Occupancy rates for the assisted living sector followed a jagged path of increases and decreases since the economic recovery. Lately, however, it looks like the industry is getting the formula right.

Inventory growth and absorption rates appear to be moving toward favorable, but flat, occupancy levels, and could settle into the 88.3 percent range through 2017, according to recent projections from the National Investment Center (NIC) for Seniors Housing and Care.

That rate of occupancy is comparatively higher than it was during the Great Recession and the economic recovery. In 10 years, the seniors housing development industry could potentially see a bigger surge, as the baby boomers enter their 80s, the prime time that Americans utilize seniors housing.

Generally, Americans 75 years and older are the target population for seniors housing, but early 80s is when many potential clients begin to move into such facilities. So while the market appears to be in for a wait to see a major boost in business, the focus remains on the baby boomers.

“The demographics are moving in favor of this sector, but I would say gradually,” says Beth Burnham Mace, chief economist at the NIC, a research and education firm specializing in senior housing, headquartered in Annapolis, Md. “The big push is still a number of years away. Everyone is waiting for the baby boomers.”

Short-term gains, then coasting along

The likely year is 2026, when baby boomers will reach the age that seniors typically move into active living and assisted housing. Until that happens, however, inventory and absorption rates through 2017 might be slightly out of balance.

“The supply that is getting delivered now is at a pace that is above demand,” says Kevin Tyler, analyst and lead of the health care sector at research firm Green Street Advisors. He adds that, “it will happen at a pace that will continue to outstrip demand as that construction starts to come on, which will happen in a big way toward the end of this year.”

Assisted living developers should post solid inventory growth in the second half of 2016, beginning with about 2,562 new units of inventory in the third quarter and 1,933 in the fourth quarter. After that, and through 2017, the NIC expects inventory to exceed 2,200 units every quarter. The number of units currently under construction represents about 8.0 percent of the assisted living inventory, according to Mace.

“There are concerns of too much supply, generally,” Mace says. “That said, it is limited to certain markets. Some markets have very little construction going on, others have lots.”

Minneapolis, for instance, is one of the 31 primary markets with a lot of construction under way, she notes. But it also has a good penetration rate when looking at the number of units relative to the target population for seniors housing. The 31 markets have an overall penetration rate of 10.2 percent; Minneapolis has a penetration rate of 19.1 percent.

Leaving and cleaving

As the seniors housing market manages the supply-demand dynamic for assisted living, a number of developers appear to be focusing more heavily on the sub-sector.

WellTower, a healthcare facility provider headquartered in Toledo, Ohio, stirred up a sensation when CEO Tom DeRosa forcefully put down the idea of spinning off a number of the company’s skilled nursing properties into a separate REIT. A number of other companies, including HCP ManorCare, had already decided to pursue that strategy. Instead, WellTower will focus on selling down the skilled nursing properties, a line of business heavily subsidized by Medicare.

“They want to be more of a private-pay business and in most states, assisted living is private pay,” Tyler said.

If DeRosa’s round rejection of a skilled nursing REIT spin-off positions WellTower to pursue more private-pay business, it could be one of several industry players positioned to thrive when that surge of assisted living clients signs up for home tours 10 years from now.