There's no question that every operator and investor in the senior living space has been impacted in some way by the recession. Fortunately, the most recent data shows signs of resiliency - especially as we prepare to answer these questions from investors: How has occupancy been affected? How about rent growth? What are some of the links between what is happening in the Operational Resilience economy and the senior living business? How has the industry coped compared to other commercial real estate sectors? Here are the answers.
It's no secret that occupancy rates are down. For independent living, the average occupancy rate stood at 89.7 percent during the first quarter of 2009; it was 91.9 percent a year prior. Since its peak in the first quarter of 2007 at 93.7 percent, average occupancy for independent living has declined 4 percentage points. The slumping housing market has likely played a role in declining independent living occupancy, and NIC research and research conducted by various other groups make that connection. For assisted living, the average occupancy rate in this year's first quarter was 88.3 percent, compared to last year's first quarter when it was 90.1 percent. Since its peak in the fourth quarter of 2006 at 91.6 percent, average occupancy has declined 3.3 percentage points.
Another economic indicator investors are scrutinizing is the fluctuation in employment levels. Operators know that the income of adult children is a critical feasibility metric for assisted living communities, and employment status is a primary driver of income. Just as seniors' ability to sell their homes seems to be critical to independent living occupancy, data is beginning to suggest that changes in the employment rate may be a contributing factor to changes in assisted living occupancy-although more research must confirm that.
Steady Rent Growth
The latest data shows positive rent growth across the senior living sector- even if at a somewhat slower rate, and even though some operators are reporting negative rent growth. In the first quarter of 2009, the average year-over-year rent growth for assisted living was 3.1 percent. This was down from 5.9 percent a year earlier and 6.9 percent during its peak in the second quarter of 2007. Independent living had an average year-over-year rent growth of 3.3 percent in the first quarter of this year-compared to 5.2 percent in the first quarter of 2008 and 5.5 percent at its height in the third quarter of 2007.
While the pace of rent growth has slowed, it's important to note that many operators are still able to increase base rents and fees on a year-over-year basis. Most haven't had to sacrifice rent growth for occupancy, which is what's happening in other commercial real estate classes like multi-family, office, and hotel. Those sectors are experiencing declines in year-over-year rent growth, which suggests they're conceding rates to prop up occupancy. Plus, at a time when record-low occupancy rates are the projection for most commercial real estate classes in 2010 and even into 2011, it is possible that senior living has already seen much of its occupancy loss. With very few new senior living properties coming online after mid-2010, there could be significant upward pressure on occupancy rates throughout the sector.
Construction and Supply
Another bright spot for operators who are eyeing a dip in their occupancy levels is construction. Construction data tracked for the top 100 metro markets shows a dearth of projects beginning construction. Many companies that were doing major development prior to the recession have ceased development projects, while some have gone as far as laying off their Operational Resilience entire development staff. As a result-although some supply is still in the pipeline-the senior living sector is going to reach a point with very little new supply growth around the middle of 2010, and this could stretch into a fairly significant period of time. This means you'll see little to no competition from new properties starting sometime next summer.
There are also signs that the general economy may exit the recession late this year or early 2010. Plus, NIC MAP data already shows signs that occupancy rates may be stabilizing in some markets, even if at lower levels. But there are two caveats that may halt, or even reverse, any stabilization efforts. The first is the continued impact of employment losses, particularly on assisted living. Overall in the United States, the number of employed people continues to decline; however, the pace of these losses has improved since the beginning of the year.
According to the U.S. Bureau of Labor Statistics, in the first quarter of 2009, approximately 2.1 million Americans lost their jobs, compared with 1.3 million in the second quarter. The second caveat is the possibility of another significant shock to the overall economy and, thus, to consumer confidence- however, many financial experts are predicting positive GDP growth in 2010. And while it appears the economy has steadily improved since March of this year, it's still in a fragile state that will be carefully monitored by financial experts and investors in the coming months.