We hear frequently about the growing demand for seniors housing across the entire acuity spectrum. Usually the underlying rationale behind this trend is the aging population, primarily in the boomer demographic. This has spurred a wave of construction in the senior living space in recent years. While these demographic forces remain in effect, the year-to-year fluctuations in market conditions can produce different — and often surprising — effects both regionally and nationally.
The move by Medicare to a Patient-Driven Payment Model also has generated uncertainty regarding changing reimbursements. Some see opportunity in the new model to adapt to a reimbursement system that will reward quality care, while others see additional regulatory overhead that will require operational adjustments.
In this article, we will look at these and other trends affecting construction, and what it means for both the skilled nursing space and seniors housing in general as we move into the second quarter of calendar year 2019.
Construction Plans Slow
In December of 2018, an online survey of nearly 300 industry leaders within the seniors housing and care space was completed, which included responses regarding their outlook for 2019. Among the interesting findings of the survey was a decline in planned construction. Forty-three percent of respondents indicated they are extremely likely to pursue a new construction project, down from 46% in 2018 and 53% in 2017. Additionally, the decline in planned Alzheimer’s unit construction was even more stark at 28%, down from 2018’s 35% and 2017’s 40%.
While this initially might seem at odds with demographic shifts, the recent wave of construction has yet to be fully absorbed into the market. The long-term outlook for the space still remains positive, but demand simply has not outpaced the temporary glut of supply. As such, survey respondents indicated increasing likelihoods of pursuing renovation and acquisition projects in 2019.
Supply Exceeds Demand, Occupancy Declines
The collective survey responses match closely with market data suggesting that the existing supply of skilled nursing and memory care units at least temporarily exceeds demand. The National Investment Center for Seniors Housing & Care’s MAP data reported that, across the seniors housing sector, supply growth exceeded absorption by 5,000+ units. While this again could seem alarming without additional context, the supply growth reported is the largest ever recorded by NIC MAP in these markets.
This news also is tempered by the fact that the total absorption recorded by NIC MAP, 14,000+ units, was the highest on record in their primary markets. This matches with the expected increases in demand that have driven the recent construction boom.
In the short-term, however, this has resulted in a decline in occupancy levels in NIC MAP’s data. This is consistent with the aforementioned survey, which saw 60% of respondents reporting average occupancy at or above 90%, down significantly from 72% in 2018. Additionally, 12% of respondents expect a decline in occupancy in 2019, up from 6% in 2018. Thus, while we might expect to see occupancy levels increase eventually, the recent construction boom should continue to pressure occupancy on many providers over the short-term.
Underlying demographics remain strong but vary by region
At the core of this give-and-take between supply and demand is the aging population. Roughly 10,000 boomers are turning 65 every day as of 2017. This number has accelerated compared to figures from earlier in the decade. In 2011, the number was approximately 8,000. As a result, the Centers for Medicare & Medicaid Services estimates there will be 81 million beneficiaries of their programs by 2030. In an even more general sense, according to census data, from 2012 to 2050 the 60+ population is expected to increase from 19.4% to 26.5%.
While this general data speaks to future growth, a closer look reveals that numbers can vary significantly depending on region. Many boomers are relocating from the Midwest to coastal areas and urban centers, and some cities are aging at faster rates than others. In recent years, Atlanta, Las Vegas and Raleigh have seen the most recent gains in senior population.
The shift of an aging population to urban centers is a clear trend, and it is further pronounced in certain cities. Accordingly, a clear understanding of urban and regional market saturation will be key in identifying opportunities in the coming years.
Assessing options, finding opportunity
The U.S Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) and the U.S. Department of Agriculture offer several programs for construction financing. Long-term fixed interest rates and relatively flexible terms make financing options from these agencies more affordable and attainable for many borrowers, provided they meet program requirements. Additionally, for experienced owners or operators of multiple sites, commercial banks can serve as a viable source of capital. Public bond offerings, private placements and even some private equity funding structures also are potential sources of capital.
Matching the capital source to the goals of an organization is a key component in the success of those looking to grow. Combining the right financial strategy with a clear understanding of a potential market’s demographics will give providers the surest roadmap to success in the years to come.
Steve Kennedy is the Senior Managing Director at Lancaster Pollard.