Understanding the Market
The following are a few key trends shaping the senior housing industry in 2019. For a full list, download our full white paper, at right.
The Sector Will Remain Recession-Resistant
We are now in the 2nd-longest U.S. economic expansion period in the history of the United States. If this continues, by mid-2019, it will become the longest economic expansion period ever. Experts predict a recession is likely not too far away. Senior housing proved its mettle in the Great Recession of 2007-2009 – it was the #1 performing commercial asset sector. During this period, rent growth for senior housing remained positive, despite large losses throughout the commercial real estate industry overall. When our next recession arrives, we should expect senior housing to exhibit similar performance characteristics it displayed in the Great Recession.The only caveat: independent living. Although the segment has seen tremendous favor in the past year, it’s also the only segment of senior housing with no clear “need.” If the economy buckles, we’ll likely see a hit in independent living as seniors choose to stay put and wait out the economic storm.
2018’s Cautious Construction Will Mean Higher Occupancy Rates
From 2018 to date, total construction investment has been down significantly from 2017 numbers. This can be attributed to several factors. In 2017, construction investment was very high, and it would be hard to sustain that level. Credit markets, always a challenge for senior housing, tightened in 2018, requiring more equity capital in each deal. Interest rates went up as well. This put a crunch on new construction. 2018 occupancy rates suffered as the market absorbed the new supply from 2017 construction. In 2019, however, occupancy rates will likely rise, as the new supply is easier to absorb. This is especially true in combined assisted living/memory care communities, as the demand for specialized memory care communities will continue to decline.
Labor Shortage Will Continue to Be a Big Issue
The economy is white-hot, and recently experienced the lowest unemployment rate since 1960. While this is great news overall, it certainly has caused labor shortage problems for senior housing. As long as we are in an economic expansion period, the labor shortage will not go away. I do not see the labor shortage subsiding in 2019. Investment opportunities in great markets that will go undone because there will not be a sufficient number of qualified people to hire to operate the senior housing community. The labor pool in that specific market will be carefully evaluated before a development is approved and funded.
Private Pay Communities Will Continue to Outperform
While a demand for more affordable senior housing remains strong, I believe private pay assisted living/memory communities will be the most reliable investments in the sector. The political environment is far too fickle to rely upon Medicaid/Medicare for funding and payment. To me, the best investments are ones based on strong demographics—income, education level, age, proximity to hospitals—that indicate potential residents can afford quality private-pay communities for years to come.
