NIC MAP® Data Service clients attended a webinar in mid-October on the key seniors housing data trends during the third quarter of 2019. Three key takeaways are shared below. We’ll share additional key learnings from the data in the next NIC Notes.

Takeaway #1:  Seniors housing occupancy increased from an 8-year low.

• During the third quarter, seniors housing net absorption totaled 4,977 units for the NIC MAP® Primary 31 markets, the greatest number of units absorbed on a net basis in a single quarter since NIC began reporting the data in 2006.
• At the same time, the quarterly change in the number of units added to inventory slowed to 3,832 units, the second fewest units added to the stock since mid-2016.
• Combined, these factors supported a 30-basis point (bp) increase in all occupancy to 88.0% in the third quarter from 87.7% in the second quarter when it had fallen to its lowest level in 8 years. The all occupancy rate for seniors housing, which includes properties still in lease up, is shown by the green line in the chart below.
• This placed all occupancy 1.1 percentage points above its cyclical low (of 86.9%) reached during the first quarter of 2010 and 2.2 percentage points below its most recent high (of 90.2%) in the fourth quarter of 2014.
  

Takeaway #2:  Third-quarter assisted living occupancy edged up.

• As shown on the chart below, distinct differences in occupancy performance between independent living and assisted living are evident. As of the third quarter, there was a 490bp difference in occupancy rates.
• In the third quarter, assisted living occupancy moved off its record low rate of 85.1% for the past three quarters to 85.4%, as relatively robust demand outpaced new inventory growth. Indeed, net absorption totaled 3,128 units in the third quarter, the most of any quarter except the Q4 2018.
• The occupancy rate for independent living inched up 20bps to 90.2% in the third quarter, 10bps higher than year-earlier levels, but below the rate earlier in 2019.
  

Takeaway #3: Assisted living units under construction slowed.

• Construction as a share of inventory for majority assisted living properties decelerated in the third quarter and equaled 7.3% or 22,000 units. This includes all properties under construction from start to completion. This was the lowest rate since 2015 and down from a peak of 10% in late 2017.
• The same pattern is not yet evident in independent living as the graph below shows. In the third quarter, construction as a share of inventory totaled 6.2%, where it has been hovering for the past year.
  

Stay tuned to NIC Notes for additional highlights from third quarter 2019 data trends.

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The funeral home industry is losing sales.

This was just one insight into the “longevity economy” that attendees of the NIC Fall 2019 Conference were treated to during an enlightening keynote session by Dr. Joseph F. Coughlin, founder and director of MIT’s AgeLab.

Coughlin is a recognized thought leader specializing in the impact of demographics—particularly related to retirement, aging, and real estate.

“Longevity is changing how all of us live,” he said, as he asked the audience to focus on more than just the numbers behind changing demographics. Coughlin described the concept of disruptive demographics and how it will change the future of seniors housing. “The future of your business is not just more old folks. These folks are very different.”

Higher Expectations

The numbers and research are compelling, however.

• Ages 60+ make up the third largest economy in the world, next in line to the GDPs of the U.S. and China.
• In the U.S., those aged 50+ are responsible for 70% of the consumer spend.
• Sixty-four percent of those 65 and over believe their IQ is higher than average.

The next generation of seniors is more educated and more confident than prior generations, Coughlin noted. He believes this leads to higher expectations and ultimately to different desires for their seniors housing. The next generation will expect different and newer products than what worked for their parents.

8,000 Days

Coughlin told the audience to think about how they, as an industry, own a third of adult life, “Old age is longer than we think,” he said. He compared the span of retirement years—roughly ages 65-85, totaling about 8,000 days—to that of ages 0-21, and 21-midlife and noted the lack of defined stages or milestones in retirement. He presented his thoughts on four retirement “stories” encountered during this stage of life.

• Managing ambiguity.  This is the point at which adults are deciding what comes next, whether it be full retirement, consulting, starting a business, etc. Coughlin noted that women over 50 are the second largest group starting new businesses.

• Managing big decisions.  Older adults at one point will face larger decisions such as whether to downsize into a smaller home, relocate, retire completely, etc.

• Managing complexity.  Complexities grow as older adults may begin to face medical problems, financial issues, and more.  

• Managing living solo.  Adjustments are needed as most older adults, particularly women, will end up living alone at some point.

Creating Communities

In general, Coughlin sees the current generation of adults entering retirement years eschewing participation in formal groups, such as joining a church or the rotary, and instead gravitating to lifestyles and ultimately housing based on smaller affinity groups, targeted to commonalities. He sees seniors moving to small towns and college towns for the informal communities and amenities available there.

