No asset class has had to contend, up close and personal, with COVID-19 more than the senior housing sector. While most of the recent high-profile infections are occurring in the skilled nursing space, all types of senior living have to address this serious situation.
For anyone who operates an assisted living community, there is currently no higher priority than the health and safety of residents and employees. The high population of at-risk residents—due to their age and possibly their health, depending on the facility’s acuity level—has put a target on these properties.
“Very early on, well before any mandatory shutdowns, Pathway implemented their normal protocols for seasonal flu,” said David Schwartz, CEO, chairman and co-founder of Waterton. Last year, Waterton acquired a controlling interest in Pathway to Living, a Chicago-based owner and operator of senior living communities. “Those steps are relatively close to the protocols that are in place today as far as cleanliness and social distancing.”
As Pathway worked to take on COVID-19, one of the initial challenges was accessing enough PPE such as gloves, face masks and gowns. Fortunately, Schwartz said that supply lines to these items have opened up in recent weeks.
Another step that senior living operators are taking is robust and repeated testing. Again, at the beginning of the pandemic access to test kits was low, but Pathway has been testing both employees and residents on a regular basis for the past month. Temperature checks and monitoring of other symptoms can be done far more frequently in between actual tests.
One particularly pernicious aspect of COVID-19 is the fact that a still-unknown number of people who become infected remain asymptomatic, but nonetheless contagious. Because of this, for the critical safety of residents, Pathway and other operators have ceased all visitation.
“The next phase is figuring out how to open up our communities so that we can invite visitors back, but also new move-ins,” said Schwartz. “Testing is really critical for any new residents who want to move into our communities.”
In the near term, the sector has most definitely been impacted from a valuation standpoint. Leasing activity is slowing, driving down the income for nearly all assets. This is occurring at different degrees, however, depending on the type of property within the sector.
For example, 55+ communities—which have a more discretionary population—are seeing potential residents hold off as they wait and see where things go with the pandemic. Even if someone did want to move in, they may have trouble selling their home in the current economy.
Even in more necessity-based properties like assisted living memory care facilities—which are Pathway’s main focus—leasing activity has also pulled back. The fear of COVID-19 has left many reluctant about moving into these facilities, feeling they may be safer in their homes for now. Additionally, those who would potentially be paying for the lease may suddenly face financial problems because of the economic downturn.
“Investor interest has pulled back, and that affects values. That is likely to continue until we see light at the end of the tunnel with a vaccine,” Schwartz said. “That being said, I believe this will also really slow down development. It’s going to be very challenging to capitalize from a construction loan standpoint, as well as finding equity willing to do that.”
At the moment, there is plenty of supply, especially now that lease velocity has slowed down. That includes all facets, from active adult and independent living to assisted memory care. Once things settle down and all of these properties start to get absorbed, it will likely still be some time before the new supply pipeline starts to rev back up.
Further out, nothing has changed as far as demographic trends. Baby boomers are still aging, so in the mid- to long-term view, demand for this product will eventually outshine any oversupply, bringing capital back into the sector.
In fact, there may be an artificial rise in demand before we know it. Those holding off on moving into these communities because of the pandemic are likely to fill up available units once the health concerns are more under control. Discretionary residents looking at low-acuity facilities will be slower to bridge this gap than those needing the higher levels of care available at an assisted living facility.
“If it’s a ‘V’-shaped recovery, I think you’ll have a lot of pent up demand and people should have the adequate balance sheets to be able to move into these communities,” said Schwartz. “If it’s a ‘U’-shaped or protracted recovery, it’s going to be more challenging and people may not be able to sell their homes when they get out of this or have sufficient income to pay the rent.”
The senior living asset class had been riding a high before the pandemic, but it’s too soon to tell how long until the sector can regain those strong fundamentals. Like everything else, so much depends on how long this economic downturn lasts.