Senior Housing Market- Post COVID
According to many industry experts, the Assisted Living and Skilled Nursing industries remain under the national microscope post-COVID. How will state and federal regulatory changes impact the industry? What will these changes mean to reimbursement levels, staffing requirements and barriers to entry?
The American Health Care Association (ASHA) estimates there was a loss of 241,000 nursing home employees, or 15.2% of workforce, since 2020. To maintain and attract new employees, operators are offering flexible scheduling and increasingly robust benefits packages coupled with more refined recruiting strategies.
Average private-pay Seniors Housing occupancy increased 20 basis points in first-quarter 2022 to 80.6 percent, according to the most recent data from the National Investment Center for Seniors Housing and Care. This is above the pandemic low of 78 percent in the second quarter of 2021, yet well below the pre-pandemic level of 88 percent in the fourth quarter of 2019.
Market Location/Asset Type
Core (Primary): Market locations are consistent with the NIC MAP top 30 MSAs, generally more densely populated, with higher barriers to entry. For Nursing Homes this includes properties in states with a Certificate of Need (CON) or similar restriction on development and states with sustainable Medicaid reimbursement programs.
Class A: Excellent-quality assets located in desirable core markets, with an average age of less than 10 years. Building finishes and FF&E, are high-end. Nursing Care properties are located on or near a health care campus with state-of-the-art rehabilitation programs and equipment.
Non-Core (Secondary): Market locations are typically outside the NIC MAP top 30 MSAs, generally less-populated areas with a thin target population base and low barriers to entry. Specific to Nursing Homes, the market will not have restrictions such as CON that limits new development.
Class B: Good-to-average quality assets located in core and non-core market locations, with an effective age between 10 and 25 years. For nursing care, the focus is on functional design, primarily containing private and semi-private resident rooms.
Class C: Average-to-fair-quality assets located in non-core locations, with an effective age older than 25 years, may be non-purpose built. Rent and occupancy levels typically fall below market averages. Nursing Homes are located with minimal access to healthcare providers.
Lending all predictions regarding the near-term future of Seniors Housing finance must consider an important question: How much and how fast will interest rates rise? The Federal Reserve raised the fed funds rate by 0.75 percent in June to curb inflation. Higher rates mean higher debt service, resulting in lower debt-service coverage ratios. As cap rates also increase in this environment, stabilized values decline. Bridge Lending seems to be increasing, allowing operators to stabilize value-add opportunities before securing permanent financing.
The consensus among most operators is that the Seniors Housing sector has moved into the post-pandemic recovery phase backed by strong long-term demand and increased investor interest.
With state, the federal government, and the Centers for Medicare & Medicaid Services financial aid ending, we expect to see more distressed assets hitting the market in the year’s second half.