally had seen recent, and in some instances ongoing, high levels of inventory growth, coupled with lower average occupancy rates, and greater competition resulting from supply and demand imbalances. On the other hand, markets with older seniors housing stock generally had maintained strong occupancy rates, in part due to barriers to entry keeping inventory growth in check, and higher levels of stabilized occupancy.

In analyzing the 31 Primary Markets, the NIC MAP data revealed that the strongest average occupancy performance was most frequently seen in the 10- to 17-year age range. Possible reasons for higher average occupancy among older properties are multi-faceted and market specific. As seniors housing properties age, the capex burden naturally increases, and industry data suggest that capital expenditures begin to accelerate around year 10 of a building life. It is possible that capital expenditures for refreshing an older property may be encouraged by new supply, and sustained expenditures may allow an older property to boost or maintain its occupancy for many years. Unspent or unwisely spent capex could result in diminished returns, so it is important for operators to appropriately time and budget expenditures based on their unique market conditions.

[1] Note that the property age data tracked by NIC is based on the date in which the building was originally opened. That said, if a building was torn down and subsequently rebuilt, the property’s age would reflect the new building open date. However, the age of a property is not adjusted for expansions or repositioned units, which are considered part of the original building.

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