Senior Housing Recovers — Slowly — From the Pandemic

More than 450 nursing homes have closed since the start of the pandemic, according to statistics from nonprofit trade groups the American Health Care Association and the National Center for Assisted Living (AHCA/NCAL). Roughly 150 of them shuttered in 2022, as conditions exacerbated by nearly three years of the pandemic caught up with operators. A further 307 closed in 2020 and 2021, other pandemic years. The grand total for the three pandemic years, though, is comparable to the total for the five years from 2015 through 2019. 

At the same time, the volume of nursing home sales declined and stayed down. The third quarter of 2022 was the slowest for investment activity since the first full quarter of the pandemic in early 2020, according to a JLL report released in January. Investment totaled $761 million, down 85 percent annually. The rolling total for the four quarters up to and including 2022’s third quarter was down 37 percent. 

In other words, it’s been rough. 

“Nursing homes across the country are on the verge of financial collapse,” Mark Parkinson, CEO and president of AHCA/NCAL, wrote in a February op-ed for RealClearHealth, a website covering the health care industry. “Today, more than half of nursing homes report they may not be able to operate for more than a year at the current pace.”

Parkinson also blamed what his group describes as paltrier federal reimbursements for some care and a severe labor shortage in the industry. 

It’s those reimbursements, as well as state-by-state regulations and benchmarks, that drive a lot of investment in senior housing. At the same time, the sector is as exposed to macro-economic trends such as higher financing costs and inflation as any commercial asset class. Though, like a much larger general multifamily market that’s benefiting from sharpened demand due to higher mortgage rates and a housing shortage, senior housing also benefits from sustained demand.

That’s due to the aging of the baby boomers — the largest generation of Americans in the country’s history, until the millennials came along. The number of Americans at least 75 years old is expected to grow 18 percent over the next five years and double by 2045, according to figures cited in the JLL (JLL) report. 

This has helped the occupancy rate for senior housing — a key measure of the industry’s overall health — recover from those sickly pandemic lows. “One-Third of All U.S. Coronavirus Deaths Are Nursing Home Residents or Workers,” went a May 2020 New York Times headline that typified nursing home coverage during the pandemic’s early days. Stories followed of families withdrawing residents, and trend pieces proliferated on aging in place at home. 

Median occupancy of U.S. nursing homes dropped more than 16 percent in 2020 from a pre-pandemic rate of nearly 85 percent, according to a February report from CliftonLarsonAllen, a professional services and accounting firm. It would rise 9.5 percent through 2021 and 2022, though, and stood at around 78 percent by last December. A recovery to the pre-pandemic norm could come in 2024, erasing the occupancy woes.  

To be sure, the nursing home industry in the U.S. is a wooly, variegated one. There are different tiers of care in terms of specialty and intensity as well as the amenities that developments offer residents; and there are publicly and privately operated individual care centers and chains, often a mix of the two. All share the characteristic of housing older people, including those who can no longer care for themselves independently.  

And all share certain trend lines coming out of the pandemic.

First, there are those hundreds of closures. Then there’s that sluggish investment activity and lower occupancy despite the country’s general recovery from COVID-19’s economic effects. Then things get more granular in terms of what’s selling and where, and what the prognosis is long term due to that baby boomer demand. 

The investment costs are going up — in some niches more than others. The sales price for senior housing was up 18 percent annually in 2022’s third quarter, to $185,000 per unit. The price for a nursing home unit rose 3.5 percent. That’s according to the JLL report, which included a survey of more than 125 top professionals in the senior housing industry. That survey, however, did anticipate revenue rising for assisted living and memory care facilities in particular over the next 12 months. Survey respondents expect revenue for nursing care facilities to decline, and that type of senior housing comprises 42 percent of total units. 

Whatever any unevenness in profitability, the prospect of rising occupancy and steady demand has investors still interested in what’s seen as a recession-proof asset class. Senior housing was the only asset class with an investment return of at least 10 percent during the worst of the Global Financial Crisis 15 years ago, according to Brian Chandler, co-lead for JLL’s national practice for senior housing and an author of the February report. 

