Demographic analysis clearly shows long-term care will have a substantially larger number of potential residents within the next five to seven years. Some long-term care leaders have predicted as a matter of course that the large incoming wave between 2020 and 2023 will more than offset any declines in census and allow the industry a quick and steady recovery.
Not so fast, many experts say.
“The silver tsunami really won’t hit us for a while, maybe 10 years or more,” Beth Burnham Mace, National Investment Center for Seniors Housing & Care (NIC) chief economist and director of outreach, tells McKnight’s. “The oldest baby boomer is 72 right now. The typical age of a skilled nursing property resident today is about 82.”
Meanwhile, some of the near-term decisions made today could turn out to be big positives in the long run.
“Demographic tailwinds will certainly be a key driver in the growing need for facility-based care as the silver tsunami begins to approach,” observes Eric Smith, managing director, principal of Locust Point Capital. “From a pure demographic standpoint, it does appear that time and those demographic tailwinds will solve near-term occupancy softness in certain markets due to over-building.”
For example, Smith points to an American Seniors Housing Association report that concludes the country will need more than 3 million senior housing units by 2040 — about 2 million of which still need to be constructed.
Kevin Laidlaw, senior vice president, mergers and acquisitions group, for Lancaster Pollard, asserts that “no one doubts that the demographic trends will be favorable for the industry. There is debate regarding when exactly this will occur, however.
“I believe the benefit of the increasing SNF demographic will be later than the pure stats would show. The main driver of this opinion is that I’ve heard from many providers that residents are entering senior housing older and sicker.”
James Hazzard, senior vice president for JCH Senior Housing Investment Brokerage, echoes that optimism.
“The leading age of the baby boomers are still relatively young and healthy, and the ‘silver tsunami’ is still several years out, with demand for senior housing and healthcare anticipated to spike around 2025,” Hazzard says. “In the near-term, we can anticipate continued low occupancy rates in many markets over the next several years.”
A magic bullet?
Anyone close to the trajectory of events from now until the middle of the next decade is naturally concerned about separating the hype from reality.
There are many variables.
One is the staffing dilemma. While Jeff Binder, principal and managing director for Senior Living Investment Brokerage, believes the absorption of senior housing units will soon exceed supply and “move the occupancy needle in a positive direction, the perpetuation of pressure on operating margins, due in large part to the escalation in employee costs, will most likely take some time before revenue increases offset expenses enough to make a marked increase in the bottom line.”
Another variable is ever-evolving market segmentation distractions — from assisted and independent living to aging in place at home. Simply putting “heads in the beds” is a gross simplification of a complex and challenging business.
Some experts, for example, acknowledge that both empirical and subjective shifts ahead are even challenging whether skilled nursing care will be seen as the best post-acute option, and whether lengthy lengths of stay in such settings will be sustainable or warranted.
“Clearly the demographics are favorable,” says Lisa McCracken, director of senior living research and development for Ziegler. “However, that does not mean we can take these demographic shifts for granted. We know that particularly on the independent living side of our business, the baby boomers have very different expectations — and more choices — than previous generations.
“If providers are not doing their homework and changing along with the changing consumer, abundant volume of older adults will not translate into move-ins. We still need to work hard and offer housing and care options that are aligned with consumer preferences.”
Which begs the question: Will the expected surge in new residents tomorrow solve today’s challenges?
“It certainly will help. Adding more fish to the pond always makes for better fishing,” quips Hazzard. “The question becomes do you have the right bait in terms of product, location and pricing to attract them? If so, how so? How much of a given is that?”
Adds Jessica Cooley, vice president of strategic accounts for Provista: “On the surface, the numbers are promising. Long-term care facility occupancy rates began dropping about five years ago from their historic rates of 85 percent to 90 percent. They’ve been hovering around 80 percent for the past five years. But the number of Americans age 65 or older is projected to grow by 18 percent to 60 million in 2023 from 51 million today.
“Over that same five-year period, 2018 to 2023, national health expenditures on long-term care are projected to jump nearly 28 percent, to $223 billion.
“The question then becomes can we as a nation afford it? Can we just keep paying more as more people need long-term care services? That certainly would be good for nursing home operators.”
Executives such as Binder warn owner-operators to stay away from the minutiae.
“Those operators relying solely on demographic momentum to solve performance challenges are few, but those who do will be sacrificing short-term opportunities and options to expedite their recovery,” Binder says.
“Enhanced census in the next few years will rely on the ability to increase market penetration rates through savvy marketing, expansion of services desired by seniors and accommodations for younger residents, given this is the area of greatest demographic growth in the next few years.
“Growing revenue via a broader array of ancillary services and non-traditional payor sources may also support an expanding senior population until the acceleration of growth kicks in later in the next decade.”
Many owner-operators now find themselves wondering if all those new customers will be enough to turn things around in time.
