On today’s show we’re talking about some of the excellent global research performed by accounting firm Price Waterhouse Coopers.

Two days ago we talk about the worst asset class in the PWC survey, that is retail. Yesterday we talked about Warehousing and Fulfillment which are at the top of the PWC survey.

Today we’re talking about senior housing. This is an area where my company is making major investments this year. The senior housing and care sector is still generating buzz, and frankly has been for several years.

Who is investing in senior housing?

PWC reported that debt providers set aside generous annual allocations. This is consistent with my findings as well. Virtually every lender I speak with mentions that they have a strong interest in senior housing. Nearly 60 percent of the three largest health care REITs’ investments are in senior housing.

This year has seen a lot of new capacity.

A wide 16-percentage-point difference exists between occupancy rates for the most occupied senior housing market (San Jose at 95 percent) and the least occupied (San Antonio at 78.6 percent). Much of the excess capacity has been built in Sun Belt cities like Phoenix, and parts of Florida. But this over supply is mostly in primary markets. Some secondary markets and tertiary markets have been largely ignored and are facing acute shortages. 

We talk about senior housing as if it is a real estate play. It’s actually a service business with a real estate component. From an expense standpoint, the number one expense is staffing. In that sense senior housing looks more like a hotel than, say, an apartment building. 

The second major challenge in senior housing is labor. Increasingly, operators are reporting labor shortages in all occupations, ranging from care managers to executive directors. In the last year, average hourly earnings rose 2.7 percent—up from 2.5 percent on average in 2017. 

The key in senior housing in senior housing is attracting and retaining talent. Wages are part of the equation, but even more important are working conditions. That’s where we believe our senior housing model is superior not only for residents, but also for staff. 

There’s no question that many of the major players have built new capacity ahead of the demand. Much of this new capacity has been in primary markets. 

Taken in its entirety, it is a time for a cautious near-term approach in the senior housing sector. Currently, some operators face challenging market conditions since supply has outpaced demand. Operators and investors who underwrote deals with 90 percent or 95 percent stabilized occupancy rates a few years ago are facing pressures as they open into markets with 85 percent or lower occupancy rates. In a time of rising expense pressures, where average hourly earnings for assisted living operators are increasing at a 5 percent annual clip, achieving NOI expectations may be difficult. In fact, there was recently a highly visible bankruptcy of an operator in the San Antonio market. Many in the industry were surprised. Frankly I was not. Some of these new complexes are taking years to fill. 

You’ve heard me beating the drum of the supply and demand, supply and demand. It’s crazy to me the number of people that only seem to analyze the demand side of the equation when making investment decisions. That’s very dangerous.

On the other hand, investors who have partnered with solid operators located in strong markets are seeing outsized investment returns. Take a look at senior housing, but do so cautiously.