A strengthening national economy and housing market are benefiting all segments of seniors housing, according to Marcus & Millichap’s National Seniors Housing Research Report for the second half of 2014. In some segments, such as independent living and continuing care retirement communities, occupancies and rents are expected to grow strongly through the end of the year.
In the newly improving economy, retirees are using equity —which was previously tied up in their homes due to the soft housing market following the recession — toward entrance-fee continuing care retirement communities or other seniors housing options, the report says.
The improving economy has been enormously beneficial to baby boomers, according to Marcus & Millichap. Boomers’ parents are the primary users of assisted living facilities. “Equipped with refilled retirement accounts, this group will feel more comfortable with the expenditure for seniors housing when the need arises,” the M&M research team wrote.
This increased demand is spurring development activity. In states where barriers to entry are reduced, construction is underway, whereas states with tougher permitting and entitlement processes lag.
Investment Sales Trends
Smaller owners of seniors housing properties are being priced out of the market, according to Marcus & Millichap. Simultaneously, the strong demand for senior housing product is causing the available inventory to contract. The purchase of portfolios by REITs and institutions, however, is creating economies of scale for the larger owners, increasing their ability to offer high prices for properties.
The huge demand for seniors housing is limiting the number of properties the owners are willing to sell, but investors that can find underperforming centers and turn them around can do well, the report asserts, according to Marcus & Millichap. Further cap rate compression overall will likely be insignificant, the report asserts, giving owners interested in selling the encouragement to do so now.
The Marcus & Millichap report provides a short-term outlook for each segment of seniors housing. Here are the highlights:
• Independent Living — A strong economy is expected to lead to further gains in occupancy and rents for independent living operators in the second half of this year. The occupancy rate is expected to reach 91.5 percent by the end of the year, up 80 basis points from the prior year. The average rent is projected to climb to 3.1 percent to $2,859 per month.
• Assisted Living — As development rises, the pace of occupancy gains will moderate. Nonetheless, occupancy is expected to climb to 91.3 percent by the end of 2014, up 50 basis points from 2013. Meanwhile, the average rent is expected to grow 3.4 percent this year to $4,218 per month.
• Skilled Nursing — Slowing inventory growth and healthy demand will support a small increase in occupancy during the remainder of 2014. Occupancy at skilled nursing facilities is projected to climb to 88.4 percent by the end of this year, 40 basis points higher than the end of 2013. The average rent is expected to climb 3.6 percent this year to $284 per bed per day.
• Continuing Care Retirement Communities — The average occupancy is expected to rise 80 basis points to 90.6 percent this year as seniors sell their homes and relocate to continuing care retirement communities. The forecast calls for the average rent to rise to $2,910 per month, 1.7 percent higher than one year ago.
— Scott Reid