Cost inflation, supply chain difficulties and wage pressures have led to a tough expense landscape for senior living operators. In early 2023, some of those pressures are easing, while others are stubbornly holding on.
Take the price of oranges, for example. The cost of the citrus fruit is expected to be “extremely high” this summer, according to recent Gordon Foods data cited by Avanti Senior Living CEO.
“You have all these little hidden things that you don’t really think about until the price starts to increase,” Lori Alford told Senior Housing News.
She added that the Woodlands, Texas-based senior living operator has had to get creative and “constantly look for new ways to either offset what we’ve been doing or find new places to source better deals.”
Avanti is far from alone in this pursuit as the industry seeks to regain margins that dropped during the Covid-19 pandemic. Others include Sage Oak Assisted Living and Memory Care based in Dallas.
“Other than perhaps TVs for residents’ rooms, there really hasn’t been anything that’s gone down in price,” Sage Oak CEO Loe Hornbuckle told SHN.
In response to these challenges, operators including Avanti and Sage Oak have raised resident rates, and in the process leaned on their reputations and have shown residents the value of what they are paying for.
Costs continue to rise in 2023
In 2022, senior living operators grappled with rising operating expenses among many different line items. In 2023, that has not seemed to have changed — and in fact, it may have gotten worse.
Nearly all of the respondents (92%) to a recent NIC Executive Insights survey reported rising operator expenses as among their biggest challenges in 2023. That represents an approximately 15 percentage point increase over what respondents said in February.
One big and growing line item in recent years has been food — and that does not appear to be changing in 2023.
A recent food cost forecast from Argentum and Gordon Foods found that, while the cost of certain food items will stabilize in 2023, some commodities could be stuck at high prices or even get more expensive this year.
For example, recent Bureau of Labor Statistics data showed egg prices rose 59.9% last year, with a carton of large eggs averaging about $4.25 as of the end of 2022. A dozen organic eggs cost as much as $8 in some areas, according to the report.
According to BLS data cited by Gordon Foods, the cost of eggs rose 163.1% between 2021 and 2022. Other food items with high recent cost increases have included butter, the cost of which rose 65.6%; fresh and dry vegetables, which rose 51.4%; and turkey, which rose by 44.7% between 2021 and 2022.
Even with higher food prices, inflation relief could be on the way. The U.S. inflation rate slowed to 5% in March, down from 6% in February and representing its lowest increase since May 2021.
But not all cost increases are due to inflation alone. An epidemic of avian flu has been behind the spike in egg prices, and “experts suggest that shortages and higher prices will continue at least for the short term into 2023,” the Gordon Foods report notes.
On the construction side, costs for commodities are “leveling after two years of hyperinflation,” according to a new Senior Living Construction Costs report from construction firm Weitz Company. Although labor is still in short supply, wage increases are now “closer to normal,” the report’s authors noted.
Wage wars take positive turn
Perhaps the most painful expense increase for senior living operators in recent years has been in labor.
As senior living companies have looked to gain occupancy to rebound from pandemic lows, they have had to lean on agency staffing and overtime among staff to fill gaps in their communities. That has had the effect of ballooning budgets and eroding margins — but there may be better days ahead in staffing costs.
While staffing will remain a big challenge in the year ahead, the expenses associated with it might finally be “settling down” after a few years of pain, according to Alford.
“The wage wars are slowing down,” Alford told SHN. “A lot of operators in the industry had to increase their wages quite a bit to catch up with the operators that were always paying above the norm. So, I think we’re going to see that slow down.”
Sage Oak has experienced a similar easing of the wage wars.
“We’re able to get better talent at prices that are more in line with what they were a few years ago,” Hornbuckle said. “I can’t quite tell if it’s just better than the bottom or if it’s actually trending in a direction that might suggest some form of normalization.”
Hornbuckle said he assumes that layoffs in other industries will continue. And that represents an opportunity for senior living operators who are hiring new workers.
“I think we’re going to get some relief because some people in other industries aren’t going to have a choice,” Hornbuckle said. “It’s a difficult time to start a business or to be an entrepreneur right now and I think that’s going to force some people back into health care.”
Automation and demand could also be impacting how prospective workers navigate their options for employment.
Hornbuckle thinks senior living operators need more passionate workers that want to be in the industry, and Sage Oak is looking outside the borders of the country for a solution.
“I think that if there were some political leadership on this, there could be bipartisan support for people coming to America to deliver health care,” Hornbuckle said. “I am of the opinion that there are too few health care workers in America.”
Reputation, value back rate increases
Alford believes that food prices and supply chain issues will continue to be problematic for operators in the coming months. If senior living companies want to continue growing beyond their current margins, they will need to offset the costs somewhere. For Alford, that “somewhere” lies in resident rates.
This year, many senior living operators raised resident rates by as much as 15% depending on factors like costs and market demographics. For many operators, it was the second consecutive year of rate increases that were needed to respond to macroeconomic pressures.
But operators can’t just raise rates and expect residents to continue paying them in a vacuum. Instead, residents need to see the value of what it is they are spending more money on.
For Alford, that value is in an operator’s reputation. During the pandemic, Avanti’s communities made it nearly 18 months without a case of Covid among residents, earning it a positive reputation among prospective residents.
“And now we’re capitalizing on that really good reputation we earned during those times to drive our rates higher,” Alford said.
Currently, the company’s occupancy is “well above” pre-Covid levels, Alford said, with some communities above 90%.
Avanti is looking for the right person to live in its 630-unit, seven-community portfolio. That means not offering discounted rates for residents and not offering move-in incentives.
“When you’re taking the right folks that fit well in your community who meet regulations … that helps create your reputation and great tenure in your buildings,” Alford said.
Sage Oak’s more established communities are entering the second quarter of 2023 with occupancy rates above 90% and in some cases, close to 100% while two communities are in the lease-up phase.
Sage Oak raised rates between 10% and 20% this year, depending on the market. But the company leaned on value to help soften the blow.
“Instead of being concerned about the cost of our food per day, we try to focus on making the dining experience so amazing that residents don’t mind paying more because when it comes to food, it can be an expense or it can be medicinal,” Hornbuckle said.
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