Seniors Housing Sector Sees Fundamentals Slip in the First Quarter

The seniors housing sector has reached its lowest national occupancy rate in six years, as the industry battles headwinds from a particularly rough flu season and excess supply.

In the first quarter, occupancy slid to 88.3 percent, a drop of 90 basis points year-over-year and 50 basis points from the fourth quarter of 2017, according to the most recent figures from the National Investment Center for Seniors Housing & Care (NIC). Twenty-two of 31 markets reported year-over-year decreases in occupancy rates. Seven had higher levels, and two were unchanged.

“We’ve seen this trend occurring now for a little while, and it’s one that we’ve expected,” says Steve Kennedy, senior managing director at Lancaster Pollard, which provides financial advice and financing solutions for the seniors housing sector.

Supply growth also continues to outpace absorption for the assisted living and independent living subsectors. However, assisted living properties have seen this trend occurring for longer, reflecting a growing divergence between independent and assisted living facilities, says Beth Burnham Mace, chief economist and director of outreach at NIC. Occupancy for the latter fell to a record low of 85.7 percent in the first quarter, as inventory growth reached 4.7 percent despite absorption slipping to 3.2 percent. Meanwhile, inventory growth outpaced absorption for independent living properties by just 70 basis points.

A report from Green Street Advisors, a Newport Beach, Calif.-based research firm, notes the data in the NIC release “reinforces Green Street’s cautious outlook on senior housing, as new supply will continue to impact operating results for large and national owners/operators.” According to the report, while construction in the sector peaked in 2016, inventory appears to outpace near-term demand growth. An estimated five- to six-month construction timeline “suggests occupancy is still at risk.”

The drop in the national occupancy rate could, in part, be related to season-specific issues, says Burnham Mace. In general, fewer seniors tend to move into such properties during the winter. The U.S. is also just starting to emerge from a severe, record-breaking flu season that forced operators to impose quarantines on their properties. “That slowed leasing activities,” Burnham Mace says.

Kennedy says he is not concerned about the drops in occupancy levels—there is plenty of demand for these properties, and new product coming on-line is forcing existing product to adjust. “We think this is just sort of a natural cycle,” he says. New construction has also been slowing down, he adds.

The NIC data, based on an aggregate of primary U.S. markets, continues to reflect the fragmentation of occupancy levels among different markets. For example, San Jose, Calif. posted the highest occupancy rate in the first quarter, at 95.1 percent. San Antonio, Texas, posted the lowest—78.3 percent. “That’s a pretty wide range of performance,” Burnham Mace says.

NIC also found that same-property rent growth slowed in the first quarter to 2.3 percent year-over-year. The fourth quarter of 2016 marked this metric’s cyclical peak of 3.7 percent.

Rising labor wages continue to put pressure on rent growth, Burnham Mace notes. In the fourth quarter of last year, the average hourly earnings for assisted living employees were up 5.0 percent, which is “significantly higher than the growth we’re seeing in rents,” she says.

The report found that preliminary investment sales volume for seniors housing properties came in at $2.3 billion for the quarter, a 17.0 percent fall from the quarter prior and down 50.0 percent year-over-year. That figure includes at least two larger deals—Welltower’s $300 million sale of 18 properties to Cascade and KKR, and Invesque’s acquisition of 40 properties from Care Investment Trust for more than $400 million.

Such large deals can give the impression that merger and acquisition activity is more robust than it is, Kennedy says. However, there are still active and aggressive buyers out there, he notes. One issue is making sure that sellers have realistic expectations of their properties’ values, an issue that has loomed large, but appears to be abating. “We think we’re largely through that,” Kennedy adds.

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