Question of the Month: Labor Impact on ROI

With workforce expenses continuing to pose a challenge to operators, should investors lower ROI expectations?

Tech softens the blow

By Geert Houben

Founder & CEO

Cubigo

It’s been well noted that 2020 is poised to be a year of disruption, holding true across many of the factors that go into seniors housing operations. Rising costs of living and growing competition must guide owners and investors to think innovatively. 

Leveraging technology to streamline operations can not only increase efficiency, but also decrease the number of work hours required. If stakeholders can get ahead of the game and look toward the future, there’s no reason why they should have a diminished forecasted return.

 

Find great partners

By Brian Sunday

Senior Portfolio Manager

AEW Capital Management

Workforce expenses are one of several challenges driving returns lower in the seniors housing sector today. 

Market selection and teaming up with strong operators that are adapting to this difficult labor market are essential for investors and developers trying to meet certain return expectations.

 

A case-by-case issue

By Dan Baker

Director, National Senior Housing Capital Markets

Cushman & Wakefield

Expense increases are unquestionably affecting the entire industry in this era of low unemployment, but not all communities are affected equally. Certain properties, markets and operators are able to offset the impact through aggressive rate growth and technology utilization to maintain margins.

In instances whereby revenue increases are harder to achieve, such as older properties, rural properties or overbuilt markets, most investors price that understanding into their underwriting when making an offer. However, as long as debt capital remains this attractive, many investors will continue achieving attractive returns.

 

Temper your projections

By Curtis King

Senior Vice President

HJ Sims

Wages have impacted seniors housing returns on two fronts. First, construction labor shortages have increased costs and factored into delays. Second, given labor is the primary operating expense, the current employment environment has put downward pressure on operating margins, which most likely will result in lower returns. 

With the labor market showing no signs of slowing down, we underwrite to higher development costs and lower profitability. The impact has been mitigated in part by buyers being more price conscious and developers being more selective. By being more constrained, investors can still achieve appropriate risk-adjusted returns.