A majority of senior living professionals believe that the Covid-19 pandemic will result in permanently higher operating expenses.
That’s according to the 2020 Seniors Housing Investor Sentiment Survey from National Real Estate Investor and the National Center for Seniors Housing & Care (NIC). This year’s survey garnered responses from 167 participants from a range of companies, including investors, lenders, developers, brokers and owners/operators. Most respondents identified as an owner or C-suite executive.
Ninety percent of respondents said that Covid-19 drove up operating expenses between March 1 and Aug. 1 of this year, with an estimated mean increase of 9.2%. And 57% of respondents said they anticipate a permanent increase in expenses as a result of the pandemic.
Operators have been spending more on equipment and supplies, labor, insurance and other items during the Covid-19 pandemic, although executives have in the past expressed mixed opinions to Senior Housing News about whether expenses will remain permanently elevated and compress margins.
Rising expenses and squeezed margins are only one of several challenges facing senior living communities, which could discourage investors, NIC Chief Economist Beth Burnham Mace said Thursday during a webinar discussing the survey findings.
Covid-19 continues to present headline risk and infection control concerns, although most operators have now adapted their operations to maximize resident safety, she noted. Other potential challenges include labor costs; the fact that existing senior housing stock consists largely of older buildings; and a shortage of high-quality operators.
However, Mace also sees many reasons why senior housing continues to be a good opportunity for investors, including the fact that the industry remains ripe for consolidation, has proven resilient in past economic downturns, and is a growing sector with increasing transparency and rising interest from institutional capital. Finally, there are the compelling demographics as the large baby boomer generation ages. Coupled with factors such as a lack of family caregivers, rising rates of divorce, and an increased focus on lower-cost sites of care, the demographic trend should result in healthy demand in the coming years.
“We’re all drinking out of the same hose with regard to demographics,” Mace said.
Investors do appear to find senior housing compelling, but pandemic-related pressures are compromising near-term prospects for the asset class.
In the five years between 2015 and 2019, the NREI/NIC survey respondents ranked senior housing as the most attractive property type for investment; this year, industrial and apartment properties ranked higher. This comes on the heels of the NCREIF Property Index showing a total return for senior housing investments at -1% in Q2 2020 — the first negative quarter for senior housing on this index since 2012.
Yet, the long-term picture is decidedly brighter than the near-term picture, with 52% of respondents saying that they have not changed their long-term investment plans for senior housing. And, although 36% of investors said they plan to invest less in the near term, 34% said they plan to invest more in the long term.
Transaction activity has been sparse, with about $4.4 billion of volume through the second quarter, Mace said. That compares to about $17 billion of volume in that time period a year earlier.
PGIM Real Estate hoped to have 45% of its $996 million senior housing fund committed by the end of this year, but only about 20% had been committed as of late August, NREI reported.
“Because of Covid, there is a lot of pricing discovery going on and a lot of transactions were pulled off the market with a significant bid-ask spread,” said Steve Blazejewski, managing director and senior portfolio manager for PGIM Real Estate’s seniors housing strategies.
About half of the survey respondents said cap rates are likely to rise over the next 12 months, while 24% expect no change and 23% expect them to decline. So far during the pandemic, Cushman & Wakefield has not seen a “broad correction” on cap rates, but underwriting has gotten more conservative, Managing Director and co-head of the Senior Housing Capital Markets Group Jay Wagner told NREI.
Indeed, 80% of survey respondents anticipate underwriting standards to tighten in the next 12 months.
However, the future is difficult to predict, with prospects for a Covid-19 vaccine still uncertain, and the possibility of a fall or winter resurgence in infections possible. Operating and expense fundamentals at the property level do seem to be improving, though, with 44.9% of respondents expecting occupancy to increase within the next year, and 55.3% saying that they expect rental rates to increase.
“Although respondents appear surprisingly optimistic that occupancies will rise, the overall average expectation is for a slight increase of 25.5 basis points,” NREI reported. “In addition, the results show a clear deterioration in confidence when compared to past surveys. Notably, 72% of respondents had predicted an increase in occupancies in the 2019 survey.”
Whenever the Covid-19 pandemic does pass, Mace is confident that the senior housing industry will recover, given how these communities meet consumers’ needs for shelter, care and life enrichment.
“The value proposition of senior housing, in my mind, has not gone away,” she said.
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