Lument: Taking the Long View: Seniors Housing Outlook

As 2023 progresses, the seniors housing outlook features both reasons for optimism and causes for concern. For the optimist, occupancy levels continue their upward trajectory, reaching nearly 84% in the second quarter, a 270 basis points (bps) increase year-over-year (YOY), according to NIC MAP data.

For those seeking a robust seniors housing merger and acquisition (M&A) market, however, things are headed in the opposite direction, as deal activity decreased substantially in the first half of 2023. Many of the transactions that did close included only one or two properties, due largely to sellers repositioning assets through strategic dispositions.

Looking forward, the following themes from the past several months should provide informative context for the remainder of the year.

Continued Occupancy Gains
Active portfolio transition efforts have contributed to encouraging occupancy momentum across the industry, as evident by the consistent occupancy gains reported by NIC MAP. As a result of the limited supply of new communities entering the market (only 4.9% of total inventory in 2022), operators remain optimistic that the remainder of 2023 will see further incremental gains. Lease-up rates at new communities are trending back toward the pre-pandemic normal, which is supporting industry optimism.

As investors continue to reposition portfolios and assess acuity mix, it is worth noting a 2023 Senior Housing Outlook Survey found that 79% of respondents expect memory care (MC) to drive the highest percentage rebound of any seniors housing and care setting. In addition, and further corroborating the optimist’s view, 78% of survey respondents predicted overall occupancy levels will return to pre-COVID levels between the second half of 2023 and 2024.

Portfolio Optimization/Strategic Dispositions Drive Decline in Valuations
Throughout the first several months of 2023, real estate investment trusts (REITs) scrutinized their portfolios in an effort to improve operations, with many reporting operational transitions or strategic dispositions of underperforming assets. As a result, many of the seniors housing transactions in the 2023 market are distressed opportunities, driving a decline in valuations during the second quarter of 2023, reaching an average price of $170,000 per unit, or a $62,000 decline over Q4 2022 levels according to LevinPro data. Additionally, LevinPro reported that cap rates have risen 50 bps since the end of 2022, representing downward pressure on valuations due to higher interest rates.

Active Buyer Mix
Of the 185 publicly announced seniors housing transactions through August 2023, owner-operators are responsible for the majority, reporting 129 deals (70%), according to LevinPro Data. Private equity groups and real estate investment firms are still active with 71 (38%) closed transactions, while REITs have only acquired 11 (6%) seniors housing assets in 2023. In the first eight months of 2022, REITs accounted for 27 deals, or 12% of the total transactions. The decrease in deal activity can be at least partially attributed to the continued pricing disconnects between the seller’s asking price and the buyer’s internal cost of capital. Driven by the sustained bid-ask spread, large industry players like Ventas, Inc. are prioritizing net operating income (NOI)-generating capital expenditure projects as the “highest and best use of capital” as the portfolios continue to rebound.

Innovation for the Aging Demographic
A recent report from the American Seniors Housing Association (ASHA) studied the baby boomer generation and found only 11% of aging seniors associated senior living communities with “fun,” while 72% of staff members described it as so. Clearly a disconnect exists, and operators are trying a variety of strategies to change that perception and make the industry more appealing to the next generation, as evident by the continued rise of the active adult segment.

In addition to an increased focus on wellness programs, operators are using innovation to improve resident experience, often through artificial intelligence (AI) systems and programs designed to help promote autonomy among residents and provide personalized self-care service. The ASHA study noted that autonomy is one of the leading drivers of consumer appeal for the Baby Boomer generation.

Despite the headwinds, the long-term fundamentals signal brighter days ahead. Those in the seniors housing industry know the mantra well by now—endure the challenges of today, reap the benefits of tomorrow. That sentiment will continue to prevail well into the next year.

Owners and operators preparing for future transactions can look to Lument for a thorough assessment of strategic options. Starting early, assessing a spectrum of options, and being prepared to move at a moment’s notice can help yield optimal results.

Laca Wong-Hammond is a registered representative of Lument Securities, LLC (Member FINRA/SIPC).