Senior Housing - The Year In Retrospect

On today’s show we’re taking a retrospective look at what’s happened in the world of senior housing in the past year.

Unlike other multifamily asset classes, senior housing follows completely different demographic and adoption patterns. That is certainly born out in the data over the past year. Rental properties have seen very little change in vacancy during the pandemic. Sales and refinance activity of rental properties have been brisk.

According to data from NIC, seniors housing occupancy fell to another record low in fourth quarter 2020, though the rate of decline eased from earlier in the year: Occupancy declined 7.0% in 2020 to 80.7%. Underlying segment trends were similar: Majority Assisted Living (AL) declined 7.7% to 77.7% and Majority Independent Living (IL) declined 6.3% to 83.5%.

Nursing care occupancy averaged 75.3 percent in the fourth quarter. Inventory growth also slowed to just 1,626 units added in NIC’s top 31 metropolitan markets, the slowest pace since the third quarter of 2013. Personally, I’m glad to see that new supply is slowing down. In my opinion, the majority of primary markets are oversupplied. The opportunity exists in secondary and tertiary markets. That means paying close attention to the hyperlocal market conditions. We’re talking about the demand side of the equation, and the income demographics to support the senior housing economic model.

Of course averages don’t tell the full story. Results varied widely among metropolitan regions, according to NIC MAP, which found that the West Coast cities of San Jose, Calif., San Francisco and Seattle reported the highest occupancy rates at 88.5 percent, 86.8 percent and 84.8 percent, respectively. Houston, Cleveland and Miami saw the lowest occupancies at 73.5 percent, 76.6 percent and 76.7 percent.

We have an 80 bed assisted living facility scheduled to open in the next couple of months and we should be in a position to start taking reservations for residents in the coming weeks. My partner in that project also operates a number of facilities in the Dallas market. In that portfolio, there is a 1.6% vacancy rate as compared with a nation wide market average of nearly 22% vacancy.

The obvious question is what is being done differently in these facilities that is resulting in such a dramatically different vacancy rate. I believe it comes down to a few key differences.

1. These homes are built on the residential care model. These homes are smaller facilities with 12 to 16 residents per home. That contrasts with the big box model of hundreds of beds in a single building
2. We have not had any Covid-19 outbreaks in any of the facilities. We had a single staff member test positive for Covid-19 and they were immediately isolated from the rest of the staff and residents and fortunately we had no propagation of the disease into the homes.

This emphasizes the importance of having a highly differentiated product in the market. When we perform the intake interview for most new residents, they’re not coming from their own home. They are typically coming from an existing big box care facility and they hated it.

It is clear that there will be opportunities to acquire distressed assets in the coming months. Some have already appeared on the market. But success in the market starts with understanding the operating model for success, not just the averages.