How Will Seniors Housing Sector Fare Through This Pandemic?

senior housing corona

It’s the end of the world as we know it…and, no, unlike the lyric in the R.E.M song, I do not know anyone who is feeling fine…Uncertainty, fear, sense of disruption, anxiety, and a total lack of control are just a few of the sentiments many of us harbor these days. The rapid and indiscriminate spread of the COVID-19 pandemic has all of us on edge. We know that many of our fellow citizens are getting ill, and some are dying, and that the illness is more severe for our seniors. We also know that more than 3 million seniors live in seniors housing and skilled nursing properties.

That is why NIC supports initiatives in the seniors housing, skilled nursing, and healthcare sectors to ensure frontline workers get the support they need and deserve. Prioritizing frontline health care workers’ needs is how we will keep seniors safe and healthy. Toward that goal, we strongly support all actions that:

  1. Prioritize testing for frontline health care workers and skilled nursing and seniors housing and care residents in order to minimize the spread of COVID-19.
  2. Increase the availability of personal protective equipment for frontline health care workers.
  3. Help frontline health care workers ably meet personal obligations, so that they can go to work. There are many creative ways to ensure that their children, for example, remain well cared for, supervised and safe while their parents are at work.

Six Areas of Impact. The COVID-19 pandemic has implications for operators, developers, and capital providers across the seniors housing and skilled nursing sectors. Below, I identify six areas of impact.

1. Residents and health care workers. First is the direct frontline impact COVID-19 is having on residents and staff. Since early March, when the Kirkland Washington skilled nursing property was identified as one of the first properties to have the coronavirus, operators have acted quickly and implemented strict protocols to prevent and limit the spread of the illness among residents and staff and across properties. Extra cleaning, sanitation and contact prevention protocols, limitations on visits, restrictions on group activities, travel restrictions and other rules have been implemented. Operators have changed staffing patterns to limit cross-contamination, acquired testing kits (to the degree possible, given severe shortages), and purchased personal protection equipment (PPE; also, to the degree possible, given shortages). Safety protocols, flexible schedules, accommodations to the new reality of social distancing rules, contingency planning for staffing emergencies, and other planning protocols are part of the solution and should be lauded. Since late January 2020, there have been some residents and staff who have contracted the illness. And as of early April, at the time of this writing, it was generally acknowledged that the pandemic would likely get worse before it gets better, based on the rapid rise evident in national statistics reported by the CDC and Johns Hopkins. The propensity of seniors to contract the illness is generally higher than the broad public, but those older adults living within seniors housing properties are generally benefitting from the continued dedication of staff in helping them manage their health, daily activities, and safety in a hyper-diligent and prepared environment. 

2. Operations. Second is operations. Revenues and expenses are being affected by the COVID-19 pandemic. Expenses are rising as labor costs associated with overtime, agency workers, and sick leave increase and as operators purchase PPE to keep their staff and residents safe. At the same time, revenues are being pressured as move-in and move-out rates and occupancy patterns adjust to the new COVID environment. At this point, there is a lot of speculation and hearsay regarding the impact of the virus on occupancy rates. Building on its strengths, NIC has therefore launched a new weekly survey to address the need for information. The “Executive Survey Insights” blog reports the results of this survey of operators about move-ins and move-out patterns, changes in occupancy rates, staffing considerations and construction delivery pipelines. The results of the first survey of responses from owners and C-suite executives of 180 seniors housing and skilled nursing operators from across the nation conducted between March 24 and March 31 showed:

  • Roughly half to two-thirds of organizations reporting on their care segment units—across their respective portfolios of properties—saw no change in occupancy rates from one month prior to the time they responded. The exception was nursing care, where about half saw declines.
  • Most organizations also reported no change in the pace of move-outs; 40 percent to 50 percent reported decelerations in the pace of move-ins.
  • Most organizations indicate that their properties are back-filling staffing shortages by increasing overtime hours, and they are supporting property staff by providing flexible work hours.
  • About 40 percent of organizations expect no change in their development pipeline going forward.

3. Economic impacts. Third, the economic effects of the COVID-19 pandemic are unprecedented and may ultimately herald us back to the days of the Great Depression in the 1930s. What was once unthinkable is now occurring. Quarantines and limited social interaction are being mandated, shops and stores are being shuttered, lines waiting for groceries are common, entertainment venues are closed, and those who can conduct their jobs remotely are working from home, while those who cannot are losing their jobs and paychecks. As a result, jobless numbers are skyrocketing. Those claiming unemployment insurance protection are projected to total more than 15 million in a matter of weeks, and the official national unemployment rate has begun to rapidly rise from its 50-year low of 3.5 percent in January 2020. Consumer spending, which accounts for two-thirds of the nation’s overall GDP, is being battered. The certainty of negative GDP growth and severe recession are now upon us.

