Seniors housing operators and investors will find some encouraging signs in the latest report on the state of the industry as the annual absorption rate of units hit its highest level since the beginning of 2007.

The annual pace of absorption was 2.1% in the first quarter of 2011, up from 1.7% in the previous quarter, and up from 1.3% a year before. Rent also ticked up 0.5% in the first quarter after being flat in the previous quarter, according to the National Investment Center for the Seniors Housing & Care Industry (NIC) based in Annapolis, Md.

“We have further evidence this quarter that the recovery in seniors housing is gaining traction,” says Michael Hargrave, vice president at NIC MAP, which tracks properties in the nation’s top 31 metropolitan statistical areas to compile survey results. “Rent growth and absorption are trending up, and those are positive signs for occupancy, and for the industry’s health.”

The report shows that occupancies have continued to rise over the last four quarters at seniors housing properties, which include assisted living and independent living facilities.

The average occupancy rate for seniors housing in the first quarter of 2011 was 87.9%, which is 0.2% higher than the previous quarter, and 0.6% higher than the 87.3% occupancy level of a year ago.

The fundamentals started to improve at assisted living properties about a year ago, and at independent living properties about six months ago. But, in the first quarter, independent living properties experienced the biggest gains.

Occupancies at independent living buildings rose to 87.7% in the first quarter from 87.3% in the previous quarter. Assisted living occupancy during the same period remained unchanged at 88.4%.

During the course of a business cycle, independent living projects may be prone to greater fluctuations in occupancy than assisted living properties, Hargrave says. In the current cycle, independent living occupancies hit a high point of 92.7% in the first quarter of 2007 compared with 90.6% for assisted living projects.

“It appears that the recovery in independent living occupancies could be a steeper slope than that of assisted living,” notes Hargrave. “Investors and operators of independent living projects might be surprised on the upside.”

Despite expectations that the overall seniors housing market will continue to improve, a number of possible pitfalls lie ahead. The residential housing market remains in tatters with further declines in home prices a real possibility.

Home prices have an impact on seniors housing since older people often sell a house in order to move to a seniors housing facility. The slow decline in the unemployment rate is another concern because adult children often help their parents pay for seniors housing.

Construction declines

The pace of inventory growth has continued to slow, reaching its lowest level ever recorded in the NIC MAP databse. In the first quarter of 2011, the annual inventory growth was 1.3%, down from 1.6% in the previous quarter and down from 2.6% a year ago. The number of units under construction in the first quarter of 2011 is down 57% from its recent peak at the start of 2008.

“We don’t expect to see the pace of inventory growth rise anytime soon,” says Hargrave, since construction financing is still hard to secure. But he warns investors to watch inventory growth carefully. “The industry has a history of building too much at one time.”

A big spurt of overbuilding took place from 1998 to 2002 when the assisted living industry grew at an average annual pace of 8.5% for four consecutive years. More recently, in 2008, the independent living inventory grew at an annual rate of 3.5%.

The growth of the seniors’ population age 75 and over is about 1% to 2% a year. That’s about the right level of seniors housing growth based on demand, says Hargrave. “We should pay attention if seniors housing growth rates hit 3% or 4%.”

Despite the overall improvement in seniors housing, local market performance varies widely. Half of the top 31 markets saw increases in occupancy year-over-year in the first quarter, but one-third of the markets experienced a decline in occupancy.

The top three markets for occupancy gains were Kansas City, Mo., St. Louis, and Las Vegas. Those three markets all had inventory growth of less than 1%. The steepest declines in occupancy during the past year were in Tampa, Cincinnati and Pittsburgh.

Meanwhile, nursing home rents are up 3.3%, while the inventory continues to decline. The report shows that for the past five years, the nursing home inventory has been shrinking at an annual rate of 0.3%. “There’s been a slow but methodical contraction of that market,” says Hargrave.