From 10,000 feet, the seniors housing sector is in equilibrium. Occupancy has oscillated around 89.8 percent for the past three years. Despite the run-up in construction and the delivery of roughly 36,000 seniors housing units since late 2013 in the nation’s largest 31 metropolitan area markets, demand has largely matched new supply. Rent growth continues to improve and recently reached its highest pace in this cycle.
From 500 feet, however, the view changes. In some instances, markets such as San Jose are booming, while others—such as San Antonio—are not. As with all real estate, it is about location, location, location, first at the metropolitan area level and then at the five- to 10-mile primary market area surrounding a seniors housing property. Performances across individual properties build the overall aggregate property market view.
Studying the market. In developing strategic investment plans, investors and operators often begin by choosing broad regions of the country or metropolitan areas in which to invest. Making this assessment usually starts with examining key data metrics from NIC or others to differentiate market performance. Differences in supply and demand patterns, stabilized occupancy rates versus all-occupancy rates, rent levels and growth rates, penetration rates and property mix and age provide desktop-level insights into why some markets are winners while others are less so.
The results of such an analysis may lead to more detailed questions about exogenous factors affecting supply and demand patterns. For supply, including new construction, these may include entitlement procedures, the availability of labor, natural and regulatory barriers to entry and the competitive landscape. And for demand, influencing factors may include the concentration and number of adult children and retirees, income levels, net worth, home ownership rates, the velocity of home sales and home prices and broad-based employment conditions and drivers.
Once a market has met requisite investment criteria, further examination of a specific opportunity may be warranted. This often involves finding the right operating partner if you are a capital provider or the right capital partner if you are the operator. It also requires a “drilled-down” primary market area examination of competing properties, including those in the development pipeline, and, of course, demographic patterns and trends. While nothing beats a feet-on-the-ground assessment, desktop analysis is always a good starting place.
Drilling into a market. An example of a first-pass, desktop metropolitan market analysis is briefly presented here and focuses on Naples, Fla., a mid-sized market in the Southeast that has drawn significant interest from developers and operators. The market’s inventory has expanded by more than 15.0 percent in the past year (the most of any of the 23 markets in the Southeast region), and with the equivalent of 11.2 percent of its inventory currently under construction, even more new product offerings will soon be coming on-line. Stabilized occupancy in Naples was strong at 93.7 percent in the third quarter of 2016 (tied for second place within the Southeast), while the market penetration rate was high at 14.0 percent (best in the region) and annualized absorption was nearly 13.0 percent. The all-occupancy rate, which includes properties still in lease-up, was relatively low at 86.7 percent (below the regional average of 88.2 percent and below the national average of 89.6 percent). Despite these conditions, asking rent growth has been strong at 8.0 percent, the best in the region.
So what do these data points portend for the future? How quickly can new product be leased, and what, if any, concessions need to be offered to grow and/or maintain market share? Using today’s development pipeline, the supply side of the equation is pretty straightforward, with 11.0 percent of the metropolitan market’s inventory base currently under construction. What about the demand side? On the demand side, the strong growth in rent mirrors rapid home price appreciation in the metropolitan area: the median existing single-family home price in Naples has risen by 88.0 percent in the last five years and is the highest in the South at $417,800 (compared with the U.S. median price of $231,100). Relative to other Florida metro areas, employment growth is also very strong in Naples, more than twice the Florida average in the last three months, according to Moody’s Analytics. A steady stream of retirees into Naples may also lay the groundwork for steady absorption levels, supported further by improving macroeconomic conditions. Higher interest rates, projected by many pundits for 2017, will also potentially boost retiree income in the area. Income from interest, dividends and rents make up more than half of personal income in Naples versus 20.0 percent in the U.S. overall, according to estimates by the BLS and Moody’s. Therefore, many metro-area level demand drivers appear to be favorable.
The next step in the investment strategy would be to drill deeper into a single property/location and determine which properties are competitive, realizing that broad market trends affect all operators regardless of their proximity to one another and regardless of whether they are “directly” competitive or not. All properties draw from the same broad demographic base.
In addition, and probably most importantly, if the investor isn’t a seasoned operator who has experience in the sector, the investor will want to work with such an operator. While seniors housing investment has a significant real estate component, it is an operating business at its core, and navigating the changing economic, competitive, political, policy, demographic and social environment requires experience, aptitude, savvy and skill.
Beth Burnham Mace serves as chief economist and director of capital markets outreach with the National Investment Center for Seniors Housing and Care (NIC.)