Market and operating fundamentals are rebounding steadily from pandemic lows, marked by increasing occupancy, robust revenue per occupied room (REVPOR) and moderating expense growth. Fundamentals are being further bolstered by slower construction starts and favorable demographic trends. While recovering, NOI has not fully recovered, leading to short-term valuations challenges and increased financing costs.
The not-yet-stable operating environment leads to higher return expectations, creating a gap between buyers and sellers. Distressed communities are trading at significant discounts to replacement costs, with minimal consideration for future cash flow projections. On the other hand, activity for stable class A communities is beginning to rise as cap rates tighten, a trend likely to persist through the rest of 2024 and into 2025. Upcoming loan maturities, private equity fund expirations, and operator fatigue will present growth opportunities for investors and operators over the next 12-24 months.
Institutional investors are showing increased interest in senior living due to its needs-based market, strong demand, record absorption, and limited supply growth. Investors must build mutually beneficial relationships with operating partners while continuously innovating to improve customer and employee experiences, ultimately enhancing enterprise value.
To sustain values across economic cycles, operators and investors must focus on operating fundamentals that drive NOI and ultimately valuations. The primary focus must remain on driving margins by prioritizing the key pillars of operating cash flow: occupancy, rates, labor, and providing quality care and service to consumers. Operators and owners often are not always fully aligned on financial goals. Managers, whose compensation is linked to revenues, often prioritize occupancy at the cost of rate. Emphasis should be placed equally on all three pillars, making financial decisions that drive the bottom line (NOI/Margin). Investors should explore compensation structures that ensure alignment with financial goals while simultaneously providing more resources to operating partners, allowing them to foster innovation, enhance technology, and hire top talent, all of which will drive bottom-line performance and advance the industry.
In conclusion, the senior living market stands at a critical juncture where attention to operating fundamentals will dictate its resilience and growth. Valuations are influenced by market recovery, demographic trends, and financing costs. Aligning investor and operator goals and leveraging innovative strategies will help the industry enhance value, meet the needs of an aging population, and ensure long-term success and stability.