SENIORS HOUSING COMMENTARY
SUMMER 2024
INTRODUCTION
As the Seniors Housing market in the U.S. continues to gain momentum, we polled industry players to gain insights into the types of opportunities being presented to investors and developers.
As demand for seniors housing continues to grow, the total number of occupied units across all acuity levels continues to set records. All of NIC’s primary markets have now seen seniors housing occupancy levels surpass 80%. Occupancy averages continue to lag pre-2020 levels; this is a result of buildings completed just prior to or during the pandemic finally reaching stabilization rather than a reflection of a lack of demand. With population growth among the prime renter age group of 75+ exceeding inventory growth, the national average occupancy rate could hit 90% by 2026. The market is expected to see an increase in the number of occupied units by roughly 10%, according to NIC projections.
As staffing and wage growth have normalized, margins are starting to expand at faster rates. While newer vintage buildings have more pricing power, overall average rents have increased by 42% since 2015. Meanwhile, the average net worth for households in the prime renter age group have more than doubled to over $1.6 million over the same time period, giving operators a long runway to continue to push rent growth and margins.
The market has seen a slight increase in construction lending but not nearly enough to build the estimated 600,000 new units needed by 2030. Currently, the amount being invested into the space is only 25% of what is needed to meet future demand.
We believe the seniors housing sector will continue to be one of the best-performing asset types in the coming years as it has been for the past decade.
RECAP
Southeast and Mountain West markets are the most attractive to investors over the next year
Long-term hold and value-add are the primary focus for those investing in Seniors Housing properties
Access to capital remains a concern at some level to 64% of those who responded to our survey
Property listings are anticipated to increase through the end of the year
OPPORTUNITIES & STRATEGY
Q: Considering the state of the economy, what investment strategies are most appealing to help mitigate risks in the sector?
A: The most appealing strategy according to the respondents in our survey is to find a way to capture the middle market for seniors. By 2030, the number of residents age 75+ in the U.S. is projected to increase by 25% to nearly 30 million, 16 million of which will be middle-market seniors.
NIC-sponsored Milken Institute research indicated that repurposing distressed senior living properties was one of four strategies to better serve middle-market seniors. Value-add investments were one of the most sought-after deals during the first half of 2024.
68% OF RESPONDENTS EXPECT TO SEE MORE DISTRESSED DEALS (RECEIVERSHIP, REO, SHORT SALE) COME TO MARKET DURING THE SECOND HALF OF 2024 WHEN COMPARED TO THE FIRST HALF OF THE YEAR
Source:
FASTEST-GROWING AGE 75+ POPULATIONS
8% Pivoting to Tertiary Markets 27% Focus on High-Growth Markets 29% Middle-Market and Value-Add Investments 13% Adding AI Tools and Software to Improve Staff Productivity 23% Regional Diversity
TO
NEVADA ARIZONA
2024 Berkadia Seniors Housing Investor Poll
OPPORTUNITIES & STRATEGY
Q: Do you anticipate property offerings to increase or decrease through the end of the year?
A: While 2023 started slow and finished comparatively strong in terms of number of deals, the M&A market was busy right out of the gates in 2024 and has only picked up pace as the year has gone on. According to those who responded to our poll, 75% expect to see the number of properties on the market increase through the end of the year as sellers look to capitalize on the momentum created earlier this year.
OF PARTICIPANTS SAY THE UPCOMING PRESIDENTIAL ELECTION WILL NOT IMPACT THEIR BUSINESS STRATEGY
Q. What is your primary focus when investing in Seniors Housing properties?
A: Long-term hold and value-add were the top investment areas for those who responded. With the average fund life between six and seven years and highgrowth markets with regional diversity among the top investment strategies, we looked at the states that are expected to see the largest population increase of the prime renter age group (age 75+) by 2030. Additional research conducted by Oxford Economics revealed that more seniors are working longer; labor participation rates among the age 65 to 69 cohort was 33.6% and markets with the highest job growth were also those that
have seen the fastest-growing senior populations. Furthermore, migration soared during the pandemic with many baby boomers following their families to popular markets in the Mountain West and Sun Belt. As those seniors who are in the labor market begin to move towards retirement, those choosing to age in place will be the catalyst for the rapid growth expected in markets like Austin, Salt Lake City, Boise, Atlanta, Boulder, Las Vegas, and Raleigh-Durham which have historically recorded senior populations well below the national average. Many are also home to major universities, suggesting that seniors are attracted to these communities for cultural amenities and access to top-tier universityoperated medical centers.
