Though still fairly healthy, the seniors housing industry is more than a little worried about the year ahead. That’s the conclusion of Robert Kramer, president of the National Investment Center for the Seniors Housing & Care Industry, who spoke in advance of the organization’s annual conference slated for Sept. 10-12 in.
While occupancies have slipped only slightly and revenues are still growing, according to Kramer, owners and operators believe that the continuing knot of troubles posed by the U.S. economy might conspire to increase their costs and cut into the bottom line. The industry’s going to have to work harder just to maintain the gains it has made in recent years, he posits. NREI spoke with Kramer at length about the state of the industry.
NREI: What are the hot-button issues for the seniors housing business now?
Kramer: Not so different than anyone else’s – there’s the credit crunch, economic malaise, housing doldrums, and inflation. That’s quite a combination of circumstances. Seniors housing has actually been fairly resilient so far in the face of these conditions.
For one thing, occupancies are down, but not dramatically. In fact, occupancies are nowhere as depressed as in the assisted living industry in the early 2000s, when they averaged in the mid 80s percentile, which is barely enough to cover debt service. Right now, assisted living occupancies are about 88%, down about 100 basis points since last year, and about 89.5% in independent living, down 120 basis points.
Still, the industry is hunkering down in anticipation of next year, focusing on sales and marketing, operational efficiencies and cost control because many suspect it will be a tough environment for quite awhile.
On the operations side, inflation is putting upward pressure on costs, especially utilities and food. That’s something we haven’t had to worry about in quite awhile. At the same time, there is downward pressure on revenue, and operators might not be able to sustain the strong year-over-year rate growth we’ve seen the last five years – about 5% each year. That will be much more difficult to achieve in the coming year.
NREI: How are operators dealing with these pressures?
Kramer: The good operators are busy holding down expenses and finding new revenue streams to supplement their increases in base rates. Beyond that, they are having to work harder and put more effort into sales and marketing.
The housing slowdown is hitting the newly opened continuing care retirement communities hardest, because seniors typically sell their homes to pay the entrance fee. The slow housing market affects the for-rent independent seniors housing market as well, and maybe the assisted living market, though probably not as much.
Operators are working with local realtors and specialists who prepare homes for sale, and working with seniors to ensure their homes are positioned to sell. Also, many operators are offering a bridge-loan program to cover the period until a senior’s house is sold, because the real trouble posed by the housing market is seniors delaying their moves.
NREI: What concerns do seniors housing investors have?
Kramer: Investors are facing a dearth of data. What are thegetting done? On what terms? What are the valuations? What are cap rates? There have been so few deals that it’s hard to know. There’s still a lot of uncertainty, and no investor likes uncertainty.
The industry has been fortunate to have the huge presence of Fannie Mae and Freddie Mac for permanent takeout financing. There’s no evidence that their troubles are affecting their appetite for seniors housing financing. If anything, it’s just the opposite because those portfolios have performed very well for them. It would be cause for concern if they were forced to cut back because they’ve been major financing sources for the seniors housing industry. So far, all the indications are good, however. They want to grow their portfolios, not shrink them.