Seniors housing occupancy continues to strengthen, says NIC analyst
By John Nelson
Increased demand for seniors housing has outpaced new construction, paving the way for occupancy gains, especially in independent living. The occupancy rate for independent living is currently hovering at 91 percent, according to Chris McGraw, senior research analyst at the National Investment Center for the Seniors Housing and Care Industry (NIC).
“When we look at occupancy, independent living is the highest occupancy rate for all the products that we track. It’s actually above where it was pre-recession,” says McGraw. “It’s completely recovered, even though it fell seven percentage points.”
McGraw’s commentary came during the closing presentation of the inaugural InterFace Seniors Housing Southeast information and networking conference on Aug. 21 in Atlanta at the Westin Buckhead. More than 300 operators, investors, developers and lenders in the seniors housing real estate industry attended the event.
How is the Southeast faring?
There is a tight correlation between the occupancy rate of seniors housing properties in the Southeast relative to the 99 markets nationwide that NIC tracks, referred to as the MAP 99. (MAP stands for market area profile.) There are 26 markets in nine states that NIC tracks that are categorized as the Southeast.
The Southeast has an occupancy rate of about 90 percent, and the MAP 99 has an occupancy rate of 90.2 percent, a spread of 20 basis points. According to McGraw, historically the spread has been approximately 60 basis points. Reflecting the national trend, occupancy in the Southeast has risen to its highest point since the recession due to increased absorption and concentrated construction.
“Occupancy (in the Southeast) has been trending upward and is currently at its market cycle peak looking back to 2008, and that’s because absorption has been outpacing inventory growth on a two-to-one basis,” said McGraw. Specifically, absorption has been growing at about 2 percent a year, while supply has been growing at 1 percent annually.
“Based on what we have in 2014 so far, absorption is on pace to be around 2.5 percent, so the demand should be similar to last year,” continued McGraw. “Supply should slow down to 1.5 percent, and that means the Southeast should continue to see some increases in its occupancy, [barring] some type of unforeseen shock.”
Independent versus assisted living
For the foreseeable future, there is going to be minimal construction in the independent living space. McGraw expects occupancy to rise above 91 percent in that product segment as a result. New supply is expected to continue to grow at a rate of less than 1 percent relative to the current inventory, and demand is projected to grow at about 2 percent.
Meanwhile, the occupancy rate of assisted living is currently about 89.3 percent and is expected to remain flat through 2015 as a result of the new supply expected to hit the market. As of the second quarter of 2014, the supply of assisted living units as a percentage of existing inventory
is about 3 percent. NIC is expecting that figure to accelerate to roughly
4 percent by mid-2015. Out of all the seniors housing product types that NIC tracks, assisted living is the only one that decreased in occupancy from the first to second quarter of 2014.
It’s definitely a seller’s market, says panel
By Danielle Everson
The seniors housing market has been a seller’s market for the past two years, according to Allen McMurtry, executive managing director and principal for Cassidy Turley. Improving market conditions have unleashed pent-up demand, leading to a wave of transactions.
McMurtry moderated the roundtable, “The State of the Seniors Housing Market,” during the InterFace Seniors Housing Southeast Conference that took place at the Westin Buckhead on Aug. 21.
The panel included Steve Gilleland, managing director of healthcare finance for CapitalSource; Scott Stewart, founder and managing partner of Capitol Seniors Housing; Joe Weisenburger, vice president of seniors housing for Health Care REIT Inc.; Matthew Ryan, director of Houlihan Lokey Healthcare Group; and Richard Hutchinson, president, CFO and co-founder of Discovery Senior Living.
Because of the wave of property and portfolio sales during the past few years, Weisenburger said there is a lot less premium product available and more development is taking place.
“More available capital in the seniors housing market is leading to the funding of more seniors housing development deals,” said Weisenburger. “The developments that are happening today will be the takeouts that the REITs and other capital sources do over the years. But there aren’t going to be as many large portfolio transactions, absent the healthcare REIT buying another REIT, or different financing sources buying other portfolios.”