OPPORTUNITIES & STRATEGY
Q. Rank the top regions you think present the most desirable investment opportunities over the next twelve months.
A: Looking at where investors and bankers are interested in deploying capital over the next year, the highgrowth regions in the Southeast and Mountain West states were at the top of the priority list for our respondents. These were followed closely by the east coast states that make up the Mid-Atlantic and Northeast regions, along with Florida (see our regional breakdown map on page 12). The DMV was
another high-growth area in terms of jobs and population and boasts one of the highest median income levels for seniors in the nation. Florida has long had one of the highest bases of seniors in the nation and has seen the greatest rate of in-migration of those in the age 65-74 cohort over the past decade. Of the major regions in the U.S., the Northeast boasts the highest median age – three of the ten states in the country with the oldest population are located here. Florida and the Northeast region provide an already established renter base given their respective demographics.
The full rankings based on our poll question are as follows:
SURVEY RESULTS: REGIONAL RANKINGS FOR DESIRABLE INVESTMENT OPPORTUNITIES
1. Southeast
2. Mountain West
3. Mid-Atlantic
4. Northeast
5. Florida
6. Texas
7. Pacific Northwest
8. Great Lakes
9. California
10. Anywhere in the U.S.
11. Plains States
75+ POPULATION INCREASE BY 2030
Source: U.S. Census Bureau;
Q: What do you see as the biggest operational challenges for communities through the end of the year?
A: Rising operating expenses were at the forefront of our respondents’ concerns, with 59% listing it as their chief issue for the remainder of 2024. While occupancy across the seniors housing sector has increased for 14 consecutive quarters, 20% of people surveyed said it is expected to be their top challenge for the back half of this year.
OPERATIONS
6.1% AVERAGE ANNUAL INCREASE IN OPERATING EXPENSES
Source: Recent quarterly earnings statements from Welltower, Ventas, Omega, and CareTrust REITs
Source: 2024 Berkadia Seniors Housing Investor Poll
Q: Rank the operational expenses you see increasing the most over the next year.
A: Seniors housing operators continue to face rising insurance premiums for assets. Property insurance, especially in areas more likely to be impacted by natural disasters, has increased at a much higher rate. While factors like
OPERATIONS
natural disasters are out the hands of operators, many have taken creative approaches with managers to keep the risk profile lower. The use of captives is an expanding trend in the industry to help reduce insurance costs. Companies will create their own insurance company with the help of an actuary to insure the property based on industry data.
INCREASE IN AVERAGE ANNUAL PAY
$25.08 AVERAGE HOURLY WAGE FOR NURSING & RESIDENTIAL CARE FACILITIES NATIONWIDE UP 4.1% Y-O-Y
Source: U.S. Bureau of Labor Statistics
Q: What are your expectations for cap rates in the sector through the end of the year?
64% OF RESPONDENTS EXPECT CAP RATES TO REMAIN THE SAME THROUGH THE END OF 2024
21% OF RESPONDENTS EXPECT TO SEE A SLIGHT INCREASE OF <50 BPS THROUGH THE END OF 2024
Deal volume for majority independent/majority assisted living and active adult communities totaled 176 completed deals during the first half of 2024, which equates to a 28% increase compared to the first half of 2023. The 99 deals closed during the second quarter alone is the largest single-quarter total in over five years for these specific asset types. The median price per unit reached $129,219 in 2Q24, the highest quarterly median price since 3Q22.
SALES TRENDS
PRICE PER UNIT & CAP RATES
(Seniors Housing excluding SNF)
SENIORS HOUSING TRANSACTION TRENDS
(Majority IL, Majority AL, and Active Adult) Source:
Q: Given the current economic landscape and looking ahead to 2025, what is your level of concern regarding access to capital?
