If you’ve been listening to this show for a while, you’ll know that I’m a huge believer in the laws of supply and demand.
On today’s show we’re going to look at what’s happening in new construction of senior housing. In virtually every market I examine, I’m seeing signs of saturation. Despite this, new construction projects are everywhere. The projects completed two years ago aren’t full, and there are thousands of more beds coming into the local market. I’m left wondering what market study the lenders looked at before approving the project.
A new report just published by Marcus and Millichap aims to put some numbers behind what we’ve seen intuitively.
Units under construction represent approximately 10 percent of existing inventory, limiting the potential for a rapid turnaround in operational efficiencies any time soon.
In the most saturated markets, new units represent more than 13 percent of inventory.
Frankly, this boggles the mind. I’m asking myself how any self respecting lender would finance a new project with market numbers clearly showing over-supply.
I’ve been having direct conversations with senior living operators over the past several weeks to try and understand the dynamics in the market.
My take is that operators are vying for market share and are willing to take a hit on operations in the short term in order to be positioned to win the war when the largest wave of baby boomers hit assisted living. The size of the market is expected to nearly double over the next decade. Back in 2012, senior citizens made up 12.8% of the total population. By 2028, they’re expected to represent over 20% of the population.
Cap rates have started to compress. Assisted living assets are highly sought after, which has narrowed the average cap rate relative to independent living levels. Overall, the average cap rate for independent living trades is in the mid-5 to mid-6 percent area, assisted living assets trade for an average be- tween 6 and 7.5 percent, and skilled-nursing properties change hands at an average in the high-11 to high 12 percent area, based on location and quality.
Then along comes Covid-19. The truth is that 93% of assisted living facilities have evaded Covid-19 so far. The care facilities most impacted by the pandemic are those long term care facilities and skilled nursing facilities. Many people in the general public don’t know the difference between a skilled nursing facility versus an assisted living facility.
The memory of outbreaks in long term care facilities is going to remain in people’s minds for some time to come.
Staffing has been one of the largest challenges facing this industry under normal circumstances. Tens of thousands of employees walked off the job because of fear of catching the disease. Those who remained have demanded higher pay. Labor represents the single largest cost in an assisted living facility. Hourly rate increases in excess of 50% are expected later this year in order to attract and retain quality staff. This fact alone will challenge the economic model for assisted living. We are seeing long lasting economic impact to the sector as a result of the pandemic.