A key topic of conversation among seniors housing investors and operators is the impact of inventory growth on occupancy rates and the ability to grow rents and revenue. Related to inventory growth are rising costs of construction, which may be one factor influencing a slowing of construction activity. This blog highlights some recent data to support those discussions.

Seniors housing construction may be plateauing. NIC MAP^® data from the fourth quarter of 2018 continues to suggest that construction activity may be slowing. There were roughly 37,000 units under construction at Seniors Housing properties (Majority Independent Living (IL) and Majority Assisted Living (AL)) for the NIC MAP 31 Primary Markets. That figure is down from the record high of 43,826 in the fourth quarter of 2017 or by nearly 6,500 units. Moreover, construction as a share of inventory slipped back to 6% of open inventory in 4Q2018, down from the recorded high of 7.3% in 4Q2017.  

Construction starts (units that have newly broken ground) for both Majority IL and Majority AL are also trending lower. In the fourth quarter, AL starts totaled nearly 1,552 units, the fewest starts since the first quarter of 2012. On a four-quarter aggregate basis, starts totaled 9,393 units, the fewest since 2014. As a share of inventory, this amounted to 3.3%. The last time it was below 4% was 2012. IL starts, on a rolling four-quarter basis, totaled 7,287 units in the fourth quarter. As a share of inventory, this equaled 2.2%. The last time it dropped below 2.5% was 2014. 

It is important to note, however, that construction data sometimes is restated—both up and down. Construction starts are some of the most commonly restated data points as they are particularly difficult to capture, so these numbers are likely going to see some changes. We occasionally find out that a project has broken ground after it has done so or that a property indicated ground break pre-maturely. Part way through a project, a property manager may adjust their plans for unit mix based on pre-leasing patterns, unforeseen challenges, or other factors. Changes to unit mix can also mean changes to a property’s majority property type designation. 

Construction costs are increasing. The Weitz Company is a major architectural/engineering/construction firm in the United States. Based on data they collect from seniors housing projects they work on and cost estimates from RSMeans, Weitz produces estimates of construction costs for seniors housing by metropolitan area. Larry Graeve, Senior Vice President at The Weitz Company, and Amy Burk, Estimator, prepare Special Issue Briefs for the American Seniors Housing Association (ASHA) focused on construction costs of Seniors Housing.

Their recently released special brief on Winter 2019 Seniors Housing Construction Costs indicates costs rose by 6 to 8 percent year over year. Weitz cites tariffs and labor challenges as contributing factors to the rising costs. As the Weitz reports highlight, geographic variations in cost are notable. The data in the graphic below present figures on a city index of 100, with an example of Wichita, KS (city index 85.6) in the furthest right two columns, demonstrating local variability by product type. For example, there is a cost range of $134 to $159 per square foot for independent living in Wichita, while Philadelphia, which has an index of 115.2, translates to a cost rate of $180 to $214 per square foot.

Local variation exists in seniors housing construction. Not only do costs differ by region, but construction activity also varies due to local development cycles and broader macroeconomic factors. The heatmap below shows local market variation.  Although many markets are “cooling” (as evidenced by the blue tones), some metro area markets still have heightened activity. One case in point is Atlanta, which of the CBSAs in the Primary Markets, had the highest level of construction as a percent of its inventory for 4Q18 at 14.8% (it was 6% for the Primary Markets). Close behind Atlanta is Sacramento, which remained at its record high level of construction as a percent of inventory (12%) for the second consecutive quarter.

Conclusion: many factors could be at play. Construction activity for seniors housing appears to be slowing—by both measurements of starts and active construction underway. While this would be good news for many operators and investors who have been facing the consequences of new supply and competition, we remain cautious until several more quarters of data validate this trend. The slowdown, should it stick, may reflect rising costs, as showcased by the Weitz data as well as other cost and wage data not discussed in this blog. Other factors impacting construction activity may include a tighter lending environment by many of the larger banks and lenders, a more competitive employment environment for retaining construction workers, more cautious investment attitudes at this stage of the development cycle, and possibly concerns about the broader national economy. Additionally, markets experiencing declining occupancies may be discouraging developers from pursuing new projects in potentially challenging areas.

