Press "Enter" to skip to content

Why Senior Living Developers Should Be Careful as New Construction Ramps Up Again

New senior living construction starts are ramping up again in many markets across the U.S. after plummeting in 2020 — and senior living investors and developers should look twice before jumping into a new project.

While there is much interest in developing senior housing communities — and many opportunities right now to do so, given the looming arrival of the baby boomer cohort — National Investment Center for Seniors Housing & Care (NIC) Chief Economist Beth Mace believes anyone undertaking a senior living development project should first ask themselves some crucial questions.

“Be really careful when you’re doing development and roll up your sleeves,” Mace said during a panel on construction trends at the 2022 NIC Spring Conference in Dallas. “Make sure you understand what other development is happening, make sure there is not any land near you that’s entitled to become senior housing in the next few years.”

Mace’s comments are underscored by the rate of construction starts, which picked up again in the fourth quarter of 2021. In fact, there were five major cities throughout the U.S. that actually saw more construction starts during the fourth quarter in 2021 than in 4Q19.

Conventional wisdom says that too many new senior living communities in one market could dilute demand and potentially drive down occupancy rates across the board in the process. For a senior living industry that is still recovering from the Covid-19 pandemic and occupancy downswings, overbuilding could present a big challenge to occupancy growth at a time when building back net operating income (NOI) is crucial.

Overbuilding was a big industry worry before the pandemic, and although it’s not not clear whether the industry is at risk of seeing the degree of oversupply in some markets as it had before Covid-19, Mace’s point was that, instead of chasing demographics or rushing into new communities and potentially winding up repeating past mistakes, more developers should slow down and ask: if we build it, will residents really come?

Caution needed

Overall, construction starts in primary markets totaled about 8,204 units of majority independent living and 9,648 units of majority assisted living in the fourth quarter of 2021 — a fairly large uptick from Covid lows in 2020 and 2021.

“In the last six months … independent living and assisted living [construction starts] have risen pretty sharply,” she said. “Not to the peak levels of where they were in 2018, but they’re definitely on the rise again.”

Most primary markets are still seeing construction levels at a rate lower than they were before the pandemic — but not all. In fact, new construction starts in 4Q21 actually exceeded 4Q19 construction levels in five markets: Washington, D.C., Portland, Oregon; Dallas; Miami and Orlando, Florida.

While Mace sees plenty of opportunities for new projects in individual markets, she cautioned that developers must be cautious about which markets they pick, given the fact that some still have supply-demand imbalances.

“There is a lot of interest in developing senior housing, and there are absolutely a lot of opportunities to develop it,” she said. “Just keep in mind that there are a lot of competitors, and a lot of other operators and businesses that want to do it.”

Workforce is another potential flashpoint for new senior living projects. While a market may contain enough potential demand to fill a community, there is no guarantee it will have enough workers to staff one. Making matters worse, there are now simply not as many workers in the industry as before the pandemic — 7% fewer in the assisted living segment alone.

“Strategic marketing plans need to really be expanded now to attract not only residents, but importantly, to figure out the workforce,” Mace said. “A lot of operators are putting the same amount of effort that they put into marketing for residents into marketing plans for new staff.”

Mace also noted that there is a lot of “old obsolete inventory” on the market today that could be repurposed into new communities or uses. In fact, 60% of the senior housing inventory in NIC MAP’s primary markets is older than 17 years.

Many operators big and small believe that demographics will be a guaranteed tailwind in the years ahead.

“That’s why you see a lot of interest in active adult, because people are thinking that they can grab that baby boomer cohort sooner than waiting until they’re ready more for traditional senior housing,” Mace said.

But while Mace agrees the demographics are very favorable, she cautioned that “consumers have choice” and won’t necessarily move into a senior housing community just because they are age- and income-qualified.

“We really need to be careful that you build the housing that the consumer really wants,” she added.

With a penetration rate still hovering around 11% for the senior living industry, more investors and developers ought to spend time thinking of ways to reach the remaining 89%.

“If we’re able to increase the penetration rate by just a little bit, we can take all the new supply that’s coming in pretty quickly,” Mace said.

That’s not to say Mace believes the industry should slow down or halt the rate of new construction. She pointed out that new communities bring new designs and materials, maturation and further diversification to the senior living industry at a time when the preferences of its prospective customers are rapidly changing.

3 big concerns

With the Russian invasion of Ukraine, the possible resurgence of the pandemic and the prospect of “stagflation” ahead, the year 2022 has not been for the faint of heart. But as she peers into the future, Mace said she has three concerns specifically for the senior living industry.

One is NOI, which has been squeezed in recent months by lower revenue and higher expenses. Inflation of goods and services is making the problem worse.

“That’s a huge issue right now for a lot of operators,” Mace said.

Indeed, many operators such as Juniper Communities and Solera Senior Living are focused on growing NOI in 2022 through a variety of strategies.

Another big concern for Mace is the workforce, both in the fact that there are fewer workers than before the pandemic and the fact that wages are rising, putting pressure on operating budgets.

To that end, some operators such as Juniper and The Springs Living have even involved their sales teams to help recruit new workers.

While average senior living occupancy rates have risen for the past two quarters, census growth is another concern Mace has for operators in 2022.

“We’ll see if that pattern continues or not,” she said. “We still have a long way to go.”

The post Why Senior Living Developers Should Be Careful as New Construction Ramps Up Again appeared first on Senior Housing News.

Source: For the full article please visit Senior Housing News

Be First to Comment

    Leave a Reply

    %d bloggers like this: