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Senior Housing Sector Getting Hit With Depressed Demand, Billions In Loan Maturities

Betting on a forecast "silver tsunami" of baby boomers seeking varying levels of at-home healthcare after retiring, developers in the five years leading up to the pandemic poured billions into new assisted living centers and skilled-care facilities.

But now, with that population hesitating to take the step into senior housing, many of these bets are in question as the sector deals with labor shortage, depressed demand and $2B in encroaching loan maturities.

“Some developers and investors made questionable decisions on operators who couldn't execute marketing plans to lease up buildings to stabilization figures, especially in the face of the pandemic, but also such more persistent factors as high employee turnover,” Partner Valuation Advisors National Practice Leader for Seniors Housing Brian Chandler said.


Demographics still point to a growing elderly population, but the road ahead for senior housing isn't as smooth as developers in the sector anticipated in the late 2010s.

“During the next 24 months, we'll most likely see more distressed acquisitions in the marketplace, as there will be undercapitalized owners who can't acquire the funding necessary to improve their assets, to remain competitive in the marketplace,” Chandler said.

Any such squeeze will be the legacy of the pre-pandemic building boom, when starts reached about 5% of inventory in 2017, followed by the pandemic and the more recent tightening of capital markets.

Roughly 7% of the $43B in outstanding senior living bonds is in default, according to data compiled by Bloomberg. That compares with less than 1% of the total municipal bond market.

“With almost $2B in retirement debt set to mature this year and a total of $3.5B by the end of 2024, Municipal Market Analytics expects that — absent an unforeseen surge of issuance — sector default and impairment rates will hit new highs,” analysts Matt Fabian and Lisa Washburn wrote in a May report.  

The picture of uncertainty for senior housing is despite improving fundamentals for the sector.

Demand is returning from the sluggish days of the early pandemic. National Investment Center for Seniors Housing & Care reports that senior housing occupancy in the second quarter of 2023 came in at 83.7%, up 60 basis points quarter-over-quarter.

“If we were to continue at this pace, that puts us back to the first quarter of 2020 occupancy by mid-2024,” NIC Senior Principal Caroline Clapp said. “At the same time, we just had our lowest quarter of new inventory arriving, so it's really a demand story.”

The rolling four-quarter starts in Q2 2023 came in at 1.7% of inventory, according to NIC data, down from 2.5% during the same quarter in 2022. 

Rising construction costs are putting downward pressure on development, with midlevel independent living construction ranging from $233 to $280 per SF, up a few dollars per SF from this spring, according to data complied by construction firm Weitz Co.

Senior housing rents gained 5.7% in the second quarter from a year earlier, according to the NIC, and that's expected to keep rising.

More than 75% of respondents to CBRE's most recent survey of senior housing executives expect rental rate increases of 3% or more over the next 12 months across all classes except skilled nursing, and no one expects decreases.


But despite rising occupancies and rents, investors seem more nervous about their properties than before. Nearly half of respondents to the CBRE survey said they expect senior housing cap rates to increase this year, compared with only 27% who said that in 2022. Respondents cited high borrowing costs and a tight capital market as the most significant threats to the sector over the next 12 months.

Also, it isn't clear that increasing rents will be sustainable over a longer term, as would-be residents compare senior housing costs with age-in-place costs.

“Even residents who can theoretically afford these rate hikes may become resistant after a certain limit,” wrote Omar Zahraoui, NIC principal in research and analytics. “It is also important to understand what both current and prospective senior housing residents are prepared to pay, and the potential impact of rate increases on the pace of move-ins and move-outs.”

Other ongoing headwinds for senior housing include staffing and workforce retention, and rising expenses such as wages and insurance will also continue to squeeze investment returns and operator margins within the industry, Chandler said.

Labor shortages and a high cost of labor have impacted the ability to get senior housing deals to pencil due to lower net operating incomes, Berkadia reports. The annual change in total employee compensation grew only 1.3% from 2017 to 2018, but even before the pandemic, it was starting to creep upward. From 2020 to 2021, the increase was 4.5%, and from 2021 to 2022, 5.3%.

Most nursing homes are short on labor, with 77% reporting moderate or high levels of staffing shortages, according to an American Healthcare Association mid-2023 report on the sector.

A possible longer-term headwind for senior housing is an attitude shift regarding aging in place and multigenerational households.

“The baby boomers have said that they want to age in place and they are trying to do that as best they can,” Clapp said. “Adult children have a little more flexibility than before, and there's better technology to help the elderly stay at home.”

In a poll this year by the University of Michigan Institute for Healthcare Policy, 88% of people between the ages of 50 and 80 said it was very or somewhat important that they live in their homes as long as possible.

The poll also found that 1 in 5 older adults had moved in the past five years, with about half of those who moved saying that they had moved to a home that was easier to get around and smaller, which points to strategies for aging in place. About 34% said their home has the necessary features that would let them age in place.


The high cost of senior housing may be another factor depressing demand as baby boomers age. A higher proportion of older renter households are cost-burdened, with more than 30% of income going to housing, compared to the renter population as a whole, according to the National Low Income Housing Coalition. Fifty-three percent of older renters are cost-burdened, compared to 47% of the general renter population.

“The need to serve the middle-income population will continue to grow,” Chandler said, with middle-income being those who have enough financial resources that they cannot qualify for government support programs such as Medicaid. These middle-income seniors risk using most of their life savings on private-pay options that they outlive.

“As this middle-income market continues to grow and due to the potential affordability issues that may arise, we'll most likely see these seniors move in with their adult children creating multigenerational households, or use home healthcare, which is becoming a preferred option for seniors,” Chandler said. “The combination of these factors may cause a lower capture rate for operators and developers.”

Multigenerational households are much more common than they used to be. In 2021, 18% percent of the older population lived with relatives of at least one other generation, about four times as many as in the 1970s, according to Pew Research Center.

During the worst of the pandemic, adult children realized that maybe mom and dad didn't need to go into a senior living facility so soon, Walker & Dunlop Managing Director of Seniors Housing and Long Term Care Investment Sales Joshua Jandris said, driving the length of stays down, and increasing the age at which people move in. In the long run, that attitude has the potential to depress demand, especially for non-needs-based properties.

The capital markets squeeze has changed investment patterns in the sector, just as it has elsewhere in CRE. The sector is now a spectrum from distressed deals to trophy-stabilized deals, Jandris said.

“These two bookends are alive and well,” he said, referring to distressed deals on one end and trophy deals on the other.

“But I would say with 80% in the middle, there's nothing going on, because if you can't pay all cash for it, or if you can't take it to Fannie, Freddie or HUD, bank rates right now are about 9%, and can go anywhere up to 12%.”

That means not only diminished volume in the market, but also a winnowing of the buyer pool, Jandris said.

“If we take a portfolio to market, we're getting north of 50 or 60 NDAs, but the amount of offers we're getting is probably maybe 10% of that, so maybe five or six offers,” Jandris said.

There continues to be a disconnect between buyers and sellers in the asset class, as sellers anticipate future rent increases, which argues for higher prices, while buyers continue to resist, Chandler said.

“While occupancies began improving throughout 2022 and 2023, we're still seeing some headwinds on the expense side, primarily around staffing and insurance costs,” Grandbridge Seniors Housing and Diversified Healthcare Finance Group Senior Vice President Meredith Davis told Bisnow by email.

Even so, her company is optimistic, Davis said.

“While managing these higher costs takes some adjustment, we're seeing our clients manage these challenges.” Davis said. “This year has been our most successful year with agency financings since the pandemic started. While interest rates have increased and credit standards have tightened, stabilized communities are still getting financed with very attractive agency debt.”

Grandbridge recently facilitated the sale of a portfolio of eight senior housing properties to four different buyers, with closings from December 2022 to August 2023.

“We've actually done very well with our senior portfolio — there's very little turnover, and seniors are very good about paying the rent,” said Avanath Director of Acquisitions Connor Mortland, who recently oversaw the company's acquisition of Rivers Senior, a 120-unit affordable senior housing community in West Sacramento, California, for $19M.

“I know that a lot of people would like to age in place,” Mortland said. “But when it comes to affordable senior housing, a large sector of the population will need it.”