It seems that the adage, “only change is constant,” applies to the senior living market.
As an industry, several factors have and will continue to drive and challenge traditional business models, services and investments in this highly competitive industry. It has never been more important to manage the risks associated with the upheaval in this market.
As healthcare providers and investors are aware, the “silver wave” (aging baby boomers) is coming! Born between 1946 and 1964, the baby boomer generation consists of approximately 76.5 million people, making up 25% of the U.S. population and 10,000 boomers will turn 65 every day for the rest of this decade. According to a Nielsen Marketing Report, boomers will control 70 percent of the nation’s disposable income and potentially inherit $15 trillion in the next 20 years. This large transfer of wealth makes an especially attractive demographic for aging service providers and real estate investors.
Creating Supply and Challenges
While the demographics support the future need for senior housing, the current state suggests that it will be at least 10 years before demand peaks. Currently, the average age of a senior living resident is early to mid–80 while the leading-edge baby boomer is just 72 years old.
Senior housing investors, developers, owners and operators are staying ahead of the curve by creating housing now for future needs. The inherent risk today is low occupancy rates for both, existing and new facilities, as supply outpaces current demand. According to a CBRE study, during the first quarter of 2017, occupancy decreased to 90.1% and 88.1%, in assisted living and memory care sectors, respectively and that downward trend continues.
An additional challenge is funding or recouping investment. As illustrated below, more than 75% of payment today is derived from CMS (Centers for Medicare and Medicaid Services). However, many developers/investors are building on the premise of 100% private pay.
- Medicaid: 63%
- Medicare: 14%
- Private pay or insurance: 22%
Over the past several years, the senior living market, including Independent Living Facilities (IL), Assisted Living Facilities (AL), Skilled Nursing Facilities (SNF) and Memory Care Facilities (MC), experienced disruptive consolidations, mergers and acquisition, and sale-lease backs, causing ownership shifts. There have been varying strategies in Real Estate Investment Trusts (REITS) due to unprofitable operations fueled by low occupancy, increased regulatory and litigious pressure, and reimbursement/payment challenges. Some REITS have sold off certain facilities and looked for market exit while others have gone hard at acquisition. The consolidation trend is expected to continue and new builds will decline. The number of new independent living and assisted living units under construction peaked in 2016 as tracked by NIC (National Investment Center – Senior Housing and Care Sector).
Yet, bed prices “for sale” have continued to increase and more than 300+ facility transactions occurred in 2016. Why was and is there such activity when occupancy and new builds have hurt the market? The answer lies in low interest rates, large capital, lots of supply and new demand from private equity firms which see opportunity in the changing marketplace.
While the first half of 2017 marked the slowest start to a senior housing investment year since 2008, metrics such as income and cash flow have become more reliable, making buy/sell/build transactions easier to evaluate. Strong capital appreciation also makes this segment especially alluring for investors. Recently, an investment shift from REITS to private equity has occurred.
Private equity fills in the investment gap by leveraging access to capital and the ability to execute on investment strategies to deliver promised returns. The industry uses its access to seek opportunities to attract and execute transactions at good pricing. The private equity firms then turn to proven operators to manage the portfolio of senior living facilities.
Changing Tax Benefits
Of concern to many in the senior housing industry is the recent tax legislation which is expected to impact both senior housing owners and older adults housed in these facilities.
For corporate owners, tax reform most likely represents a tax break.
For senior housing operators and investors, the tax bill saved a key funding source, private activity bonds (PABs), which provide tax-exempt financing for non-profits. At the same time, tax reform eliminated advanced refunding, which allows holders of PABs to refinance once during the first 10 years of the bond issuance. The complete impact of these actions will unfold over time.
Additional Emerging Risks
As owners and operators assess the future of the senior housing market, providers must manage the current lull while preparing for the patient surge and enhance operational efficiencies and quality of care to thrive. The industry must:
- Meet a rapidly increasing care demand, meeting quality of care metrics
- Care for an older more acute population, with higher rates of dementia
- Recruit and retain qualified staff in a historically low-wage industry
- Reduce injuries to control worker’s compensation cost
- Improve the health of its workforce to affect escalating employer healthcare cost
- Achieve greater integration with other provider organizations
- Manage IT challenges and all that comes with Electronic Health Records
- Meet regulatory and reimbursement challenges
- Manage reputational risk
It is apparent that owners and operators need experts to unravel the complexities of this changing landscape. Managing the risks of Senior Living operations requires a partner with knowledge, experience, and a proven record of navigating the ever-evolving world of senior living.