By Gary R. Lucas
Senior Vice President, Managing Director-Marcus & Millichap’s National Seniors Housing Group
While the reimbursement-dependent portions of the seniors housing market remain at a crossroads, other sectors are benefitting from the improving economy and housing market. Independent living assets, which recorded the sharpest decrease in occupancy during the recession, are now posting healthy gains. Occupancy in these facilities should surpass the rate at assisted living properties by year end as multifamily demand remains strong. Rents at age-restricted and Class A apartments, in particular, are climbing at a rapid pace, making independent living units a more-viable option for some seniors.
Additionally, some older residents may move forward with retirement plans at the first sign of a housing market bottom, which materialized over the past six months. Skilled nursing operators, meanwhile, are challenged by reduced reimbursements from state Medicaid programs. Also, some states are hesitant to shore-up Medicaid for the long term until the Supreme Court rules on the PPACA. A judicial strike-down of the entire bill will significantly alter federal funding for state programs and indirectly change Medicaid reimbursements. Other states, however, are moving forward with plans to privatize Medicaid. New York could be the first in a series of states to hand over reins of healthcare to the private sector to manage costs.
Chicago seniors housing fundamentals continue to improve with occupancies, rents and construction showing improvement. The Windy City ranked within the top 20 major metropolitan markets as of the first quarter of 2012, according to the National Investment Center for the Seniors Housing & Care Industry (NIC). Out of the top 31 markets surveyed, occupancy for independent living (IL) facilities increased nearly an entire percentage point on a YOY basis, reaching 86.6 percent at the end of the first quarter. Meanwhile, assisted living occupancy soared 190 basis points to 83.7 percent at the end of 1Q on a YOY basis. Rents have also increased, with rates rising 1.3 percent on a YOY basis to $2,736 per month. There are currently 640 units of IL housing under way, which is nearly double the number of units that came online last year. AL rents rose only 0.2 percent to $3,983 per month. Currently, there are 355 units of new AL housing under construction, a 20 percent increase in new development compared to last year.
Independent living facilities
Over the past 12 months, developers completed 4,600 IL units across the country, according to NIC, expanding inventory by 1 percent. Only 6,900 units are under way as multifamily builders are focusing their efforts on market-rate apartment projects. Occupancy improved 70 basis points over the past 12 months to 89.3 percent, though the rate held steady in the first quarter of this year. Portland and Las Vegas recorded occupancy gains or 360 basis points and 390 basis points reespectively, while IL facilities in Los Angeles reported a 200 basis point decline.
Rents are moving higher in step with occupancy, though significant gains are unlikely to be realized until occupancy breaks into the low-90 percent range. In the past year, average rents increased 2 percent to $2,699 per month. Growth is accelerating, as operators lifted rents 1.3 percent in the last six months alone.
Assisted living facilities
According to NIC, developers added 3,400 AL units to inventory in the past 12 months, expanding stock by 1.2 percent. An additional 6,500 units are under construction across the country, though downward pressure on occupancy is unlikely to materialize. In the first quarter, occupancy at AL facilities slipped 30 basis points to 89.8 percent. Despite the modest decrease, the rate is still 30 basis points higher than during the same period one year ago and 100 basis points above the recessionary low in the second quarter of 2009.
Through the recession, owners only cut quarterly rents twice, and over the past year, operators lifted rents 0.8 percent to $3,474 per month. In the first quarter, average rents climbed 0.5 percent, though rent growth will likely slow over the next six months as occupancy trends remain choppy.
Skilled nursing (SN) facilities
SN inventory declined by 2,700 beds year over year as profitability remains challenging due to state budget cuts, reports NIC. Currently, 5,700 beds are under construction, though that figure is unlikely to keep pace with the number of closures in the coming year. Over the last six months, occupancy at SN facilities has remained flat at 88.5 percent, and is down 30 basis points from one year ago.
The highest occupancy is in several New York cities, where Certificates of Need are difficult to obtain. Syracuse and Albany each boast stabilized occupancy rates above 95 percent. Average rents for SN beds were $266 per day in the first quarter, up 3.1 percent from last year. High reimbursement rates in Connecticut and Massachusetts put those states at the top of the ranking, while markets in Texas, Oklahoma and Louisiana pepper the bottom of the ranking.
Continuing care retirement communities
In 2011, approximately 19.4 million Americans were over the age of 75, the prime seniors housing demographic. By 2016, the number of residents in this cohort is expected to grow by 7.7 percent to 20.7 million people, creating a significant amount of demand for the product. Home values have stymied many would-be retirees from moving into independent living facilities or CCRCs. Housing prices have climbed 1.3 percent over the past six months, however, the first two-quarter gain since 2005. Currently, the national median home price is $166,000. Occupancy at entrance-fee CCRCs was 88.9 percent in the first quarter, relatively unchanged from the cyclical low due to challenges in the housing market. Rental CCRCs, meanwhile, reported occupancy at 88.7 percent in the same period, according to NIC MAP.
While investors are unlikely to repeat the banner trading year that was 2011, activity in the seniors housing sector is at a sustainable pace and demand will continue to filter into the product from outside sources. Last year, multi-billion dollar deals lifted prices and sales volume to rarely seen levels, and illustrates the maneuvering that industry giants will focus on as operating conditions become more challenging. In the skilled nursing sector, consolidation will remain an overriding theme as smaller operators without the advantages of scale find it difficult to compete with larger owners. In addition, small operators may divest ahead of a potential privatization of Medicaid, which would effectively force dispositions. Independent living properties, meanwhile, will attract the attention of traditional apartment buyers as cap rates in the multifamily segment remain compressed. Some of these buyers may underestimate the challenges of operating seniors housing facilities, even independent living ones, and return these properties to the market in just a few years.
Gary R. Lucas is senior vice president and managing director of Marcus & Millichap’s National Seniors Housing Group (NSHG). Contact him at gary.lucas@marcusmillichap.com or 415-963-3000.