“College communities form a virtual assisted living, if you will,” he said, noting the availability of entertainment, dining options, and even care at medical schools.

He pointed out that the “service-on-demand” apps and in-home technology popular with the millennial generation are life-changing for seniors too. Already, smart devices can be used to monitor medications, eating habits, and other health concerns. Services that started as conveniences are enabling seniors to stay safer in their homes for longer.

Users vs. Buyers

The baby boomer generation is not the audience for seniors housing yet, but they tend to be the decision makers for their parents’ selections. And buying decisions in general are made primarily by women. “The future is indeed female,” said Coughlin as he cited statistics showing that women are three times more likely to perform online research when making purchasing decisions. Women are now the primary decision makers for automobile purchases, consumer electronics, and health care products.

Looking to the Future

As providers look to the future, Coughlin recommends organizations work to become trusted members of the community so there’s a natural relationship. He sees an evolving notion of seniors housing in which care, community, and brick and mortar overlap with platforms, partnerships, and pipelines built on trusted relationships.

“The future of service and senior services is not a place,” said Coughlin, “it’s any place that person may live.”

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No matter where they live, most seniors prefer to age in place. But as they do, they also typically need more services. These can include assistance with the activities of daily living as well as health services.

But what’s the best way to deliver those ancillary services in a seniors housing or skilled nursing setting?

Effective home care and home health strategies were discussed recently at a well-attended session at the 2019 NIC Fall Conference in Chicago. A panel of experts took a deep dive into the pros and cons of outsourcing the services or taking them in-house.

“Seniors housing and care operators need a strategy,” said panel moderator Joel Nelson, president and CEO at Life Care Services (LCS).

The panelists agreed that an effective strategy can help boost resident satisfaction and also extend length of stay. Residents who can get the help they need where they live are less likely to move. They’re more satisfied, and so are their families.

The difference between home care and home health was defined. Home care consists of help with activities of daily living (ADLs). Home health is typically a Medicare-certified and reimbursed service, such as physical therapy or nursing care.

Several macro trends are impacting the home care and home health markets. The Centers for Medicare and Medicaid Services (CMS) is moving toward value-based care, seeking the best health outcomes in the lowest cost settings. More healthcare is being delivered at home. Also, CMS is allowing some payors to offer home care services. “That creates opportunity,” said Cheri Greenfield, senior vice president, Home Care Operations, Humana.

A 2018 study by Humana showed that the next generation of seniors will have less social support because of smaller and fragmented families, and more elders will live with chronic conditions. “We need to invest in the right services,” said Greenfield.

New Rules Disrupt Home Health

A big change takes effect January 1, 2020, that will impact the home health landscape. The new system—Patient Driven Groupings Model (PDGM)—changes reimbursements from per visit payments to ones based on value.

“The change will push mom-and-pop home health agencies out of the business,” predicted panelist Paul Kusserow, president and CEO, Amedisys, a large home care and home health services provider. He estimated that of the 12,500 home health agencies in the country about a third will have trouble surviving the change in the payments system.

Kusserow views the situation as an opportunity to purchase home health agencies and grow Amedisys. He noted that seniors housing operators might also consider jumping into the home health business, though a partnership with an established company might make more sense because of the complexity of the business.

Panelist Todd Kaestner agreed. “Home health is a technical and complex business,” said Kaestner, executive vice president, corporate development, Brookdale Senior Living. The company offers home healthcare in about 70% of its 800-plus communities. Home care services are available in 100 locations.

LCS launched a home health business in 1985 but several years ago decided to outsource the work instead. “We didn’t have enough scale,” said Nelson, adding that the availability of labor was an issue along with the need to heavily invest in new technology.

Start-ups are difficult, noted Kusserow. Amedisys launches 12-15 home health care agencies a year. The cost is about $500,000, and sometimes double that amount for agencies that require special licensing, such as for hospice services or in a state where a certificate-of-need must be purchased.

Nelson asked the panelists whether home health and home care services compete with seniors housing or represent a route to referrals and higher occupancies.

Humana’s Greenfield views the relationship as a partnership. “We can come together to identify the right services at the right time,” she said.

Kaestner at Brookdale doesn’t see home health as a competitor because of its episodic nature. Home health providers offer treatment for a specific condition over a short period of time. But he added home care services can help increase the length of stay of residents. “It can be a win-win,” he said.

