Market Signals 2010

Research by NIC shows the highest occupied seniors housing properties also have the highest level of rent growth. The analysis was conducted on 4 years of seniors housing YOY rent growth data and provides compelling evidence that the higher your occupancy, the more pricing power you have. In addition, higher occupied properties, in general, also have higher Average Monthly Rent (AMR) levels than lower occupied properties.

For the purposes of this research, seniors housing properties were divided into 5 categories with counts as follows:

For the 4 year period between 4Q06 and 4Q10, the average YOY rent growth in each quarter (collectively) for those properties that were 95% to 100% occupied was 2.9%. Properties that were 90% to 95% had an average YOY rent growth each quarter of 2.8%, while properties that were 85% to 90% had average YOY rent growth in each quarter of 2.4%. The laggards in this category were properties that were 80% to 85% occupied (2.2% average YOY rent growth in each quarter) and properties that were below 80% occupied (2.0% average YOY rent growth in each quarter).

Across the aggregate of MAP 31, occupancy rates for majority independent living (IL) properties and majority assisted living (AL) properties have generally trended in a similar fashion over the past few years. Both property types established their respective cyclical occupancy peak in late 2006 or early 2007 (AL at 90.7% in 3Q06 and IL at 92.7% in 1Q07) and both property types reached cyclical bottoms in 2010 (AL at 87.4% in 1Q10 and IL at 87.0% in 3Q10). Similar trends are one of the reasons why NIC MAP reports many metrics out on seniors housing which incorporates both IL and AL properties.

Given that IL and AL have trended in a similar fashion at the aggregate MAP 31 level, one would expect this to hold at the metropolitan market level. While this is generally true across markets, there are a number of very notable exceptions. Two such markets are highlighted below.

Phoenix, AZ

Phoenix’s IL occupancy declined 780 bps from 91.5% in 3Q07 to 84.3% in 3Q10. Even though it rose by 30 bps in 4Q10, the IL occupancy rate is still near bottom in Phoenix. Part of the challenge for IL in Phoenix is that over 1,600 units have been added to inventory since 1Q08. 27.6% (16 of 58) of the stabilized properties in Phoenix reported occupancy at or below 80% in 4Q10.

AL occupancy in Phoenix is up 400 bps since reaching a cyclical low of 85.4% in 2Q09. At 89.4% in 4Q10, AL occupancy is also at its highest level since 2Q07 when it was 89.6%. Phoenix’s AL inventory has grown by 186 units since 1Q08 and there are a reported 110 units under construction in two majority AL properties as of 4Q10.

Riverside, CA

In Riverside, IL occupancy rate has declined over 1,000 bps since early 2007. At 82.6% in 4Q10, the IL occupancy rate is down 160 bps from last quarter and 60 bps YOY. 8 out of 26 IL properties in Riverside are now reporting IL occupancy at or below 80%. YOY rent growth is now 0.3%, which has slowed from a year ago when it was 2.1%.

AL occupancy in Riverside has risen nearly 800 bps since 1Q08. At 90.0%, AL occupancy is up 190 bps YOY and at its highest level since MAP began reporting data (4Q05). Interestingly, YOY rent growth for AL is now -2.6% and has been negative for three consecutive quarters. There is a possibility that the negative rent growth could be helping occupancy.

 

Recently released 3Q10 NIC MAP data reveals that IL occupancy rates are still in decline. The 3Q10 occupancy rate was 87.1%, which is down 30 bps from last quarter and 80 bps year over year. IL occupancy is currently at a cyclical low, although the pace of quarterly and annual declines has slowed recently.

A closer examination of the 1,444 majority IL properties in MAP31 shows which properties are outperforming and which are lagging. It appears that the highest occupied IL properties (upper quartile in occupancy) have seen their occupancy rate decline to a lesser degree than the lowest occupied IL properties (lower quartile in occupancy). The upper quartile IL properties had a 3Q10 occupancy of 95.5%. This occupancy is level with 2Q10 and down 20 bps from 3Q09 when it was 95.7%. Compare and contrast this with the lower quartile IL properties, which had occupancy of 81.0% in 3Q10, down 60 bps from 2Q10 and 180 bps from 3Q09.

As recently as 1Q08, the spread between the upper and lower quartile was well below 1,000 basis points (bps). In 1Q08, the upper quartile had occupancy of 97.6% while the lower quartile had occupancy of 90.9%. Since then, however, things have changed markedly. The spread is now 1,450 bps and it appears that the upper quartile is stabilizing while the lower quartile is in decline.

Each quarter, NIC MAP reports market level occupancy, rent growth and construction trends in each of the 100 largest metro markets. To incorporate NIC MAP data in your analysis, please visit www.nicmap.org.

Recently released 3Q10 NIC MAP data reveals that seniors housing occupancy rates were unchanged sequentially. At 87.7%, occupancy is level with 2Q10 but down 40 basis points (bps) from 88.1% in 3Q09. On the surface, occupancy appears to be stabilizing, albeit at near bottom levels.

When looking market by market, things appear to be anything but stable. Just seven of the top 31 metropolitan markets saw their occupancy rate change in the past year by less than 50 bps. These markets could be deemed as stabilizing. The other 24 markets are either showing signs of increasing occupancy or signs that occupancy rates are in decline. 11 of the 31 markets saw their seniors housing occupancy rate increase by 50 or more bps YOY, while 13 registered an occupancy decline of 50 or more bps.

Two such seniors housing markets to highlight examples of the instability are Riverside and Boston. Riverside seniors housing is clearly showing signs of recovery. At 87.2%, Riverside’s occupancy rate is up 80 bps from 2Q10 and up 191 bps from 3Q09 (one year ago). Furthermore, Riverside’s occupancy rate is at its highest level in three years (it was 88.4% in 3Q07). Could pricing adjustments be driving occupancy gains in Riverside? That is unclear (NIC has yet to establish a relationship between YOY rent growth and occupancy changes) but YOY rent growth, which was 3.0% two years ago (3Q08) is now -1.1% in 3Q10.

