First-quarter data showed continued downward pressure on occupancy rates, with assisted living occupancy falling to its lowest level since NIC began reporting data in 2006—85.7%. A broader measure, the occupancy rate for all of seniors housing (independent and assisted living) for the 99 Primary and Secondary markets tracked by the NIC MAP® Data Service, had a first quarter occupancy rate of 88.1%, not the lowest on record, but a nadir since mid-2011 and down from 90.0% as recently as Q4 2015. During the nine quarters since then, inventory growth has exceeded demand by 23,000 units (70,000 units of inventory growth versus 47,000 units of net absorption).
Occupied Penetration Rates. Based on this data, the occupied penetration rate for seniors housing in the 99 Primary and Secondary markets was 9.9% in the first quarter, defined as occupied units divided by the number of households over 75. If the occupied penetration rate increased by 20 basis points to 10.1%, the occupancy rate would be 90.0% based on first quarter inventory levels. For this to happen, an additional 17,000 units would need to be absorbed, an achievable number since this number of units was more than absorbed on a net basis in the past four quarters.
For an occupancy rate of 95%, a rate that is often underwritten as a stabilized occupancy rate for a property recently opened, today’s penetration rate would need to increase by 70 basis points to 10.6%, the equivalent of 64,000 units of additional net absorption. This is equal to the number of units that have been absorbed in the 99 Primary and Secondary markets on a net basis since the third quarter of 2014 through the first quarter of 2018.
Its notable, however, that a 95% average occupancy rate has never been achieved for the aggregated 99 Primary and Secondary markets; since the fourth quarter of 2009, the average occupancy rate has been 88.9% and only in four of the thirty-four quarters that NIC has reported this data has the aggregated occupancy rate reached 90% or more. That said, this is not the case for individual metropolitan markets (such as San Jose, Baltimore, Portland, Sacramento, Pittsburgh, Seattle, New York, Boston, Los Angeles, Sand Diego, San Francisco and Philadelphia which all had first quarter 2018 seniors housing occupancy rates that were 90% or higher.)
Seniors Housing Inventory versus Multifamily Inventory. For another perspective on recent market fundamentals, it may be helpful to look at the multifamily sector, where completions (inventory growth) as a share of total inventory equaled 1.8% in 2017 according to estimates by CBRE, the equivalent of 266,000 units. For seniors housing, inventory grew by 30,000 units from year-earlier levels in the first quarter for the 99 Primary and Secondary markets. While seemingly small on the surface, for seniors housing this equals a 3.3% increase in inventory. A comparable estimated increase for the nation would be roughly 45,000 units (under the assumption that the 99 Primary and Secondary markets represent approximately two-thirds of the national inventory which equals the share of 75-plus households for this geographic aggregate relative to the nation).
Further, a comparable increase of 3.3% in apartment stock equals 490,000 units or 41,000 units per month. The sizeable differences of course are due to orders of magnitudes of differences in the stock of multifamily units versus seniors housing. Indeed, the multifamily sector is significantly larger than seniors housing (14.7 million units versus an estimated 1.4 million seniors housing units at the national level or 927,000 for the 99 markets).
And How Do Demographics Fit In? Another way to gain perspective on recent market fundamentals for seniors housing is to compare the estimated 45,000 units of new supply delivered nationally in the past year against the demographic growth in the number of Americans in the 83-plus year cohort for the comparable period. The selection of 83-plus may be viewed as a proxy for those individuals who could be potential residents in seniors housing. Based on recently updated estimates from the Census Bureau, in 2017 this equated to 8.5 million individuals. In 2018, an additional 138,000 people are projected to age into the 83-plus cohort and by 2025, the Census Bureau estimates that there will be 10.2 million people in this cohort for an increase of 1.6 million people over the eight-year period from 2017 to 2025. With a penetration rate of roughly 10%, this suggests the need for 164,000 additional units of seniors housing supply over this eight-year period. Using the numbers cited above for the current national run-rate of 45,000 units of stock added in the past 12 months, 164,000 additional units could be added in 3.7 years, outpacing the potential eight-year demand requirement.
However, it is notable that a similar analysis done for a younger cohort–those 80 and older–yields a different conclusion. In 2017, there were an estimated 12.4 million individuals aged 80 and older versus the 8.5 million figures cited above for those over 83. By 2025, the Census Bureau estimates that there will be 15.6 million people in this cohort for an increase of 3.2 million people over the eight-year period from 2017 to 2025. This compares with the growth of 1.6 million for the 83 and over cohort. With a penetration rate of roughly 10%, the 80-plus cohort growth suggests the need for 316,000 additional units of seniors housing supply over this eight-year period. Using the numbers cited above for the national run-rate of 45,000 units of stock added in the past 12 months, today’s supply pace of 45,000 units per year would be shy of the demand by roughly one year’s worth of today’s inventory growth or 45,000 units.
So, where does this leave us? An estimate of demand using the 80-plus cohort suggests that today’s supply run-rate will leave us short of inventory by 2025, ceteris paribus, while the 83-plus cohort analysis suggests excess inventory by 2025. The answer is probably somewhere in the middle of these two results and points out how sensitive the analysis is to the age-cohort assumption used.
From a practical point of view, there are two ways to prevent today’s occupancy rate of 88.1% from falling lower. The first would be to slow the rate of new supply delivery to below today’s pace especially in markets where occupancy rates are below the national averages due to excessive inventory growth. The second would be to boost demand by growing today’s occupied penetration rate. And one way to do this would be to attract younger residents because today’s greatest demographic growth is oriented toward the younger old. (For more thoughts on growing penetration rates see: http://www.nic.org/blog/boost-market-performance-penetration-rates/)