Hundreds of businesses, including capital providers, developers, owners, operators, service providers, and others, rely on the NIC MAP^® Data Service as they research, analyze, and assess their markets and prospects across the country. Clients know they can trust the accuracy of the data NIC makes available, as they leverage the ever-expanding utility of NIC’s online platform; but they may be unaware of what happens behind the scenes in order to produce such quality data. There’s a lot going on, so we’re breaking this into two parts, and will post the second half next week.

In fact, NIC has invested heavily, since its earliest years, in its data collection and quality assurance practice, to achieve its mission for improved transparency into the seniors housing and care property markets. NIC’s efforts have helped propel the sector to its current status as a leading property type in the commercial real estate industry. Quality data has increased access to capital, lowered costs, and, ultimately, helped improve access and choice for America’s seniors.

Today, NIC supports a talented and experienced in-house data group dedicated to producing the finest quality data available, and enjoys close, long-term alliances with some of the industry’s leading vendors of data collection services. In 2018, 22 people, employed both in-house and by vendors, produced four quarterly data releases, two Seniors Housing Actual Rates Report releases, all of the data for the Fifth Edition of the NIC Investment Guide, and many custom data requests, both for internal and external clients. All the while, the group worked daily to collect thousands of data points, assure quality across its entire platform, add new data from new sources, research and analyze trends, streamline processes and develop new reports and new features.

To shed light on what it takes to produce the quality and volume of data that NIC offers, NIC convened the leadership of its data group to discuss their approach – and share how NIC’s data investments are providing value to clients – and the sector overall – every day.

Dan Raney, Director, Product Solutions & Technology, started off by explaining that NIC collects data from a number of sources: “Many of the larger contributors are able to give us detailed reports from their property management systems, but we also work closely with the ProMatura Group, who gets information directly from properties over the phone. They have a team of 15 people dedicated to data collection for NIC, and don’t work on anything else. “

The in-house group that manages NIC’s data is divided into several distinct teams. There is an internal research and data collection team that focuses just on construction data. Three team members are responsible for researching projects in the pipeline, from the early planning stages through construction starts. They comb through a complex collection of resources to identify and track proposed and planned construction in 140 U.S. metropolitan markets. Once a project breaks ground, the ProMatura Group tracks the property through its opening day.

NIC’s systems have built-in checks designed to flag and block any data that sits outside given parameters. The three-person Quality Assurance team looks at thousands of records daily, in order to assess whether the data has errors in it – or whether indeed they point to actual shifts in the market. “Our teams are constantly reviewing quality assurance reports throughout each quarter.  They are very detailed in their inspection of the data, diligently examining the nuances of each data set (skilled nursing, actual rates, etc.). Although each data set is unique, we’ve put together a common quality control process that ensures the accuracy of all data before it is reported to our clients.” said Raney.

Research Manager Brian Connolly’s group is responsible for initial data collection and quality assurance. Many sources provide data constantly, while others provide periodic updates. Some data sources are one-time downloads. In the case of ProMatura’s contribution, Connolly says, “ProMatura is calling the same properties in the same markets every quarter. They’ve been able to build relationships with these communities and have built a lot of trust with the people they’re talking to provide the detailed data points that NIC requires for its reporting. They’re speaking the same language. Every quarter they call about 13,000 properties. This past quarter they finished 96% of those calls, meaning they’ve entered all the relevant data reporting into our survey instrument and submitted it for our review and publishing. Again, should any data they report fall outside our thresholds, it is flagged for review. We review those records every day, as they come in.

“ProMatura has worked with us for over ten years. They understand how this data is used in the industry, and how important it is to everyone out there that it is accurate and complete. We have an excellent partnership with them. They also manage data that some of our corporate contacts enter into workbooks, which they then enter into our system, which then can be reviewed for quality along with all the other data.

“We also get data directly from corporate partners at the property level, which is now a somewhat automated process. There’s a separate QA process for this type of electronic data submission. The systematic computerized process makes it much easier for these partners to submit their data to us and reduces the strain on our own resources as well.”

