While the reimbursement-dependent portions of the seniors housing market remain at a crossroads, other segments of the industry are benefitting from an improving economy and housing sector, according to a new research report completed by Marcus & Millichap Real Estate Investment Services.
The occupancy, rent and construction data is based on the 100 largest metropolitan statistical areas in the country as tracked by NIC MAP, a data analysis service of the National Investment Center for the Seniors Housing & Care Industry (NIC).
Independent living properties — which recorded the sharpest decrease in occupancy during the Great Recession — are now posting healthy gains. By the end of this year, average occupancy is projected to reach 90.4 percent, up 110 basis points from 2011. Rents are expected to climb 3 percent to an average of $2,780 per month.
The quick turnaround in occupancy in the independent living segment is significant and a reflection of conditions in the market-rate apartment market, explains Gary Lucas, director of the National Seniors Housing Group at Encino, California-based Marcus & Millichap.
“As nationwide occupancy for traditional apartments has soared over the past 2 years, rents have climbed to a level where traditional apartments are no longer a major substitute for independent living units,” says Lucas. “A short time ago, the independent living sector was the weakest, but now it is the second strongest and still has room to strengthen.”
At least some of the additional strength in the independent living sector is likely to come from the slowly improving housing market. Even so, seniors could delay selling their homes until more significant price appreciation returns, which could be as early as 2013, says Lucas.
“As it stands, the tax write-off on a home short sale will expire at the end of 2012, making the cost of short sales much more significant for homeowners, while the cost of foreclosure is high for lenders,” explains Lucas. “Combined, these two forces will keep more people in their homes, limiting the supply of distressed houses on the market and setting the foundation for a more normal housing market.”
The rest of the pack
Demand for assisted living units is expected to be relatively healthy this year while construction is light compared with historical deliveries, according to Marcus & Millichap. Occupancy is projected to finish 2012 at 90.2 percent, up 10 basis points from 2011. The forecast calls for the average rent to rise 1.8 percent to $3,537 per month.
In the skilled nursing sector, operators are challenged by reduced reimbursements from state Medicaid programs. Also, some states are hesitant to shore up Medicaid for the long term until the U.S. Supreme Court rules on the Patient Protection and Affordable Care Act.
If the nation’s highest court were to strike down the entire bill, it would significantly alter federal funding for state programs and indirectly change Medicaid reimbursements, emphasizes Marcus & Millichap. A decision is expected sometime this month.
Other states, however, are moving forward with plans to privatize Medicaid. New York could be the first in a series of states to hand over the reins of healthcare to the private sector to manage costs.
As states continue to grapple with budget issues and pull back on reimbursements, skilled nursing operators will be challenged to fill beds, predicts the Marcus & Millichap report. At the end of this year, occupancy at skilled nursing facilities is expected to reach 88.8 percent, up 30 basis points from 2011. Rents per bed are projected to climb 2.9 percent to $274 per day.
Meanwhile, a stronger turnaround in the housing market will be required to move the needle higher on occupancy at continuing care retirement communities, according to Marcus & Millichap.
By the end of 2012, the combination of a stronger national economy and stabilizing home prices is expected to boost occupancy at continuing care retirement communities to 89 percent, a rise of 20 basis points compared to 2011.
Overall, 2,000 units in the continuing care retirement community segment are under construction, representing less than 1 percent of existing stock, according to Marcus & Millichap.
The average entrance fee into the independent living section of a continuing care retirement community rose 2.4 percent in 2011 to $259,000. Costs are heavily weighted by the high end of the market, however, as the median entrance fee is $216,000.
Deal flow accelerates
In the independent living segment, transaction velocity more than doubled in 2011, largely due to the Atria Senior Living portfolio sale to Ventas. The median sales price was $141,300 per unit, up 17 percent from 2010 as Class A assets changed hands. Average cap rates during the period were in the mid-7 percent range, but dipped to 5 percent in some instances.
Deal flow in the assisted living sector also doubled during the past year as several portfolios changed hands. Ventas, Health Care REIT and HCP were all active buyers, driving the median sales price up to $153,000 per door. Average cap rates in 2011 were slightly below 9 percent.
In the skilled nursing segment, Health Care REIT’s $2.4 billion purchase of Genesis HealthCare and HCP’s $6.1 billion acquisition of HCR Manorcare resulted in a large increase in dollar volume and velocity in 2011. The median sales price jumped to $94,300 per bed. Excluding the two largest sales, per-bed prices were just below $70,000, still relatively high.
Long-term prospects
In 2011, approximately 19.4 million Americans were over the age of 75, the prime seniors housing demographic. By 2016, the number of residents in this cohort is expected to grow by 7.7 percent to 20.7 million people, creating a significant amount of demand for the seniors housing industry.
Still, home values have stymied many would-be retirees from moving into independent living facilities or continuing care retirement communities in the short run, points out Marcus & Millichap. Housing prices have climbed 1.3 percent during the past six months, however, representing the first back-to-back quarterly gains since 2005. Currently, the national median home price is $166,000.
The improving economic climate could cause demand for seniors housing to increase for another reason, points out Lucas. “Seniors who delayed a move [due to the recession] may be encouraged by their adult children to begin transitioning into seniors housing as more people return to work and options for family members to provide care dissipate.”
— Matt Valley