A: As we enter the second half of 2024, the debt market is beginning to thaw regarding capital access. According to data from the St. Louis Federal Reserve, the Federal Funds Effective Rate (Fed Funds) has remained at 5.33% since August 2023. While whispers of a cut continue to swirl, creative approaches to access capital are more commonplace. One
DEBT TRENDS
of those creative solutions has been REITs stepping in to fill the void left by banks. Since the failure of five banks in 2023, many smaller and regional banks have slimmed down, narrowing the capital pool even further. According to data from Real Capital Analytics, Welltower (WELL) has been the largest single issuer of sales, refinancing, and new construction debt in 2024. Banks still are the primary lender in the space, issuing roughly 51% of the nearly $4 billion during the first half of 2024, with the average loan being $19.1 million.
55% OF PARTICIPANTS HAVE DEBT COMING DUE IN THE NEXT 12 MONTHS
The second quarter of 2024 marks a milestone for the seniors housing sector as the total number of occupied units surpassed one million for the first time.
Both secondary and tertiary markets reported a median occupancy rate of 91.2% at the end of 2Q24, 170 bps above that in the 31 NIC primary markets. With a 90 bps increase since the end of 2023, secondary markets have seen the largest increase followed by tertiary (60 bps) and primary markets (50 bps).
As operators approach what is historically the busiest time of year for leasing activity, look for median occupancy rates to continue to climb for what would be the 15th and 16th consecutive quarters in
MARKET TRENDS
3Q and 4Q24. An average of 14,405 net new leases have been signed during the third and fourth quarters since 2021. If that trend continues, the average occupancy rate for the sector could finish 2024 above 91% for the first time since 2019.
Turning our attention to rent growth, average rent has risen by roughly 3.5% nationally during the first six months of 2024. By comparison rent grew by 4.0% between January and the end of June 2023, indicating a slowing of rent growth. Tertiary markets saw the largest increase in rent to start the year, as average rent ended 2Q24 at $4,826, a 3.7% increase from the end of 2023. Bridgeport, CT ranks as the most expensive
market in the country for a seniors housing unit with an average rent of $7,932. The affluent New York City suburb is one of seven markets across the country to boast average rent in excess of $7,000 per month. Despite record wealth and growing incomes, baby boomers remain sensitive to pricing. Of the markets that ranked in the top ten for largest rent growth during the first half of 2024, six of them reported a decline in median occupancy over the same time period. While tertiary and secondary markets may be more sensitive to price increases impacting occupancy rates due to their smaller inventory totals, it is a trend to keep an eye on for primary markets going forward.
CHANGE IN MEDIAN OCCUPANCY
CHANGE IN AVERAGE RENT
ABSORPTION RATIO *
to Date though 2Q24 for NIC Map markets with more than 1,000 seniors housing
As the number of occupied units and occupancy rates continue to climb, the construction pipeline continues to shrink. The last time there was a quarter-over-quarter increase in the sector was between the third and fourth quarters of 2021 when the pipeline stood at 61,179 units being built. Since then, the number of units under construction has declined by roughly one-third to just over 40,000 units. While there is a consensus among those in the industry that more housing is needed as soon as possible, a combination of factors has undoubtedly slowed construction activity. The sector was hit extremely hard during the pandemic, buildings that were completed right before 2020
MARKET TRENDS
became difficult to fill, pushing away developers who might have capitalized on low interest rates. As the sector has recovered, the costs of construction have become prohibitive. According to the Associated Builders and Contractors, since 2020, the price of materials has increased by 37.7% and builders still face significant labor shortages, particularly among the specialty trades. For those looking to finance, the rise in interest rates has significantly increased loan payments from what they were four years ago.
Over the past 24 months, privately held development companies have been the top investors in the space, accounting for 79% of the $9.7
REGIONAL BREAKDOWN
billion in construction financing that has been issued according to data from Real Capital Analytics. Based on current construction timelines, those properties that broke ground in early 2022 have estimated completion dates of late 2024.
Developers remain focused on primary and/or coastal markets. Among the twelve markets with more than 1,000 units under construction, all are either a NIC Map primary market or in the case of Raleigh and Virginia Beach, located in a coastal state. With nearly 4,700 units underway, Washington D.C. continues to boast the nation’s largest pipeline, followed by Los Angeles, Dallas, Miami, and New York City.
INDEPENDENT LIVING COMMUNITY
ASSISTED LIVING COMMUNITY
MEMORY CARE COMMUNITY
