There is mounting evidence in some markets to suggest senior housing construction starts are slowing — though the industry is far from out of the woods yet.
That was a top takeaway from National Investment Center for Seniors Housing & Care (NIC) Chief Economist Beth Burnham Mace, who talked about the overall landscape for the sector during a presentation at the NIC Spring Conference in San Diego last Friday.
While the rate of new construction is just one piece of the overall puzzle, a slowdown in new supply would be good news for operators which have struggled to fill beds in recent years due to new local competitors. Annual inventory growth has outpaced annual absorption for both independent living and assisted living units since about 2016.
There were about 37,000 senior housing units under construction during the fourth quarter of 2018 in the 31 primary U.S. markets that NIC tracks. That number is about 6,500 units less than the record high of 43,826 units under construction a year prior. Similarly, construction as a share of inventory fell to 6% of inventory for the quarter, a significant decrease from the 7.3% share recorded in the fourth quarter of 2017.
“There’s enough evidence, we think, we hope, crossing everything, that there is a slowdown going on in construction,” Mace said.
Mace pointed to San Antonio as a market that exemplifies the possible trend. In 2015, the market saw new construction as high as 23% of inventory. But just three years later, that percentage shrank to roughly zero. Still, other markets haven’t fared well at all. Atlanta, for example, has faced high levels of construction percentages to inventory.
“That’s a case where a market … got oversaturated, the message has gotten out there, and now we’re going to watch the occupancy increase again,” Mace said. “That’s kind of the way we expect development cycles to occur.”
Still, there may be other factors contributing the slowdown in new construction, such as rising construction prices, as NIC was careful to note in a February blog post. A more constrained lending environment, cautious investor sentiments and labor woes in the construction industry could also help drive new construction starts down.
The broad picture for senior housing looks mixed, Mace said.
Rising wage pressures, the looming possibility of a recession and an industry-wide labor shortage have caused some anxiety among investors, owners and operators. Mace’s comments came against the backdrop of recent quarterly earnings where some large industry players — such as Ventas (NYSE: VTR) and Brookdale Senior Living (NYSE: BKD) — don’t anticipate a major shift in market fundamentals until after 2019.
On the bright side, senior housing occupancy remained stable in the fourth quarter of 2018, and demand in the fourth quarter of 2018 was “as high as it’s been since we’ve been tracking the data,” Mace said.
Average occupancy rates vary widely among markets, however. In Philadelphia, Boston, San Diego and Pittsburgh, occupancy grew in the fourth quarter of 2018 when compared to the same period in 2017. But it was a different story in Houston, Miami, Seattle and Denver, where occupancy at the end of 2018 was lower than in the prior year. Overall, 19 markets saw decreased occupancy while nine saw an increase, year-over-year, according to NIC data.
“Demand was strong. It just wasn’t strong enough,” Mace said. “And that put downward pressure on the occupancy rate.”
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Source: Senior Housing News