COVID-19 Stalls Construction Pipeline in Undersupplied Senior Housing Market
The COVID-19 pandemic interrupted a nearly 12-year growth cycle for the senior housing market. As a percentage of existing supply, units under construction tapered throughout 2020, dropping from peak levels of 7% at the end of 2019 to 4.7% in the first quarter of 2021—magnifying the long-term supply shortage.
According to the JLL Valuation Advisory Seniors Housing and Care Investor Survey and Trends Outlook report, assuming the reduced capture rate realized during the second and third quarters of 2020 holds over the longer term, along with the reduced construction trend, it is projected that the senior housing sector will be undersupplied by 625,000 units by 2045. This suggests that supply growth would need to increase by 26,000 units per year to meet peak demand levels.
JLL research also shows that stabilized occupancy rates fell to record lows, closing the fourth quarter of 2020 at 82.9% in primary markets and 83.2% in secondary markets. Much of this decline is directly attributed to infections, mandated holds on new resident admissions, safety concerns and isolation fears. Construction starts reached an all-time high in 2018, resulting in significant inventory growth throughout 2019 and 2020, furthering the impact of the pandemic on average occupancy levels.
Rents, however, continued to rise, despite significant occupancy losses. Following four consecutive years of year-over-year decline, total price per bed for nursing homes increased by nearly 22% in the first quarter of 2021, marking the second-highest price point for nursing homes ever recorded, according to JLL data.
The successful roll-out of vaccines, initially aimed at our most at-risk population—the senior community—was a positive step for the market. Recent government data shows an estimated 91% of residents in senior living communities and 65% of staff have been vaccinated, resulting in a significant decline in infections.
JLL Valuation Index points to COVID-19-specific operating expenses averaging between $1,420 per unit for independent living and $3,320 for nursing care.
The strength of the national housing market pushed home values up some 15% year-over-year as days on market decline. With home equity values being a major determinant of senior housing residents’ ability to move into and afford senior housing rents, this is a positive factor in determining reabsorption rates.
Looking Forward
In a sector previously positioned for disruption, there is an acceleration of existing trends with the emergence of new innovations in technology, infrastructure and design. While health and wellbeing were always top proprieties, health care leaders are now laser-focused on the health and safety of residents and staff as they reopen.
The good news is that as we emerge from the pandemic and return to a more normal existence, the market is poised to face some of its strongest demand ever. While there remain many challenges, long-term demand is robust, fueled in large part by aging baby boomers. Representing approximately 22% of the U.S. population, baby boomers are now within 10 years of occupying senior living assets.
The tapering of new supply is expected to continue, with construction starts declining to 10-year lows. Considering the reduced construction starts already experienced, with further decline anticipated, the projected re-stabilization period is two to four years, depending on market location.
With operators focused on understanding the ramifications of COVID-19 and caring for their residents and staff, they now face the opportunity to build occupancy levels. Additionally, the market is trending toward more lifestyle-focused segments of senior housing.
Senior housing property market fundamentals were greatly impacted by COVID-19, testing the “need-driven recession-resistant” narrative of the sector. The process of getting back to more normalized market capture rates depends on operators’ ability to address trepidation and fears that arose during the pandemic, with reabsorption rates expected to be market- and region-specific.