Question of the Month: Industry Recovery Process

by Jeff Shaw

Where is the industry currently at in the recovery process?

A period of soul searching

By Talya Nevo-Hacohen

Chief Investment Officer

Sabra Health Care REIT

The industry is well into its occupancy recovery, but margin recovery is still out of reach. Emerging out of the economic challenges of the pandemic, the industry is confronting dislocation in the capital markets and shifts in valuation that are not temporary. And finally, the industry is trying to figure out how to be relevant to the baby boomer generation, which will demand customized experiential living.

The seniors housing industry is in a period of soul searching, trying to figure out what and who it wants to be when it grows up, and then starting to navigate a path to get there.

We’re just getting started

By Michael Uccellini

President & CEO

United Group of Companies

We’re in the first inning of the next game. We are in the new Global Financial Crisis, except interest rates aren’t near zero percent — they are 5.5 percent. We have meteoric interest rate increases, sales activity is non-existent and construction lending is non-existent. Many deals are getting shelved or dropped. 

All that means less supply is coming online in the next few years in a market with a housing shortage. That will bode well for occupancies at properties that have already been built or are under construction. The senior population is dramatically increasing, and the baby boomer generation will demand different housing styles and programming. 

That said, we closed two deals in late October — a construction loan and a bridge loan. So deals are getting done with well-heeled and knowledgeable sponsorship. 

2024 will be a rough year with more turbulent and choppy waters. I do not see interest rates coming down until December 2024 and into 2025. I am hopeful that spreads will tighten in the second half of 2024.

Coach and listen

By Julie Podewitz

CEO & Founder

Grow Your Occupancy

Sales and occupancy are trending up, but are not back to pre-pandemic levels. The new-construction lease-up rate is slower. Standard benchmarks have gone from 60 to 80 percent pre-leased to 30 percent. Lease-ups are especially slower in memory care and assisted living. 

For some it’s been a mental challenge to shift back to pre-pandemic momentum. Staffing challenges have paralyzed sales directors into an “I can’t sell what I don’t believe in” state. The turnover at key positions is a hindrance as well. 

We are seeing disruption calm a bit in this area, but need to commit to valuing our team members by providing comprehension onboarding, coaching, key performance indicators and regular communication so they feel seen, heard and valued.

Targeted investment pays off

By David A. Smith

Principal, The Gatesworth Communities

Founder, Sherpa CRM & One On One Services

Author, “It’s About Time”

The high cost of capital plus shrinking margins make it likely that the seniors housing industry is facing a painful struggle in 2024, and likely beyond.

It is not surprising that many providers are retrenching, attempting to do more with less. And yet it is in this very context that some may benefit instead from using this time to try and do more with more — specifically when it comes to enhancing the consumer experience. 

Yes, there is a high cost of capital today (still nowhere near the peak of what we have seen over the past 30 years). There is also a very high probability of increasing occupancy, as well as potential ancillary revenue streams with some targeted physical plant- and staff-enhancing expenditures. Investment should increase the quality, frequency and personalization of service, activity and care offerings. This is the approach that we have taken with our small, upper-end portfolio in St. Louis, The Gatesworth Communities. 

This investment has enabled us to sustain higher rents, with fewer concessions, more ancillary revenue streams and a strong perceived competitive advantage at all levels of care. We believe that demand for seniors housing will continue to grow. As it does, we hope to use a targeted investment approach to further increase our competitive edge and our revenue potential.

Look for ways to boost margins

By Lynne Katzmann

Founder & CEO

Juniper Communities

In a couple of ways, this feels more like a trick question. I would turn it around and ask: What do we mean by recovery? Recovery to old occupancy levels? Recovery to old margin levels? Recovery to old levels of value?

Perhaps a better question to ask is: Where are we going? Where should the industry be setting its target for 2024 and beyond? What are reasonable financial targets for occupancy, margin and cap rate, and how will operations need to change to achieve these goals?

Before I go on, let me be clear. Occupancy has increased dramatically, and the majority of buildings in our core portfolio have not only recovered, but also have exceeded earlier occupancy levels. Revenues have increased and we’ve also been able to open up some new revenue sources, including payments from managed care and a better collection process for ancillary services. Unfortunately, at the same time, labor shortages and rapidly increasing wage rates together with increased costs of staples, like food and utilities, have cut into margins.

Many would say I’m an eternal optimist. That said, I do believe margins will return to pre-pandemic levels, although I believe we will get there in new, creative and often technology-enhanced ways. As far as value goes, we provide only one part of the value equation. The other part is market dependent. We will see.

In my mind, the key to thriving will be in tweaking — or, more likely, re-designing — our product for our coming consumer. Remember, even adult children today are looking for something different for their parents. 

Part of the answer includes rethinking our product from care and service to  one which is longevity oriented, providing a host of services that promote well-being to enable people to live not only longer but better. With that comes opportunities for new pricing strategies, and potentially new sources of revenue, which will help boost margins. 

The next two years look bright

By Bill Pettit

Managing Partner

Black Dog Capital Advisors

I believe the markets are shaping up very well for a strong recovery over the next 24 months. 

There are a few important hurdles. The industry still has a large volume of distressed properties to clear before there will be much interest in new development starts. 

Our high interest rates and inaccessible debt markets appear to ensure that existing inventory will benefit from strong demand and a return to strong revenue growth. In the meantime, we will continue to experience a steady trend of new demand from baby boomers.

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