After facing down a pandemic for three years, the senior housing industry now faces a new reality—some parts good and some not so good.
On the plus side, the occupancy rate is improving. The labor market is tight, but better than it was a year ago. New inventory growth is relatively limited. And, inflation and expenses continue to rise, although at a slower pace
On the less positive side is a lot of uncertainty, which few business leaders like. They wait for clues on whether interest rates will continue to climb. Debt financing is scarce. The stability of the regional banks, a source of loans for the industry, is a concern. Added to that, economists think a mild recession seems more likely than not in the next 12 months.
So, what do current market trends tell us about where the industry is headed?
A panel of experts recently took a deep dive into that question during a NIC Leadership Huddle webinar. The conversation was led by NIC Chief Economist Beth Mace. She was joined by three senior living executives with different roles and market perspectives.
Putting the conversation in context, Mace presented a detailed look at current economic conditions and the commercial real estate and senior housing markets. She said that inflation, the direction of interest rates, and the impact of rate hikes to date remain a concern though senior housing market fundamentals are recovering.
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Commercial Credit Freeze
The capital markets are a worry.
“It’s incredibly inefficient to finance something,” said panelist Aron Will, vice chairman and co-head, National Senior Housing, CBRE Capital Markets. A large slice of equity capital has returned to the market, but debt financing is difficult to secure. 
The national banks have been out of the lending market since last summer and the regional banks have liquidity problems. It’s especially difficult to refinance or trade value-add type properties—the projects that need the most help. “There’s just not a lot of deals that qualify,” said Will.
The general slump in commercial real estate is having a spillover effect on senior housing, according to panelist Steve Blazejewski, senior portfolio manager and managing director at asset management firm PGIM. Institutional investors have hit pause waiting for the liquidity crisis to pass. “Nothing is transacting,” said Blazejewski.
Good Things Happen Here
From an operator’s perspective, Kris Woolley expressed a big sense of relief. “It feels a lot better today,” said Woolley, founder and CEO, Avista Senior Living. “COVID was just overwhelming.”
He said his staff of 1,100 people is in a better frame of mind now. Reliance on expensive staffing agencies has decreased dramatically. Rents are being raised without pushback from consumers.
Fewer new communities are opening so there’s less competition. Net operating income is up year-over-year. “Despite the very difficult capital markets issues, there’s a lot of good things going on,” he said.
Avista is fielding more inquiries about management assignments from institutional owners with troubled properties. Woolley said that a reset in valuations could provide an opportunity for operators to seek some form of ownership. Regional operators could be the winners. “The market is creating a much deeper bench of mid-sized, regional operators,” he said.
Recession Apprehension
The panelists expect more trouble in the short-term but a brighter outlook in the years ahead as baby boomers age into senior housing and care.
For now, the continued disruption in the capital markets and the prospect of a recession worry the panelists. A lot of senior housing properties have floating rate debt and higher interest rates are sapping any gains being made in net operating income. “It’s difficult,” said Woolley.
Some troubled properties are going back to the lenders. “What happens then?” asked Mace. The panel agreed that lenders do not want to operate senior housing properties.
Blazejewski expects write-downs, loan covenant modifications and property sales at lower prices. Banks are already asking equity providers to put in more capital to refinance loans. But opportunities could emerge for investors with capital to buy loans.
Older properties represent a big challenge. “You can’t put enough CapEx into them to keep them competitive,” said Will. As an alternative, older properties could be retooled to provide a more affordable product for the underserved middle market.
Beyond the next 12-18 months, the outlook for senior housing is bullish. New construction is down 54% from its peak. The aging population is a big plus. Consumers are also more aware of the senior housing product than they were 10 years ago.
Another bright spot is senior housing’s fundamental strength. Annual rent growth has recently topped 5%. “That’s a remarkable statistic,” said Will. “The resilience of this asset makes it a shining star.”
To stay current on senior housing market conditions during these turbulent times, visit NIC’s new Senior Housing Market Conditions Hub for insights and resources on factors influencing the outlook for senior housing and care.
The next NIC Leadership Huddle webinar will be held June 13. Prominent real estate research directors will discuss market trends and the economic outlook. Register now!