Modest gains seen for senior housing

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A pair of reports, one from CBRE and one from NIC Map Vision, show that the senior housing market has made modest improvements as it recovers from the sharp downturn in occupancy it experienced during the pandemic.

Market or markets?

The senior housing is highly fragmented with NIC Map Vision dividing it into majority independent living (IL), majority assisted Living (AL) and majority nursing care (NC) segments. CBRE adds active adult (AA), memory care (MC) and continuing care retirement community/life plan community (CCRC/LPC) segments.

Point in time

The NIC Map Vision report gives a quarterly snapshot of current state of the market for senior housing. The data is gathered from 15,000 properties in 140 metro markets. The report discussed here is a freely distributed extract from a more detailed report that is available to their paying clients.

The report shows that occupancy, which had been over 90 percent for IL properties and over 85 percent for AL and NC properties, plunged by over 10 percentage points when the pandemic hit. Occupancy bottomed out in early 2021 and has been recovering slowly. In Q1 2022, occupancy was 83.1 percent for IL properties, 77.9 percent for AL properties and 77.6 percent for NC properties.

NIC Map Vision reported positive annual rent growth for the three senior housing market segments, with rents rising 2.7 percent for IL properties, 4.1 percent for AL properties and 2.5 percent for NC properties. These are well below the rates of rent growth being seen for market-rate multifamily properties.

Cap rates were reported to be 5.4 percent for IL and AL properties and 6.0 percent for NC properties.

Asking investors

The CBRE survey is done twice each year. It takes a different approach to collecting its data. Rather than gathering data on the operations of senior housing properties, it asks investors what they are seeing in the market. The investors are also asked their expectations for where the market is heading. The survey was taken in February, before the latest meeting of the Federal Reserve Board reset interest rate expectations.

In addition to covering more segments of the senior housing market than the NIC Map Vision report extract, it breaks the markets into more categories. These include whether the property is class A, B or C and whether it is in a core or non-core area. It also focuses more on investment parameters, particularly on cap rates, than on operational data.

A pattern that emerges from the data is that higher cap rates are associated with property types whose operation is more labor intensive. Right before the pandemic struck, cap rates were around 6.8 percent for IL properties, 7.2 percent for AL properties, 7.8 percent for MC properties and 12.4 percent for NC properties. After rising in late 2020, cap rates have been trending downward. They are currently around 6.7 percent for IL properties, 7.4 percent for AL properties, 7.9 percent for MC properties and 12.0 percent for NC properties.

An interesting observation in the report is that the cap rate spread for IL and AL properties over market-rate multifamily properties in 2022 is the same as it was in 2014. It is about 200 basis points for IL properties and 260 basis points for AL properties.

Looking ahead

When asked which market segment presented the greatest opportunity for investors, the results came back nearly in the reverse order of the amount of care required by the resident. AA was cited by 34 percent of investors while AL was cited by 26 percent and IL was cited by 23 percent.

Most investors said that they were using anticipated rent increase rates of 1 to 3 percent or 3 to 7 percent in their underwriting. Generally, property types with higher levels of resident care had lower rates of anticipated rent increases.

The most investors said that they expected properties to recover their occupancy losses either in 6 to 12 months or in 12 to 18 months. Property types with higher levels of resident care had longer anticipated time periods to recover their occupancy then did those requiring less resident care.

Investors cited staffing difficulties as the highest perceived threat to the senior housing industry.

The CBRE report is available here. The NIC Map Vision report is available here.