After a halt in the development and construction of new projects in senior housing during the pandemic, growth is back — with investors and operators navigating economic challenges in order to seize demographic opportunities.
That’s according to data and insights shared during Senior Housing News’ recent BUILD conference in Chicago.
Construction lending and activity is rebounding as occupancy recovers, although inventory growth still is relatively slow, said Beth Burnham Mace, chief economist with the National Investment Center for Seniors Housing & Care (NIC). She sees development challenges and opportunities as roughly in balance at the moment.
Meanwhile, Des Moines, Iowa-based LCS has been able to keep its developments on track despite the pandemic, and is continuing to pursue its sizable pipeline while managing supply chain woes and other disruptions.
Senior housing occupancy fell to historically low levels after the onset of Covid-19, according to NIC data. And although census has started to recover, many senior living communities still are struggling.
“There are a lot of operators out there that are operating properties that are way below 80%,” she said.
However, trends are promising., Occupancy rebounded modestly in the third quarter to 83.2% in independent living and 76.9% in assisted living.
The rebound in occupancy pairs with record demand. Previously, there was negative absorption in the four consecutive quarters beginning in 2Q 2020. Then, in the second quarter of this year, absorption recovered to normal levels before exploding in the third quarter.
Not surprisingly, new inventory growth slowed dramatically during the pandemic and remains well below historical norms. Third-quarter 2021 inventory growth was 3.2%, compared to a peak of 5.0% in 2018.
But, as occupancy has come back, so too has construction lending activity.
Generally, banks and equity groups have been good partners, helping operators through the Covid distress. Banks do not want repossessions, they want solutions. However, they will have to start addressing difficult situations.
“I think you’re going to see more workouts moving forward,” Mace said.
Despite that forecast, lenders are returning to the marketplace and opening their coffers for construction projects after taking a step back amid Covid fears.
Financial institutions lent out just under $400,000 million for senior housing construction and more than $118,000 million for skilled nursing construction in the second quarter of this year, according to the NIC Lending Trends Report.
“For development, you need capital. You need to have money, Mace said. “Now, we’re starting to see that spigots are opening back up.”
Still, lenders are exercising caution. Usually, they are lending to borrowers and sponsors they already are familiar with, and having strong operators in place is a must, Mace said.
With the increase in lending, construction starts have picked up.
“We’re back to levels that we saw back in 2015; so, it’s about 33,000 units right now under construction,” Mace said.
Even as construction activity resumes, the constricted global supply chains and other complications could lead to longer project timelines. Mace believes this will extend a period in which new senior housing supply is limited.
“Maybe that is going to give us a window of limited inventory growth as we move into ‘22 and 2023,” she said.
The amount of money needed to move forward with development is also impacted by what Mace called an elephant in the room.
That factor is inflation.
“We’re facing inflation numbers that we hadn’t faced in 30 years,” Mace previously told SHN.
On top of inflation, the industry faces supply chain disruption, wage pressures, and trade policy complications from tariffs, many of which were in place before the Covid pandemic.
For those firms that can navigate the challenges, there are demographic opportunities waiting on the other side.
One such firm, LCS, found a way to push development through during the pandemic, according to LCS Executive Vice President and Managing Director Chuck Murphy, who participated in the panel.
“We’re not cocky about it, I don’t want to portray that — we’ve been able, with our capital partners and the strength of our company, to continue through Covid, but it did slow things down,” he said.
Still, LCS and its partners have brought new communities to market, including the recently opened Clarendale at Clayton, a luxury community located near St. Louis, developed in partnership with Ryan Cos.
The current pipeline is robust but Murphy is cognizant of the continuing challenges, particularly with regard to the availability of equipment and supplies.
“The new buzzword is ‘just in case,’ instead of ‘just in time,’” Murphy said.
The buzzword refers to the need to be well prepared when resources are stressed. The supply chain issues will persist for “quite some time,” according to Murphy.
LCS controlled development risk during the pandemic by buying contracts earlier, as the company’s leaders assumed the Covid situation would get worse before it got better.
And then there are the challenges in the labor market, which are extreme across the U.S. economy and in senior living specifically.
The lack of accessible, qualified labor is the “real pitfall” that could hold back senior living growth, Murphy said.
He and Mace agreed that there are no easy solutions to the labor crisis, but Mace suggested that the senior living industry could do a better job of promoting its “mission of the heart.”
Senior living associates have an opportunity to be mentored, loved and nourished by residents while serving them, which is a value proposition that cannot be matched by fast-food restaurants, she said.
“I think that our industry is really attractive to certain types of people that are caregivers,” she said. “And I don’t think we do a great enough job on that, actually, when we’re advertising for [workers], when we’re trying to recruit.”
Senior housing opportunities in the coming years center around demographics, updates to existing infrastructure, and expanding consumer options.
Demographics are destiny, a phrase repeated throughout BUILD, highlights the aging American population. There will be 1 million new people aged 80 years or older within the next five years.
The demographics of the aging population matter, too. Middle-income seniors, the so-called “forgotten middle,” present a tremendous opportunity for developers.
The cohort of seniors aged 75 or older in the middle-income group will double from 7 million to 14 million by 2029, according to Mace.
“It’s a huge group … we need to figure out how to service that.”
The challenge with the forgotten middle is providing as much as possible, but at more affordable rates than other products.
“Anybody who can crack that code is going to be shooting great,” Mace said.
LCS remains bullish across the spectrum, according to Murphy.
Consumers have evolved in recent years and have more options than they did as recently as 10 years ago. Not only are there more options, but consumers articulate their needs and preferences much better. The key is to provide consumers with options, both through new ground-up development and by repositioning existing communities, according to Murphy.
One option that consumers increasingly want is active adult products. While the demand for active adult products is growing quickly, this sector remains an overall small portion of senior living.
“But we’re seeing it more often,” said Murphy. “And we’re seeing it as potential competition for other products.”
Understanding what consumers want and connecting with their families is an amenity in itself, according to Murphy, who also cited technology as an increasingly important focus for LCS.
“We like to focus on innovation,” said Murphy. “People confuse that with amenities.”
For LCS, innovation can mean anything from flexibility on meal plans to more options for personal technology.
“It’s about a service offering,” said Murphy. “Things that allow people more choice in what they’re doing with their senior living experience.”
However developers seek to seize opportunities and serve the coming consumer base, Mace and Murphy agreed there is plenty of debt and equity capital out there.
“Everybody is looking at the demographics and smacking their lips,” said Mace.
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