Warning signs have been plentiful, and include:
Reimbursement pressures, a massive new payment methodology to learn in short order, anemic occupancy rates, an increasingly fickle and impatient workforce and a soaring economy whose rising interest rates could not have come at a worse time for fixing its ailing infrastructure.
Earlier this year, a series of high-profile skilled nursing sell-offs by healthcare real estate investment trusts left even the most optimistic financial observers wondering if SNFs were beginning to lose their luster with big buyers.
Some troubling news came from NIC. Among the key takeaways in NIC’s most recent “Skilled Nursing Data Report”: Continued occupancy rate declines sank to 85.9% in the third quarter. Rural markets have suffered most.
Record drops in so-called “quality mix” metrics around the star rating system (the lowest since NIC started measuring them in 2011).
NIC also cites weak managed Medicare revenue and continued declines in private pay revenues.
NIC executives stressed that few of these trends were unexpected and none should be viewed as ominous.
“The occupancy pressure started back in 2015, and it has continued,” said NIC senior principal Bill Kauffman. “The continued pressure on length-of-stay, more Medicare Advantage penetration and continuation of competition from home health are among a multitude of factors that are pressuring the sector.”
Then, there’s the mounting competition from assisted living, the financial pressures from which were laid bare by an article in the August 2018 issue of Inquiry: The Journal of Health Care Organization, Provision, and Financing. In reviewing the records of 657 nursing homes, researchers concluded that assisted living capacity is hurting nursing homes’ financial performance. While researchers also found that growth in the assisted living industry has coincided with falling levels of nursing home occupancy, they uncovered minimal correlation or cause and effect between the two.
There’s also been a building boom in the assisted living sector. Curtis King, senior vice president of HJ Sims, said one of the biggest surprises from his view is “the continued inflow of capital into the private pay seniors housing industry, given declines in occupancy across the board from significant supply growth.”
Kauffman echoed the eyebrow-raising activity among private buyers, calling that segment “the driver of activity.”
Some financial executives nonetheless remain bullish on current conditions for SNFs.
“The foundation has been well laid for the next several years,” says Michael Mooney, associate broker at JCH Senior Housing Investment Brokerage. He believes lower tax rates and low unemployment in all sectors, coupled with modest interest rates, promise improvements in both census and rates. Moreover, he says, “seniors and their families will have more money to spend on post-acute and retirement housing than at any time in many years.”
While many operators are positive about the proposed changes, “there will likely be some level of shakeout, as not all providers will be able to adapt,” Mooney says.
Still, behind the “cyclical” observations that usually crop up when stubbornly negative trends persist, some say current conditions have given them pause.
“There is something bigger at work in this cycle that is going to persist beyond a normal business cycle, particularly in skilled nursing,” notes Jim Bodine, executive vice president at HJ Sims. “We’re not seeing a lot of new capacity being built. Instead, there are replacements or renewals being undertaken. Typically, you see beds being repurposed or taken off line. We are dealing with serious challenges in demand and reimbursement right now. I certainly don’t think the sky is falling, but I’d say there are serious challenges that providers are dealing with.”
The cost of capital also continues rising in this booming economy.
“No doubt, the interest rate environment today is more challenging than it was 18 months ago,” says NIC’s Mace. “The Fed has raised the prime several times already and is on a path to continue. It does affect lending rates, of course. It also affects what you can earn on your savings.”
While lending rates remain competitive, “what has changed recently is that the spread between longer-term fixed rate bond debt and shorter-term variable rate bank direct purchase is very narrow,” McCracken notes.
Compounding building and renovation concerns are the administration’s tariff policies, according to Don Husi, managing director of corporate finance senior living and FHA/HUD for Ziegler, who believes the industry could be facing rising construction costs for the foreseeable future.
Looming regulatory issues also will continue dogging providers even as the tsunami floodgates begin to open.
A direct pain point is the new Centers for Medicare & Medicaid Services survey process that substantively changes how facilities qualify to care for Medicare and Medicaid patients, according to Provista’s Cooley. Indirectly, most providers will be dogged by what Cooley calls “a growing menu of value-based reimbursement programs for hospitals.”
Meanwhile, the biggest wildcard of all between now and the arrival of the silver tsunami is labor.
In fact, Binder believes the difficulty in attracting and keeping qualified employees is the single biggest economic influencer on senior housing and long-term care.
“This issue is just not going to go away, so savvy operators are enhancing culture, altering benefits and creatively compensating to slow down turnover, realizing that the cost to hire, train and retain new employees can be more financially draining and potentially unnerving for the care and comfort of residents,” he adds.
Chris Taylor, managing director at Capital One Healthcare, says the booming economy’s record-level unemployment has wrought wage pressures the industry has likely never seen. Bodine agrees, noting while construction and capital costs will continue dogging providers in the near term, the biggest elephant in the room is human capital.