Considerations for 2022 Resident Rate Increases

As 2021 comes to an end most senior housing operators including Assisted Living, Memory Care, Independent Living are contemplating resident rate increases for their services.

If you are thinking 3% to 4% you are probably in trouble.

We see many Assisted Living, Memory Care and Independent Living clients who have gotten their top line  gross revenue back close to pre-Covid levels,  their bottom lines are lagging far behind due to their profit margins not keeping pace with their increased expenses.

When calculating your rate increases for this year consider the number of expenses that have disproportionately increased when compared to normal times.

Labor

is a good example. Many states have mandated an increase in minimum wage. Many smaller mom and pop assisted living, memory care and independent living operators do not believe that this has a significant impact on the overall expenses of running a business. It is critically important to realize that the increase in minimum wage bumps the entire stack of wages not just the entry-level people. As an example, if you hired a valued employee 2 years ago at $12/hr and have given them merit increases to $13/hr. and new hires are coming in at the same wage your valued employee probably won’t be happy.

Insurance

the rates that operators of assisted living, memory care and independent living facilities are paying for insurance have increased dramatically with no sign of improvement anywhere in the near future. We are seeing some of the craziest workers compensation cases in the history of our business. In some locations where wild fires are common, it is difficult if not impossible to get fire insurance. We have heard many people say that their insurance costs are up 20% to 40% and may go higher.

Energy/Utilities

the cost of natural gas, electricity and other forms of power have increased well beyond what was anticipated. The cost of natural gas has doubled in many cities.  The cost of trash collection and disposal has gone up dramatically. Far more than normal inflation would account for.

Food

as the cost of all the above items increased, this will naturally impact the cost of raw food and its delivery. We have heard estimates that raw food may go up as much is 20% this year. Consider that the biggest factor in the cost of food is labor and transportation to market and it is easy to see why the food companies will pass along these increased expenses.

New or Higher Taxes

The new administration and state government have promised higher taxes on corporations. These taxes need to be added to the expense equation of your facility’s profitability. The final number has not come out yet but use your best guess.

Summary

Take the time to add up all your known increases in expenses including labor, food, all of your insurances and energy. Divide that dollar figure by your number of residents and it will give you what your rental rate increase needs to be to simply maintain your existing profit margin. To return to full profitability the increase will need to be added on top of that. Many assisted living, memory care and independent living operators are finding that a 7-10% increase in rates are not far off.

For a complimentary valuation on your assisted living, skilled nursing, independent living, or memory care facility, visit our Facility Valuation page.

The National Senior Housing Market: 2021 Midyear Review

The Senior Housing industry, while a need-driven business, is at least for the near future facing some uncertainty as they recover from declining census and increased expenses caused by the pandemic. Divided into three major market segments: unlicensed facilities such as Independent Living (IL), Active Adult, and licensed facilities which would be Skilled Nursing Facilities (SNF) and Assisted Living Facilities (AL) are each facing unique challenges as the sector emerges from the pandemic.

Independent Living/Active Adult serve a younger/healthier population and are less need driven and therefore are a more discretionary move. As seniors get vaccinated and restrictions relax, active adults are once again moving to these communities.  These communities are recovering at a faster pace than what industry experts expected.

Skilled Nursing facilities by their nature are caring for the most significant percentage of “High-Risk” seniors with underlying medical conditions and were hit hard by the COVID-19 virus. As the sector emerges from the COVID-19 crisis amid sweeping regulatory changes, significant increases in expenses related not only to PPE and infection prevention protocols as well as increases in wages could force the exit of “mom & pop” operators unable to weather the financial storm.

Assisted Living Facilities serve seniors that require assistance with the activities of daily living.  The sector was also negatively affected by COVID-19 both by the virus itself and the resulting restrictions placed on allowing new move-ins.  As a result, the industry is experiencing the lowest occupancy since the recession. As Assisted Living facilities in most areas have been able to “open back up”, occupancy is rebounding.  Most industry experts believe that, depending on location, it could be two to four years before occupancy and operations normalize.

For the last 18-months both state and federal government and the Centers for Medicare & Medicaid Services have offered financial support which has kept many operators afloat.  This financial aid, for the most part, is ending. As a result, we expect to see more distressed assets hit the market in the second half of the year. We also expect to see a significant number of operators throwing in the towel due to increased labor costs, insurance and litigation, more regulations all leading to disappearing margins and diminished profits, all leading to being simply exhausted.

According to JLL Valuation Advisory’s recently released fourth annual Seniors Housing Investor Survey and Outlook, even though the seniors housing industry still faces many challenges, long-term demand still has the sector on a trajectory for growth.

Transaction activity is picking up significantly in all sectors of the senior housing industry and we expect it to continue during the second half of the year.  We are encouraging investors considering the sector to pay close attention to every aspect of the transaction.  During the due diligence period investors need to really evaluate what capital investments are going to be needed especially, what CAPEX does the property need.  They also need to evaluate what potential residents are looking for in a facility and what ways they can optimize employee retention.

Cindy Hazzard

Principle, JCH Senior Housing Investment Brokerage

Office: 714-463-1672 Email: [email protected]