All property data is collected by Connolly’s group, and combed and checked for accuracy. He explained the purpose of NIC’s multiple checks prior to analysis: “The point is to have some redundancy in the way we review all the data. It means we have numerous eyes on every data point, with numerous checks throughout each quarter. The thresholds we use are based on historical trends for that property. We can use them to benchmark the data we’re collecting and make sure there are no surprises sitting so far out of the trend that we need to look at it more closely and clean it up. After the collection period ends, in the data finalization process we run all of our checks repeatedly to make sure the data is clean before it is turned over to our analysts for reporting.”

Data collection is far from the end of the story. Next week’s post will delve into the analysis, quality assurance, and reporting efforts of NIC’s data group.

The Labor Department reported that there were a significant number of jobs added in January–304,000 and well above the consensus expectation of 172,000. This was the 100th consecutive month of job growth.  December was revised down to 222,000 from 312,000 and November was revised up to 196,000 from 176,000.

The 800,000 Federal workers going unpaid during the partial federal government shutdown were still counted as employed and as a result federal government payroll estimates were largely unchanged in January. In contrast, the uptick in the unemployment rate may have been influenced by the furloughed employees due to definitional differences in the household survey which is used to estimate the unemployment rate.

Indeed, the unemployment rate increased 0.1 percentage points from 3.9% in December and from a near-50 year low of 3.7% in November to 4.0% in January. Nevertheless, the jobless rate remains well below the rate of what is generally believed to be the “natural rate of unemployment” of 4.5%, which suggests that upward pressure on wage rates will continue. Further indications that this is in fact starting to occur were released in the report. Average hourly earnings for all employees on private nonfarm payrolls rose in January by three cents to $27.56. Over the past 12 months, average hourly earnings have increased by 85 cents, or 3.2%.

A broader measure of unemployment, which includes those who are working part time but would prefer full-time jobs and those that they have given up searching—the U-6 unemployment rate—rose to 8.1% in January from 7.6% in December.

In January, employment in health care rose by 42,000. In the past year, health care has added 368,000 jobs.

The labor force participation rate, which is a measure of the share of working age people who are employed or looking for work rose 0.1 percentage point to 63.2% in January, still very low but up from its cyclical low of 62.3% in 2015. The low rate at least partially reflecting the effects of an aging population.

Adding further evidence to the strong job market are unemployment insurance claims which recently reached a near 50 year.

In an announcement by Federal Reserve Chairman Powell this week, the Fed indicated that they would not be raising interest rates in the immediate future due to concerns about global economic growth and limited inflation. That said, the jobs report shows that the labor market remains robust. Further indications of strength in the economy could cause the Fed to raise rates sooner. In December, the Federal Reserve raised the fed funds rate by 25 basis points to a range of 2.25% to 2.50%. That marked the fourth increase in 2018. The Fed has now raised rates by a quarter percentage point nine times since late 2015, after keeping them near zero for seven years.

Expanding on a recent NIC Blog Post that detailed care segment occupancy across the NIC MAP^® 99 Primary and Secondary Markets within Continuing Care Retirement Communities (CCRCs, also referred to as life plan communities) compared with those in non-CCRC freestanding or combined communities, the second installment of this two-part blog post examines the regional occupancy performance of independent living, assisted living, memory care and nursing care segments within and across entrance fee and rental CCRCs.

The following narrative describes 3Q2018 CCRC occupancy aggregated from the NIC MAP Primary and Secondary Markets—99 of the nation’s largest core-based statistical areas (CBSAs), broken out across eight geographical regions. (Note that NIC MAP recently released data for 4Q2018). For the analysis, occupancy data for CCRCs, both entrance fee (EF) and rental payment CCRCs was considered. CCRC segments inventory was comprised of 63.3% entrance fee and 36.7% rental payment models in 3Q2018. The occupancy rate used was the “all occupancy” rate which includes properties still in lease-up as well as stabilized properties.

Entrance Fee CCRCs vs. Rental CCRCs

Entrance fee CCRCs generally had higher occupancy than rental CCRCs, with some variability by care segment and by geographic region. Entrance fee CCRC occupancy was 3.3 percentage points higher than rental CCRCs in the third quarter of 2018 (92.1% vs. 88.7%). Across regions, entrance fee CCRCs led rental CCRCs by 2.8 percentage points in the independent living segment (93.0% vs. 90.2%), 1.6 percentage points in the assisted living segment (91.9% vs. 90.3%), 3.8 points in the memory care segment (90.9% vs. 87.2%), and by 2.5 percentage points in the nursing care segment (89.3% vs. 86.8%). Note: the referenced percentage point differences were rounded.