Telemedicine will change the home health market, said Kusserow. “It’s a tremendous opportunity.” Sensors will monitor the elder’s activity and health, signaling when assistance is needed. Amedisys invested last year in Medalogix, a Nashville-based predictive analytics company. It provides data to customize care plans to reduce hospitalizations and keep seniors in the most appropriate care setting—information sought by managed care plans.

Whether a senior living provider decides to launch its own home care and home health business or partner with another provider, the panelists agreed that a strong local management team is necessary for success. “All healthcare is local,” said Kaestner. “This is a people intensive business.”

Debt and equity capital is readily available for the right borrowers, according to panelists at the 2019 NIC Fall Conference. 

Private equity interest in the sector has not slowed as players compete for the best properties and development opportunities. Debt funds are assuming a bigger role as a capital source while traditional debt providers aim to stay disciplined amid wariness about the broader economic outlook and overbuilding in certain markets.

“It’s an interesting time,” said Sarah Anderson, managing director, Newmark Knight Frank. “The industry is in a good spot.”

Back-to-back educational sessions at the conference, held last month in Chicago, addressed the capital markets. The first panel discussion explored capitalization options. The second session compared new and traditional debt and equity capital sources.

The broader economic outlook provided context for the discussions. Panelists noted that unemployment is very low, 3.5% in September, its lowest point since December 1969, which has pressured wages and staffing in the sector. The Federal Reserve has cut interest rates two times so far this year, and may cut rates again, a plus for borrowers but also a worrisome sign that economic growth is slowing. 

“This is the longest economic expansion we’ve had,” noted panelist Grant Saunders, senior vice president/senior banker, KeyBank Real Estate Capital. He didn’t think any one factor might tip the economy into recession, adding that the correlation between seniors housing performance and the broader economy is somewhat muted in both bad and good times.

Private equity continues to play a big role in the sector. “We don’t see any slowing,” noted Anderson. She added that a lot of opportunistic capital is sitting on the sidelines, waiting to buy up troubled properties in overbuilt markets.

The agencies—Fannie Mae, Freddie Mac, and HUD—are actively lending and offering competitive rates, said panelists.

Debt funds have emerged as an alternative funding source, noted panelist Dan Reilly, managing director, White Oak Healthcare Finance, a debt fund. He’s bullish on skilled nursing properties, especially those owned by local operators that have good relationships with hospitals and other referral sources. “It’s a huge opportunity,” he said. “Great operators with great track records will win in the skilled nursing sector.”

Reilly said his fund has earmarked money to invest in new construction, though other lenders are wary of ground-up development at this point in the economic cycle.

“We like to understand new construction projects,” said Anderson. Developers prefer partners with sufficient liquidity to provide a completion guarantee and an operator with a good track record. Panelists noted that an operator should also be invested in the deal so its interests are aligned with those of the lenders and investors.

Panelists in the first session analyzed three case studies, providing insights into how they viewed each deal.

In the second session, panelist John Mark Ramsey, CEO, Sentio Investments, noted a disconnect between investor expectations and property performance. The operating environment is somewhat tricky while, in his opinion, investors still haven’t lowered return projections.

Ramsey likes repositionings and new development, in certain situations. “Other firms are moving in that direction,” he said.

The mezzanine debt market remains robust, according to Tim Podboy, head of originations, Heitman. Some banks dictate the use of preferred equity as an alternative, however.

Will credit standards tighten?  

“I think we will see some tightening,” said panelist Steve Anderson, managing director, Ally Bank Healthcare Capital.  He predicts that slower lease-ups will also slow lending.

Panelist Ramsey agreed. He thinks banks will tighten their lending standards because of a combination of an oversupply in some markets, labor shortages and rising expenses. In response, banks will focus on the quality of the operator and sponsor, he added.

Ally’s Anderson urged lenders to be patient. “Buildings will fill eventually,” he said.

Panelists in the second session also discussed the NIC study “The Forgotten Middle,” which explores the future housing needs of middle-income seniors. The speakers addressed how capital sources might work together to produce more housing for this growing cohort of elders.

Public-private partnerships were discussed as a financing option. Private capital sources will probably not accept the lower returns expected from middle-market housing. But other types of capital might, noted Ramsey, singling out so-called impact funds or those that invest with a social goal in mind.

Panelists agreed that middle-market communities may require a variety of capital funding sources. The hard part will be how to pay for the care component.

“There has to be a solution around how to provide care,” said Brock Andrus, managing director, structured finance, Bridge Investment Group. Emerging technologies that improve the efficiency of care delivery will play a role, he said. Partnerships with nonprofit organizations to operate the properties are another alternative, he added.

