The National Senior Housing Market: 2019 Midyear Review
The senior housing industry is a need-driven business. Divided into three major market segments: unlicensed facilities such as Independent Living (IL) sometimes referred to as Active Adult, and licensed facilities which would be Skilled Nursing Facilities (SNF) and Assisted Living Facilities (AL), nearly every family, regardless of their financial resources, will require the specialized care from one of these segments. This fundamentally acts as a driving force for the senior housing industry no matter the overall climate of the economy. As investors are realizing the immense need for these facilities and services, Senior Housing transactions in 2019 are on track to achieve record levels, however several factors could affect the market performance moving forward.
REITs continue to divest assets that that no longer meet their operating criteria. Many have become active in the marketplace as buyers, believing it is stabilizing. Private Equity also continues to be an active participant in the space. Foreign investors continue to enter the marketplace. Insurance providers, a new player, are slowly entering the sector as they recognize its value. There is more demand for multi-level campuses, most notably Active Adult with either an Assisted Living or Memory Care component. Skilled Nursing, while still actively trading, is considered the riskiest by most investors.
The most notable issue that continues to plague the entire industry is the labor shortage. Given the robust economy, finding and keeping entry level workers remains a challenge. In response, many operators are attacking the issue by finding new ways to retain staff using simple yet very effective ways to make staff feel “appreciated” like improving appearances of breakrooms and/or holding once a month special “Thank you” lunches. These efforts cost very little but go a long way toward improving team atmosphere. Skilled Nursing Facilities continue to feel turbulence and anxiety as the new Patient-Driven Payment Model (PDPM) is becoming a reality, taking effect October 1, 2019.
Although high barrier to entry communities remain attractive to developers, the vigorous construction has slowed due, at least in part, to rising construction cost. In response to the abundance of product that caters to the high end of the market, a number of operators and developers are shifting their focus to the middle market of the senior housing industry. This continues to be the largest underserved senior population needing residence.
According to the Seniors Housing Acquisition and Investment Report the average price of Assisted Living rose in the last quarter of 2018 with an average price of $204,000 per unit. Independent Living rose to $251,800 per unit. Skilled Nursing fell 2% to an average of $75,600 per bed.
As new product continues to come online, some markets continue to struggle with absorption rates. If this continues, it will cause some turbulence in Cap Rates and ultimately effect ALF pricing. Still currently, overall valuations should remain strong through the balance of 2019.
Principle, JCH Senior Housing Investment Brokerage