Is Senior Housing on the Upswing After a Pandemic-Induced Tumble? Two Experts Weigh In

After withstanding the pandemic and its subsequent challenges, the senior housing industry is seeing occupancy rates and construction starts trending upward, and owner-operators and lenders across the country are taking notice.

Since the senior population in the U.S. is expected to reach 22% of the total population by 2050, CRE professionals are adapting senior housing facilities to the needs of current and future residents. But this comes with some obstacles.  

Fundamentals Inching Forward

“Whether it be skilled nursing, independent living, assisted living or memory care, the fundamentals from an occupancy perspective are still slowly inching back towards pre-pandemic levels — it’s been a tough grind,” said Michael Gehl, chief investment officer of FHA Lending at NewPoint Real Estate Capital. 

NewPoint Real Estate Capital is a real estate lender focused on financing solutions for a variety of asset classes, including senior housing, healthcare, multifamily and affordable housing. Launched in June 2021, the firm works with clients nationally, has a servicing portfolio valued at $53B and is projecting $6B in originations volume for 2022.

Gehl said that alongside pandemic-related challenges, the industry is facing pressures from inflation and labor costs, compounded by employee retention issues.

“Labor is by far the biggest challenge affecting the industry,” Gehl said. “Due to workforce constraints, senior living providers are having to rely on nursing agencies as a stopgap to meet staffing requirements, which is driving up costs dramatically.”

Though costs vary depending on the market, certified nursing assistants who work for staffing agencies can cost up to 50% more than nurses hired directly by a facility, Gehl said. While some senior living providers have slowed their recruitment of agency CNAs, others have had no choice but to hire agency nurses if they wish to remain fully operational, he said.

Building owners and operators who went above and beyond early in the pandemic to give 15% or 20% pay increases to their staff are faring better than those who are playing catch-up due to greater employee turnover, said Sean Huntsman, a senior managing director at NewPoint focusing on senior housing agency financing and bridge lending executions. He added that while independent living, assisted living and memory care facilities are still facing occupancy challenges, things are moving in the right direction.

“Throughout the pandemic, family members of potential residents with lighter care needs were keeping them home longer,” Huntsman said. “We’re now seeing occupancy improve as the pandemic slows, which has been accompanied by some rent increases.”

Lending Trends

While operational trends are consuming attention from developers and investors, the way market lenders are structuring financing for senior housing is also experiencing some adjustments, Gehl said. 

“Bridge loans have seen some changes,” Gehl said. “Leverages are down slightly, and where a strong borrower might have been able to get 85% to 90% financing on an acquisition last year, they’re most likely going to get between 75% to 80% now based on the issues we’ve been discussing.”  

Gehl said that debt service coverage is not usually a limiting factor for solidly cash-flowing skilled nursing home deals, which are typically 11% to 13% cap rate assets. However, those interested in assisted living, memory care and independent living facilities will have more challenges with coverage based on higher interest rates. 

“Bridge loans closed in the past two years have many nonstabilized components to them,” he said. “Facilities that haven't restored their pre-pandemic occupancy are still struggling with expenses, so they are not as prepared for a more stabilized takeout from conventional lending sources like HUD. FHA loan volumes are down this year and will continue to decrease until bridge-to-HUD loans underwrite to the values and leverage required for HUD takeouts.”

Huntsman echoes Gehl when it comes to lending hesitancy. 

“With pullback from a number of lending institutions across the country, we are seeing an opportunity for some lenders to continue to finance properties in infill locations and higher barrier-to-entry markets,” Huntsman said. “When coupled with the improved occupancy and increased rents achieved by an experienced senior housing operator, these transactions are attractive for lenders to pursue. With the higher rates we're seeing today, the borrower with a lower loan request and lower LTV — along with the supportive debt service coverage — will be the type of loans that will get done.”

Huntsman added that creativity is key when finding solutions for borrowers faced with a maturity during today’s elevated rates and compressed margins.

In early 2022, owners were seeing higher occupancy and, in some instances, securing higher rents and examining a refinance with a lower rate, he said. Today, the same borrowers with loans that were starting to pencil are now faced with providing cash-in to refinance their existing loan.

On the construction loan side, some borrowers are opting to wait until rates come down before converting to a fixed-rate loan, even if it means taking down a previously approved loan extension term and paying an extension fee, he said. However, a rising rate environment could be beneficial to some sellers where today’s higher rates can lead to a calculation of reduced pre-payment penalties — a favorable way to realize cost savings when selling, Huntsman said.

Shifting Strategies

A new economic and lending landscape has also led some owners to adjust their strategies and explore new asset types.

“Because of the lending pullback, slow construction starts and high cost of inventory, some senior housing owners are shifting focus from new construction to renovating their existing properties,” Huntsman said. “On average, construction loans can be four years plus a one-year extension to accommodate slower lease-up trends. By renovating, owners will be able to increase rents and maintain quality staffing, allowing them to be more competitive in the market for a fraction of the price and time.” 

The senior housing sector is also trying to figure out how to garner attention from baby boomers as they get older, Huntsman added. To respond to the impending senior housing needs of this generation, active adult rental housing, an emerging asset class within the sector, aims to attract older Americans before they need more advanced levels of care.

Active adult rental housing developments are age-restricted, lifestyle-focused multifamily communities that offer the convenience of maintenance-free living for those looking to downsize without having to pay for healthcare services they may not be ready for. 

Investors and developers are attracted to this type of senior housing due to the lack of hefty costs associated with healthcare and employee payroll. While this concept may be enticing to building owners, this asset type, like most nonluxury multifamily properties, has proven to be somewhat of a struggle in today’s market because high land and construction costs are pushing rents beyond the level that most active adults can afford, Huntsman said.

Though active adult housing is known for a slower lease-up, operators typically see less turnover since the asset class caters to younger seniors, Huntsman said.

In addition, the demand for active adult housing can vary by the market, type and demographics. Wood frame properties with podium parking built in high Walk Score locations have done well, Huntsman said.

“Mid and high-rise construction can have challenges due to added costs, which translate to above-market rents,” he said. “Smaller markets with relatively more affordable land prices can work with cottages, bungalows or even duplex and triplex townhomes — all very attractive to the downsizing active adult prospect.”

Looking forward, CRE professionals view the full spectrum of senior housing as a need-driven asset class that has performed well throughout all cycles, including prior recessions, Huntsman said.

“If you look back at what happened during the 2008 financial crisis, the rent growth in senior housing did well compared to those of other asset types,” Huntsman said. “Even though we’re seeing senior housing gain momentum in the market, economic factors like inflation and labor shortages can affect move-in rates, driving down length of stay and heightening turnover and operational costs. Investors, however, remain cautiously optimistic for senior housing as a whole, signaling promise for owners, developers and lenders.”

–Originally published on Bisnow