• Independent living segment occupancy was the highest in the Mid-Atlantic region for both entrance fee CCRCs (95.1%) and rental CCRCs (93.2%). The largest differences in independent living segment occupancy between entrance fee and rental CCRCs was reported in the Mountain region (8.4 percentage points). Independent living segment occupancy was slightly higher in rental CCRCs than entrance fee CCRCs in the Southeast region (by a one percentage point difference).
• Assisted living segment occupancy was the highest in the Northeast for rental CCRCs (93.7%) and the West North Central and Northeast regions for entrance fee CCRCs (93.4% and 93.3%). Rental CCRCs had higher assisted living segment occupancy than entrance fee CCRCs in the Southwest, Southeast and Northeast regions. The largest differences in assisted living segment occupancy between entrance fee and rental CCRCs was reported in the Mountain region (10.9 percentage points).
• Memory care segment occupancy was highest in the East North Central and Mid-Atlantic for entrance fee CCRCs (94.4% and 93.4%) and the Northeast and Southwest for rental CCRCs (94.0% and 93.6%) but was particularly low for rental CCRCs in the Mountain region (69.1%). The largest differences in occupancy between entrance fee and rental CCRCs was reported in the Mountain region (17.3 percentage points) and Pacific region (11.9 percentage points), where entrance fee CCRC occupancy was higher than rental CCRCs, and in the Southwest, where rental CCRC occupancy was 11.0 percentage points higher than that for entrance fee CCRCs.
• Nursing care segment occupancy was highest in the Northeast for both entrance fee and rental CCRCs (92.9% and 91.8%). Occupancy was particularly low in the Mountain region for rental CCRCs (76.4%). Rental CCRCs had higher nursing care segment occupancy than entrance fee CCRCs in the Pacific and Southeast regions. The largest difference in nursing care segment occupancy between entrance fee and rental CCRCs was noted in the Mountain region (11.2 percentage points).

Higher occupancy in entrance fee CCRCs may be due in part to higher rates of resident turnover in rental-model CCRCs, according to data from ASHA’s State of Seniors Housing, 2018 database. While communities with rental CCRC payment plans offer monthly or annual leases for housing and services, entrance fee CCRCs include contract stipulations such as refund percentage and timing of refund, which may help retain residents who put down a sizable up-front fee to reside in a CCRC. An additional reason for higher occupancy rates in entrance fee CCRCs may be due in part to the fact that the majority of entrance fee CCRCs are nonprofit organizations (72.6%). According to NIC MAP, nonprofit CCRC occupancy in the Primary and Secondary Markets has consistently exceeded that of for-profit CCRCs by more than four percentage points since 2Q15.

However, product differences are unlikely to tell the whole story. Further analysis is needed to more fully explain CCRC segment occupancy performance by payment plan and by region. In addition to local economic drivers, income levels, inflation-adjusted purchasing power, and penetration rates, other contributing factors that could be explored include inventory growth patterns, consumer acceptance of the entrance fee model, and the health of the residential housing market—specifically as it relates to entrance fee CCRC occupancy performance since often CCRCs target upfront fees to local home sales prices near or around the median to enable consumers to fund a move with a near one-to-one exchange.

(Double-click the image below to enlarge.)

NIC MAP^® Data Service clients attended a webinar in mid-January on the key seniors housing data trends during the fourth quarter of 2018.  Key takeaways included the following:

Takeaway #1:  Seniors Housing Occupancy Edges Up, but Remains Soft

• The all occupancy rate for seniors housing, which includes properties still in lease up, inched up to 88.0% in the fourth quarter from the seven-year low of 87.9% in the third quarter.  The fourth quarter rate was 70 basis points below its level of 88.7% in the fourth quarter of 2017.
• During the quarter, net absorption totaled 5,149 units, the greatest number of units absorbed in a single quarter since NIC began reporting the data in the first quarter of 2006. Historically, we often see a bounce up in demand in the fourth quarter from the third quarter and often the fourth quarter is the strongest quarter of the year.
• On a quarterly basis, there were 5,341 units added to inventory in the quarter, not as much as the record pace of 6,400 units reached two years ago, but still a lot by historical norms (3,100 units per quarter on average since 2006).