“Significant amounts of capital are seeking deployment into senior housing due to the sector’s long-term demand trends and recession-resistant nature,” Chandler wrote in an email. “Spreads between interest rates and cap rates are still strong enough that most lenders still see senior housing as a good investment.”

The cost of loans for assets have increased. Interest rates for borrowing to buy senior housing range from 5.25 percent to more than 8 percent, according to the JLL report. And coverage ratios are up as much as 10 percent.  

This helps explain the mix of senior housing investors. The top 10 owners own more than one-third of all senior housing in the U.S. That includes Welltower (WELL) and Ventas, public real estate investment trusts that together were the top buyers in the 24 months ending Sept. 30, according to JLL. The brokerage did note that institutional investors like public REITs are pulling back, while more private capital is circling senior housing as it recovers from the pandemic.  

Whatever their corporate structure, senior housing buyers now share one salient characteristic: They tend to be big. This is not a space for the proverbial little guy.

“In some of these states, you can get very competitive on the pricing, and a lot of these smaller groups don’t have the ability to compete with some of these REITs and more capitalized private equity groups,” said Dave Balow, a senior vice president at Senior Living Investment Brokerage.

It’s not just the rising borrowing costs and heftier pricing. A labyrinthine regulatory and funding web that varies state to state stretches across the industry. Thirty-five states and the District of Columbia operate under certificate of need (CON) regulations, which means a government agency vets proposed health care developments. It’s ostensibly to prevent oversaturation of certain services, including nursing home care, which can prevent too much competition for owners and operators in those areas. 

Another variable rippling across the union is Medicaid expansion. By February, 40 states, plus D.C., had opted into federal funding through the Affordable Care Act to expand coverage to more lower-income Americans (and South Dakota, whose voters in November approved an expansion, should soon become the 41st). This can heighten demand for senior housing and nursing care.  

The state patchwork makes for an odd mix of areas where senior housing remains particularly competitive, in terms of investment pricing and sales. “Sun Belt” can be used to describe where multifamily investors post-pandemic are flocking. “Secondary cities” does the same for office buyers (the ones that are left, anyway). “Boston, San Francisco and San Diego” sums up a lot of geography for life sciences investors. For senior housing, it’s all over the map. Balow’s firm, for one, is seeing a lot of investment activity in West Virginia. Florida remains a perennial favorite. New York and California are busy, too. Iowa, Illinois and Missouri are proving tougher.

Geographically extrapolating where senior housing facilities, and nursing homes in particular, might shutter is even more difficult. A confluence of trends — including Medicaid funding shifts, labor shortages, too many facilities and loss of older residents — has to come together to cause the closures. 

“The closures are occurring in areas that have out-migration of population,” JLL’s Chandler said. “While the senior population is normally still higher in these areas, the younger generation is moving on to find better employment opportunities and more social engagement. This also leads to a labor shortage in these areas.” 

Again, as with locating the best investment potential, it’s scattershot. CliftonLarsonAllen’s report explored financial risk alone for senior housing by state, and found Maine and New Jersey particularly risky, with states such as South Carolina, Delaware, Nebraska and Oregon not too far behind.

It’s in states that are healthier for investment where senior housing closures are fewer, though there are no statistics for how many properties have been redeveloped. 

“An existing operational nursing home in a state that’s pretty desirable — it’s not likely it’s going to be repurposed for anything else,” Balow said. “We do see across the country vacant nursing homes that are being repurposed.” He cited workforce housing and behavioral treatment centers as two common repurposings for senior housing.

The other big repurposing? Senior housing. Whatever its fate coming out of COVID, senior housing tends to occupy sites in central urban or suburban locations amid that sustained baby boomer demand. It’s sometimes a matter of upgrades, then, rather than demolitions. 

“For redevelopments,” Chandler said, “it is mainly in areas where there is an oversupply of beds, and the older facilities are having trouble competing with the newer facilities as residents are willing to pay slightly more for a unit at a higher-end, newer facility than the facility built 10-plus years ago.”

Tom Acitelli can be reached at tacitelli@commercialobserver.com.