Ryan said that about five years ago, a healthy-size seniors housing portfolio for an owner/operator included five or six properties. Today, that number has increased to 15 to 20 seniors housing communities. Houlihan Lokey Healthcare Group is focused on portfolio transactions.
“I think there is still a significant number of transactions out there that are in the $100 million to $500 million range. I think the multi-billion dollar transactions — to Joe’s point — there aren’t many of those left,” said Ryan.
Gilleland of CapitalSource noted that the seniors housing development occurring today is being undertaken by owners who have no long-term hold plans.
“We’re seeing a lot of folks coming to us for construction financing. Unfortunately we’re not doing it on the assisted living side, just skilled nursing at this time,” said Gilleland. “I’m talking to people who say they are doing the roll-up and then they have an exit strategy either with a REIT or a private equity fund.”
Tutterow: The great unlocking of the housing industry is to come
By Haisten Willis
Kennesaw State University economics professor Roger Tutterow, who delivered the keynote economic overview at the InterFace Seniors Housing Southeast conference on Aug. 21, has good news to share about the future of the economy.
Tutterow, who has made appearances on CNN and been quoted in The Wall Street Journal, opened up by saying consumer confidence will return to what he considers “normal” levels by the end of this year. He also predicted there will be a lot more movement in the housing industry — including seniors housing — in the near future.
While many homeowners remain upside-down on their mortgages, Tutterow predicted a “great unlockening” later this year as housing prices recover and more people are able to make long-awaited moves.
“For the vast majority of American households, a large percentage of their wealth was not in their 401(k), but in their house,” Tutterow said. “We at one time had $13.5 trillion in equity in our homes. That was the peak of the housing market. By the time we got to late 2008, early 2009, it was down 60 percent.... The good news is we’ve been gradually amortizing these loans, and home prices have been rising.”
Many of those moves, he predicted, will come in the form of Baby Boomers settling into seniors housing. Their children, often called the Echo Boom generation, have embraced living with their parents for a few years after college, but will soon be purchasing their own houses on a large scale.
Reasons for growth
Many factors point to strong growth in the seniors housing industry, Tutterow says, not the least of which is the sheer number of Boomers reaching retirement age every day. Moreover, people are living longer on average.
“Between 1960 and 2010, we saw about a five-and-a-half year increase in the life expectancy for someone at the age of 60,” Tutterow said (see bottom graph, page 31). “Not only are Baby Boomers moving into the senior age, but as life expectancy goes up it means they will occupy senior housing for a longer period of time. The question that has to be resolved is what will happen to the age at which they enter senior housing.”
Around the country, Dallas and Denver homes already are worth as much as they were before the recession, said Tutterow. Atlanta is a top market for investors buying homes to rent. Florida enjoyed a bigger housing boom than the rest of the Southeast before the recession, and fell harder than its regional neighbors when the economy tumbled. However, the Sunshine State is now recovering nicely and home prices are again rising faster than they are in the rest of the Southeast.
This trend coupled with stabilization of the banking industry points to a stronger economy in the near future. “At the end of July, more banks were profitable nationwide and in Georgia than at any time since 2006,” Tutterow said to the crowd gathered in Atlanta’s Westin Buckhead hotel. “The banks are coming back.”
Job growth has been slower than anticipated. According to the Bureau of Labor Statistics, total nonfarm employment increased by 142,000 nationwide in August, compared with an average monthly gain of 212,000 over the prior 12 months. The economy has been adding jobs since early 2010.
Tutterow said the economy has reached December 2007 employment levels. States with a heavy exposure to residential real estate, such as Florida, Arizona and Nevada, lost the most jobs during the recession. In contrast, states with rich oil resources, including Texas and North Dakota, have fared the best.
“It’s all about oil,” he said. “My friends in Texas never really thought we had a recession.”
In fact, Tutterow said fracking could lead the United States to become oil independent within the next 10 years. Oil prices are seeing a positive trend as well, recently falling below $100 per barrel.