Takeaway #2:  Median Occupancy Has Never Been Below 90%

• The median occupancy rate was more than four full percentage points above the all occupancy rate in the fourth quarter of 2018. It has averaged 350 basis points above the all occupancy rate since 2006 and has never fallen below 90%.
• The difference between the median and all occupancy rates can be traced to the fact that poorer performing properties pull down the average occupancy rate. Many institutionally-owned seniors housing properties benchmark to the median occupancy because of this fact.

Takeaway #3:  Record Inventory Growth and Absorption for All of 2018 for Assisted Living

• For all of 2018, assisted living net absorption equaled 9,283 units, the most in any year since at least 2006.
• Inventory growth also reached a record high of 13,670 units in 2018, making the gap between net absorption and inventory growth equal to 4,387 units, a bit less than the annual results for 2017 (4,473 units), but still very wide.
• Note the wide difference between stabilized and non-stabilized occupancy rates—nearly 320 basis points. This stems from the large number of units that have come online but are not yet leased up.
• It is also notable that net absorption equaled 3,743 units in the fourth quarter, which made the fourth quarter of 2018 the strongest quarter for net demand on record and more than three times the average net quarterly absorption since the time series began to be reported in the first quarter of 2006.
• Occupancy remains very low at a rate of 85.4% during the fourth quarter, which was unchanged from the third quarter.  In the second quarter, the rate had reached an all-time low of 85.3%.

 Takeaway #4 Construction Starts Trending Lower

• A key takeaway from the recent data is a slowdown in the four-quarter moving sum of starts for both majority independent living and majority assisted living. Indeed, in the fourth quarter, assisted living starts totaled nearly 1,552 units, the fewest starts since the first quarter of 2012.  On a four-quarter aggregate basis, starts totaled 9,393 units, the fewest since 2014.  As a share of inventory, this amounted to 3.3%.  The last time it was below 4% was 2012.
• For independent living, starts on a rolling four-quarter basis, totaled 7,287 units in the fourth quarter. As a share of inventory, this equaled 2.2%. The last time it was below 2% was 2014.
• It’s worth noting that this data often gets revised up or down in subsequent quarters, due to inherent lags in reliably collecting this often hard-to-capture data.

Key Takeaway #5:  Seniors Housing and Care Transaction Volumes Less in 2018 Than In 2017

• Preliminary data shows that seniors housing and care transactions volume registered $12.3 billion in 2018. This  includes $7.1 billion in seniors housing and $5.2 billion in nursing care.  The total volume was down 23.4% from the previous year’s $16.1 billion and down 15% from 2016 when volume came in at $14.6 billion.  Total annual closed transactions  volumes have not been less than $13 billion since 2012.
• The institutional buyer type represented 17% of the $12.3 billion in closed transactions in 2018 as its total closed dollar volume decreased by 59% from 2017 when it represented 32% of volume and closed $5.2 billion in transactions. However, 2017 was represented in a significant way by Blackstone when they closed some larger deals over $500 million.
• The public buyer share of volume increased from 25% in 2017 to 32% in 2018. In terms of the dollar volume, it held relatively steady as the public buyer closed $4 billion in both 2017 and 2018.  In 2018, the volume was carried by the Welltower/QCP deal and in 2017 it was carried by the SABRA/Care Capital Properties deal.   The public buyer has averaged $3.8 billion in closed transactions per year over the last three years.
• The private buyer continues to be the most consistent and steady source of capital as it registered over $5 billion in closed transactions in 2018 at $5.2 billion. It represented 42% of all volume in 2018, which was up from 34% in 2017, when it closed $5.5 billion in transactions.  Over the past three years, the private buyer has averaged $5.5 billion and it has closed above $5 billion in transactions for five straight years.
• Cross-border activity has seen a steady decrease in dollar volume since 2015 when it registered $2.1 billion. It has averaged about 5% of volume over the past three years and closed $500 million in 2018, which was down from 2017’s $900 million.