The National Senior Housing Market: 2019 review and 2020 outlook
2019 was a fascinating year for the Senior Housing sector. The construction cycle slowed, the popularity of multi-level facilities increased, and skilled nursing is still as hot as ever, even with the new PDPM payment model coming into effect. As investors are realizing the immense need for these facilities and services, the outlook for senior housing transactions in 2020 will remain bullish.
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.
Independent Living/Active Adult communities continue to gain popularity as baby boomers consider retirement living options. This model typically isn’t licensed and offers a living environment chock full of exciting amenities designed for a “healthy” senior looking for peers to live near. This type of community is typically significantly less costly than Assisted Living, yet offers a sense of comfort in knowing that people your age are nearby. Some even offer the added option of “home health” should the need arise.
Skilled Nursing assets continue to be in high demand with capitalization rates for stable-performing assets remaining at 10%-13%. The new Patient-Driven-Payment- Model (PDPM) payment system that took effect in October 2019 may increase the exit of “mom & pop” operators that weren’t prepared for the change. If a significant number of them come on the market as distressed assets, it may well affect the average per bed price being offered.
The Assisted Living sector continues to face several issues, including labor shortages, lower occupancy levels, higher acuity coupled with shorter stays, the desirability of multi-level facilities and how to best serve the middle market. Several factors are contributing to the labor shortages. First, the booming economy has resulted in a smaller pool of available workers. Second, and probably the most important is raising minimum wages. It’s a given that caring for seniors is much more demanding than working in retail, yet the pay is often the same. As development slows and the glut of new developments are absorbed, occupancy levels will continue to improve. Savvy operators are discovering that improving culture at the facility level not only increases staff retention, it escalates census as well. An emerging trend for buyers in the sector is the desire to have multi-level facilities; this could be independent living combined with assisted living or assisted living combined with memory care. We anticipate potential buyers continuing to look for multi-level assets or for ways of potentially adding an additional component to an assisted living facility acquisition in 2020. As more and more baby boomers come of age in 2020, astute operators will continue to develop creative ways to serve middle-market seniors who can’t afford to live in today’s senior living model.
Principle, JCH Senior Housing Investment Brokerage