The National Senior Housing Market:
Analysis and in-depth look into its immediate future.
Senior Housing continues to enjoy a very robust, yet stable marketplace in 2018. While some product types within the asset class have distinct concerns, the overall outlook is very bullish. Senior Housing is divided into three major market segments: Independent Living (IL), Skilled Nursing Facilities (SNF), and Assisted Living Facilities (ALF). We will focus on licensed healthcare facilities, SNF and ALF, in today’s analysis.
ALF transactions have been consistent in 2018. REITs continue their focus on this product type while diluting some of the SNF saturation in their portfolios. ALF cap rates have inched up slightly, primarily due to capital costs in the market, while SNF cap rates have remained constant. The class “A” single-asset ALF cap rate remains in the high 6% range, and then goes up, depending on the facility’s quality, performance, and location. SNF cap rates have consistently remained between 10% and 13%. As new construction enters the marketplace and interest rates rise, we will likely see some movement in the cap rates on both product types. How big the nudge, of course, is yet to be seen.
Also noteworthy is that occupancy has slumped in both product types in recent quarters. We attribute this to the new product entering the space as well as naturally occurring industry cycles. New construction is a hot topic in ALF and Memory Care Facilities. There is significant development activity in many markets – potentially too much in some. We have witnessed a considerable number of construction starts in Texas, Arizona, Illinois, Minnesota, the Southeast, and the Northeast. While the baby boomer generation will undoubtedly fill this new product eventually, they are not yet significant Senior Housing consumers. As a result, we may have a few rough years ahead regarding occupancy in some of these markets.
In addition, an unexpected headwind has hit Senior Housing in recent quarters: labor shortages. Finding entry-level labor at the facility level has proven to be an increasing challenge for many operators. The good news is the industry is attacking this issue head on, implementing several solutions, often bringing migrant worker resources to the forefront. Another dynamic industry shift is the movement away from large, top-heavy corporations. Many larger national operators are instead adopting a top-light, bottom-heavy management format where each facility stands on its own, with the corporate office merely as a support system.
The big issues to watch looking forward will be the absorption rate on new construction, specifically in ALF and Memory Care, and the industry’s response to the labor shortage. Nevertheless, the fundamentals in Senior Housing are very strong and will remain strong for the foreseeable future.
Senior Vice President, JCH Senior Housing Investment Brokerage
Nick Stahler has 12 years of experience in the Senior Housing Investment industry with 1 billion dollars in closed sales.