Slowly but surely, the performance of seniors housing assets is improving. While rent growth in 2022 in the sector represented a period of catch-up after the pandemic stymied the ability of operators to raise lease rates, continuing rent increases in 2023 began contributing to more meaningful net operating income recovery, according to Walker & Dunlop’s recently released Senior Housing Outlook report.
Now, seniors housing owners are positioned for a sustained period of significant revenue expansion amid improving occupancy and a shortfall of new inventory, reports the Bethesda, Maryland-based commercial real estate financing and advisory firm. The undeniable demographic trends remain favorable: By 2035, Walker & Dunlop points out that the number of U.S. citizens over the age of 85 years old will increase by approximately 75 percent to over 11 million individuals.
Currently, there are roughly 2 million individuals in nursing homes and assisted living communities across the country. Nursing facility data from the Center for Medicare & Medicaid Services (CMS) and assisted living data from the American Health Care Association and the National Center for Assisted Living (AHCA/NCAL) indicates that the expected 75 percent increase will occur over the next decade, according to Walker & Dunlop. It is likely there will be supply shortage unless more communities are built.
“We continue to recover from COVID, and this year has been a nice move toward more normalization across the board with annual rent rates growing at approximately 4 percent in the third quarter this year. And, many primary markets are still achieving rent growths in the high single digits,” observes Kevin Giusti, senior managing director in Walker & Dunlop’s Charlotte, North Carolina office, who is responsible for seniors housing, skilled nursing and hospital financing. “Operating margins still aren’t where they were prior to the pandemic, but they’re closing the gap as occupancy improves, expenses plateau and rents grow.”
Finance Market Thaws
Seniors housing occupancy has grown for 13 consecutive quarters, according to the National Investment Center for Seniors Housing & Care (NIC). In the third quarter of 2024, a quarter-over-quarter increase of 70 basis points bumped average occupancy in the U.S. up to 86.5 percent, a level just a notch below what it was in late 2019. Additionally, the annual number of seniors housing unit starts has declined to below the number of units being delivered, the organization says.
Walker & Dunlop
The brighter fundamental environment has begun to spark more financing activity, say Giusti and Daniel Baron, director of Federal Housing Administration (FHA) finance with Walker & Dunlop in Charleston, South Carolina. One driver has been newer seniors housing assets that had difficulty leasing up during the crisis and lost value as operating margins shrank and interest rates escalated. But as those properties finally achieve higher rates of occupancy, they are becoming candidates for permanent debt insured by Fannie Mae, Freddie Mac and the Department of Housing and Urban Development, they note.
Many of the best candidates for the loans are located in primary markets as these markets show greater census and rent growth without any new inventory coming on board, Giusti and Baron add, while a greater number of assets in smaller markets are still struggling to gain occupancy, rent growth and proper staffing. Still, depending on a property’s location and sponsor, lenders have shown an inclination to stretch beyond lower underwriting parameters that became more commonplace following the pandemic recovery.
“The lending community is more bullish — a lot of people are doing the supply-and-demand math and can see opportunities on the horizon,” Giusti explains. “From meetings we’ve had during industry conferences recently, our sense is that capital that has been on the sidelines for several quarters is ready to pursue deals.”
Meanwhile, lenders familiar with skilled nursing facilities continue to search for deals in that space, he reports. Just as improving operating conditions are benefitting private pay seniors housing, higher federal, state and insurance reimbursements are furthering the recovery within the skilled nursing sector.
“We’ve been in the middle of skilled nursing deals where reimbursement has increased, and it has significantly moved the needle in terms of underwriting,” Giusti says. “Those facilities, too, are close to returning to their pre-COVID operating margins.”
Construction Still Sidelined
Except for projects like entrance fee continuing care retirement communities (CCRC) — where entrance fee deposits can help fund the project and where strong demand for high-end projects outshines construction costs and capital costs — lenders currently have little appetite for financing new construction, Giusti and Baron say. That’s the case despite a looming shortage of seniors housing units to adequately serve the aging population, they add.
Even though the benchmark secured overnight financing rate (SOFR) has ticked down roughly 0.75 percent since mid-September, construction debt prices of around 8 or 9 percent are still double what they were a few years ago, Giusti says. At the same time, lenders today only want to provide debt up to 55 or 60 percent of a project’s cost, which is down from around 70 percent prior to the spike in interest rates, and construction material prices remain inflated.
What’s more, seniors housing buyers in some cases can choose the more attractive option of acquiring a newer but unstabilized asset for less than what it would cost to build a new project, report Giusti and Baron. “We’ve been monitoring several deals over a few years in markets where there was a good amount of construction but where the assets never really filled up,” adds Baron. “Any new construction is still going to depend very heavily on the market and demographics.”
— By Joe Gose. This article was written in conjunction with Walker & Dunlop, a content partner of Seniors Housing Business.
To learn more about Walker & Dunlop, click here. To read the 2024 Seniors Housing Outlook from Walker & Dunlop, click here.