Seniors Housing Business

AUG-SEP 2018

Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.

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22 www.seniorshousingbusiness.com Seniors Housing Business n August-September 2018 In Decatur, Georgia, Solomon Development Services is building The Holbrook, a $73.7 million active adult community. Despite the fact that the property is going up directly across the street from Clairmont Crest, a well-established seniors housing community, the two owners believe they can co-exist by targeting both different acuity levels (active adult versus independent living) and income levels (luxury versus below-market-rate). Clairmont Crest ownership notes that the community is 100 percent full with a waiting list, so demand is ample. (Photo by Christina Cannon) By Jeff Shaw The numbers don't lie: despite healthy con- sumer demand, seniors housing is overbuilt. Absorption in the sector has been consis- tently positive and strong, according to the National Investment Center for Seniors Hous- ing and Care (NIC). The Annapolis, Md.-based, nonprofit data and analytics organization tracks data using the top 31 primary metropoli- tan U.S. markets. NIC numbers show that absorption has been particularly strong in assisted living, where it has held at over 3 percent of existing inventory every quarter for several years. However, new construction has outpaced that number, hover- ing around a 5 percent increase each quarter. Independent living features a similar trend, though slightly more muted for both absorp- tion (1.2 percent) and inventory growth (1.9 percent). The result has been a noticeable sag in occu- pancy rates. In the second quarter of 2018, the combined occupancy rate for independent liv- ing, assisted living and memory care hit an eight-year low of 87.9 percent. Broken out by segment, the data shows the occupancy rate for assisted living dipped to 85.2 percent in the sec- ond quarter, the lowest point since NIC started tracking the numbers in 2005. NIC predicts further occupancy declines for the immediate future. In short, consumer demand is healthy and seniors housing is attracting new residents, but the addition of new supply is occurring at an even faster rate. Consequently, occupancy rates are struggling. "The second quarter of 2018 was the 10th consecutive quarter in which supply out- paced absorption," says Chuck Harry, chief of research and analytics for NIC. Investors flocked to seniors housing in the wake of the Great Recession because the sec- tor proved to be more recession-resistant than other real estate asset classes due to the need- based component of providing care, according to Harry. "Seniors housing proved to be more resilient during that downturn in terms of both opera- tional and investment performance. That defi- nitely drew attention, especially from institu- tional investors," says Harry. "Seniors housing has proven to be less cyclical. This construc- tion cycle has been driven by the assisted living space." Unfortunately, NIC predicts several more quarters of sliding occupancy rates before demand and supply find a balance. Many developers seem to be building for the fabled Silver Tsunami of aging baby boomers. However, that demographic wave isn't due for another 10 years or so. The youngest baby boomers are just now retiring, with the largest spike in the 83-and- over population not coming until 2030, accord- ing to U.S. Census Bureau projections. The average age of an assisted living resident is approximately 87, according to the American Seniors Housing Association. "This year and next year we see moderate rates of growth in the 83 to 87 age cohort, but it does pick up thereafter," says Harry. "But in terms of when the baby boomer generation is apt to start seriously considering seniors hous- ing for its needs, that's likely a decade off." What do we do now? Developers often wave off the NIC numbers by pointing out that seniors housing is a local business. The prevailing wisdom is that many markets are still underserved, and it's simply a matter of finding those markets. But when supply and demand fundamentals are having such a clear impact on the industry as a whole, how can developers be sure they've found that underserved market? "There are a lot of people who have made mistakes. They have built on the wrong prop- erty, in the wrong market, with the wrong product, with the wrong unit mix, with the wrong architect," says Joe McElwee, develop- ment principal with Washington, D.C.-based private equity firm Capitol Seniors Housing. Capitol's pipeline currently includes 15 developments either opened, under construc- tion or awaiting building permits totaling about 1,350 units. McElwee says Capitol is con- stantly reviewing its market selection criteria, making sure that nothing is missed. "I'm always looking in the rear-view mirror and questioning myself and whether I have the best site, and whether a competitor could trump me and get a better site. We have a very disciplined approach to site selection, not only where the competitors are, how old they are and who they're being managed by, but also their relation to what we think is the right market." Market reports must be deep and multifac- eted for developers to be sure they're not con- tributing to overdevelopment, according to Occupancy Hits a New Low n Development Strong absorption isn't enough to outrun the feverish pace of new seniors housing development, particularly in assisted living.

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