How this will play out in the seniors housing and care sector is yet to be seen. However, during the last recession 10 years ago, the sector held up reasonably well in terms of occupancy, rents and investment performance, especially compared with other commercial property types.

Longer term, economists are mixed on the impacts of COVID-19 on the economy, with discussions on supply-chain disruptions, globalization trends, and business confidence weighing heavily on these views.

4. Capital markets. Credit makes the economy spin. Without credit, the economy would grind to a halt. For the last several weeks, we have witnessed the Federal Reserve making a full-throttle effort at keeping the credit markets open, functioning, and operational. In mid-March, the Fed dropped the fed funds rate back to its 2008/2009 recession low of 0 percent, implemented another and aggressive round of Quantitative Easing (QE), lowered the discount rate, cut reserve requirements, and implemented new credit facilities. In effect, the Fed is doing all within its power to keep credit flowing. 

For banks and lenders, capital providers, both public and private, the world has shifted. The cost of capital has changed, spreads are widening, terms are changing, and loan proceeds are being re-assessed. While Fannie and Freddie are open for business, debt financing is nevertheless harder to come by.   

That was one of the key takeaways from NIC’s first “Leadership Huddle” webinar, which focused on the impact on seniors housing and skilled nursing from financial market uncertainty associated with COVID-19. Other key takeaways included:

  • There is capital out there, albeit a more limited supply and priced at rates that are not nearly as aggressive as six months ago.
  • Seniors housing and care has a foundation underneath it that a lot of other property types in real estate don’t have. And that is access to Fannie Mae, Freddie Mac, and HUD lending sources.
  • The GSEs are offering forbearance programs to help borrowers manage through these difficult times.
  • Financial partners are laser-focused on supporting their client/customer relationships and their respective portfolios
  • Unlike the hospitality industry, the seniors housing and care industry is still operating and is open for business.
  • Transparency is key, and as Kurt Read, principal at RSF Partners, long-time NIC board member and current chair said, “whatever is going on right now will come out in the future, and those who are transparent and forthright in communicating what is going on will be viewed favorably once we get through the crisis that we’re in now”.

5. Transactions and pricing. For many markets, including some in the commercial real estate realm, transactions activity has ground to a screeching halt as a new world order is being called into play. Questions on valuations, comps, and the competitive landscape are emerging. Visibility and transparency are missing, price discovery lacking, and bid/ask spreads are changing. The drop in stock prices for many of the public health care REITs has highlighted concerns about underlying asset values, and this may be bleeding over into private sector valuations as well.

As in during the previous financial crisis, distressed assets may grow as operational risks unfold, opening a market for some to invest in distressed assets.

6. Construction. What has long been a challenge for existing operators may be less so in the near term as construction slows sharply and project delivery dates become extended—i.e., construction pipelines and inventory growth may slow. Cities such as San Francisco and Boston have mandated that all non-essential commercial real estate construction cease for the immediate future, while skilled construction trades workers, many of whom are older, may stay away in other locales. Disruption may also occur as cutbacks in “non-essential” government workers create hurdles in the due diligence process, such as title searches and recording mortgages and as the permitting and inspection processes are elongated. 

Lastly, supply chain disruptions for materials and supplies are impacting construction activity. Since January, when COVID-19 economic effects were first felt, there were delays on finished materials from China and South Korea that impacted the U.S. construction market. These disruptions have affected materials pricing and created cost overruns, and they are not expected to end anytime soon.

In wrapping up, the world has changed. And changed a lot. These changes will affect the seniors housing and care industry in myriad ways—some of which are listed above and some of which are still to emerge. NIC’s COVID-19 Resource Center is one source to help stay informed of emerging trends by providing transparency through data, analytics, and connections. These changes and emerging trends will lead to innovation and provide a new opportunity for some businesses, such as telehealth, virtual video communications systems, cleaning and sanitation businesses. But the COVID-19 pandemic will also bring unforgettable grief and sadness—for both individuals and businesses.

Collectively, we can help provide support, solutions, encouragement and assistance for those on the frontlines and for those behind the scenes in management and decision-making roles. Finding productive ways to support the frontline workers in seniors housing is a very good way to support their contributions and celebrate their heroism.

Beth Burnham Mace is chief economist with the National Investment Center for Seniors Housing & Care.

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