“We have to figure out a way to care for people in the most appropriate setting,” said Ramsey.

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Supply follows demand. Or that’s how the thinking goes.

So it makes sense that aging baby boomers—76 million Americans—represent a huge opportunity for the seniors housing industry. After all, they’ll need an age-appropriate place to live.

But demand for seniors housing is much more nuanced than raw demographics. Consumer preferences, local market dynamics and other factors play a big role in how much, and what kind of seniors housing will be needed in the years to come.

A panel of experts at the 2019 NIC Fall Conference took a deep dive into the factors that impact demand trends and development cycles. They agreed that baby boomers will create more demand for seniors housing in the years ahead, though a large amount of new supply may not be needed for another decade. Panelists also weighed in on demand drivers such as local market differences, the importance of branding, and the aging stock of existing properties.

“The long-awaited crush of baby boomers is already here,” noted panel moderator Susan Barlow, co-founder and managing partner at Blue Moon Capital Partners, an investment fund based in Boston. “They’re helping their parents select seniors housing and their opinion counts.”

NIC Senior Principal Lana Peck provided an overview of demand trends. Here are a few key points:

• The overall occupancy rate for seniors housing (assisted living and independent living) in the second quarter of 2019 in the top 31 primary markets was 87.8 percent, the lowest since 2011. Independent living was five points higher (90.2%) than assisted living (85.1%).
• Second quarter occupancy in local markets varies widely from the highest, San Jose (95.7%), to the lowest, Houston (81.1%). Rent growth also varies, but hovers around 3%.
• Absorption of new inventory is ramping up while new construction, especially of assisted living, appears to be slowing.

(NIC third quarter 2019 data show similar trends.)

What’s Ahead?

Peck previewed new research on demand trends which was detailed in NIC’s October Insider newsletter.

Looking at age 80-plus households, factoring in a penetration rate of 18%, the study projects that an additional 881,000 units of seniors housing inventory will be needed between 2019 and 2030. But, Peck noted, the demand hits at different times. Fewer units will be needed in the near future than were produced in 2018. The most units will be needed between 2030 and 2040 (105,000 units annually).

Panelist Gleb Nechayve provided insights on market selection. He is senior vice president, head of research and chief economist, Berkshire Residential Investments, Boston. He argued that it’s not if market selection matters, but how it matters.

Unlike other commercial real estate asset classes, seniors housing lacks some fundamental research on market selection and property performance. “Understanding differences in risk-adjusted returns across markets is critical to market selection,” said Nechayve.

Based on NCREIF and NIC MAP data, Nechayve made some observations:

• Markets with high occupancy tend to have higher rent growth.
• Higher demand usually accompanies higher supply growth.
• Markets with supply constraints tend to have higher occupancies.
• A concentration of wealthy seniors and adult children, also with a high level of education, contributes to positive property performance.

Blue Moon’s Barlow addressed consumer trends that influence demand today and going forward. She noted that baby boomers, especially adult daughters, are already impacting their parents’ housing decisions. Healthcare integration is important, especially for families who live far apart. Creating a sense of community is a way to differentiate a property.

As an example, she cited a Blue Moon financed project in Denver. The new property will sit at the center of the city’s Jewish community, providing housing options for elders in the area.  “The developer is building something that is an asset to the whole community,” said Barlow.

Where would the panelists buy land for a new senior living development?

In the near term, panelist Nechayve said the best spots are those similar to the ones already succeeding, places with a well-educated population with high incomes. “That’s where to concentrate,” he said. But he cautioned that future demand will likely come from elsewhere.

Peck noted, “We could see something very different in 10 years.” While demand will increase, much of it will likely come from middle-income seniors. NIC recently released the results of a study, “The Forgotten Middle.” It details the growing need of this group for moderately-priced housing options.

Another demand factor to watch is building obsolescence. Seventy percent of the seniors housing stock is 20 years old or older, said Nechayve. “There’s tremendous opportunity for new development to replace those properties in major markets.”

Peck noted that the “sweet spot” for building occupancy is in the 10-17 year age range. That’s when operators have mastered efficiencies and have learned how to maintain resident satisfaction. “The communities are institutions in their neighborhoods,” she said.

Barlow remarked that Blue Moon capitalized three older assets last year and they’re among the best performing properties in the portfolio. “It’s what goes on inside the four walls that counts,” said Barlow. “The properties are known in the community as the best place to live.”