Boston seniors housing has arguably held up very well during the past few years. It had maintained 90%+ occupancy throughout the worst of 2008 and even up to 3Q09 when it was 91.7%. But occupancy has declined since then. The occupancy rate is now 89.0%, which is down 40 bps from last quarter and 270 bps YOY. Inventory growth is the most likely suspect in Boston’s recent occupancy declines. Several new projects have recently opened, and as a result, the seniors housing inventory has grown by 7.9% in the past year.

For data and analysis on your market, please consult the NIC MAP 3Q10 Metro Market Reports which can be purchased in the NIC Store.

Subscribers to NIC MAP learned on July 27 that seniors housing occupancy rates in 2Q10 rose for just the second time in the past 13 quarters. At 87.7%, the occupancy rate was up 10 bps from 1Q10 but down 20 bps from one year ago.

While the occupancy rate is still very near its cyclical bottom, there are reasons to believe occupancy rates may have less downside risk than just a few quarters ago. One such reason is that many metros appear to be in clear recovery. In fact, 15 of the MAP31 metros recorded an annual occupancy increase in 2Q10. This is the largest such number since 1Q07, when 17 metros recorded an annual occupancy increase.

One such market exhibiting this trend is Riverside, CA. The 2Q10 seniors housing occupancy rate in Riverside was 87.3%, which was up 40 bps from 1Q10 and an eye opening 220 bps from 2Q09. In fact, the 2Q10 occupancy rate in Riverside is the highest recorded since 3Q07, when it was 88.8%.

Each quarter, NIC MAP reports market level occupancy, rent growth and construction trends in each of the 100 largest metro markets. To incorporate NIC MAP data in your analysis please visit www.nicmap.org.

A chief reason why seniors housing is viewed as “outperforming” other asset classes in recent times is the fact that YOY rents are continuing to grow. NIC MAP has previously published data showing that seniors housing YOY rent growth was 1.5%. This compares to data provided from the Mortgage Bankers Association and PPR showing that office and multifamily YOY asking rents declined by 9% and 6%, respectively.

Although rents continue to grow, the pace of growth has slowed considerably. In fact, the pace of YOY rent growth has slowed in each consecutive quarter since establishing a cyclical peak of 4.0% in 2Q07. At 1.5% in 1Q10, we are left wondering if rent growth will slow further or even go negative in the near term. A key way to tackle this question is to look at individual property distributions to see if any patterns have emerged.

When trying to see if rents are declining it would be important to know if a large share of properties are reporting a YOY decrease in rents. This is, in fact, not the case. The percent of properties reporting a YOY decrease in rents was 13% in 1Q10. Further, the share of properties dropping rents has oscillated between 9% and 15% since 4Q06 and is showing no evidence of increasing. While we have all heard the “reports” of properties dropping rental rates, it is safe to say it is neither the norm nor an industry wide trend.

What has changed is the share of properties not raising rents, or holding rents steady. This group is represented by the percent of properties reporting YOY rent increases between 0% and 1%. This group has seen their share rise from 20% in 2Q07 to 45% in 1Q10. This suggests that operators are pursuing a strategy of “withholding rent increases”. This represents a significant share of all seniors housing properties and is the predominant reason why YOY rent growth has slowed from 4% to 1.5%.

While it is difficult to predict exactly where and when YOY rent growth will bottom, it does appear (based upon existing data) that rents will continue to grow.

Each quarter, NIC MAP reports rent distributions in each Metro Market Report. To purchase the report for your market please visit www.nicmap.org.

It is widely known that seniors housing occupancy rates have declined during the past three years. In fact, since reaching a cyclical peak of 92.3% in 1Q07, the seniors housing occupancy rate has declined by 430 basis points (bps) to 88.0%. Occupancy has declined in 11 of 12 quarters since 1Q07. When looking at occupancy performance by property type, it is clear that some property types have fared better than others.

Generally, assisted living properties (AL) have fared better than independent living properties (IL) during the past three years. Combined assisted living properties (properties that have a majority of assisted living units along with independent living, memory care or nursing care units) have declined by 270 bps from 90.3% in 1Q07 to 87.6% in 1Q10. This compares to freestanding IL properties, whose occupancy rate has declined by 620 basis points, from 91.0% in 1Q07 to 84.8% in 1Q10.

CCRCs have declined 410 bps in the past three years and are now 89.7% occupied across MAP31. Interestingly, CCRCs have maintained 90%+ occupancy until this quarter and are still boasting the highest average occupancy rates of all property types mentioned in this signal.

Each quarter, NIC MAP provides insights, trends and analysis on over 12,300 properties on the 100 largest MSAs. To update your analysis of seniors housing properties in your market(s), please visit www.nicmap.org.

Much has been made of the lack of new construction activity and ensuing emptying of the construction pipeline for seniors housing properties in MAP31. And with good reason; as of 1Q10 there remain just 78 seniors housing properties comprising 8,897 units under construction. This is a far cry from just two years ago (1Q08), when there were 159 properties and 20,601 units under construction. Construction starts have slowed considerably as well; over the past year, construction began on just 3,886 units within seniors housing properties, down 73.6% from 1Q08, when construction starts totaled 14,700 units during the previous 12 months. With the decline in the construction pipeline and the dearth of new starts, it is easy to see why investors might be intrigued by near to medium term supply prospects in seniors housing.

But the slowdown in construction has not yet translated into a slowdown in supply growth. In fact, seniors housing inventory is still growing at levels above 2,000 units per quarter. In 1Q10, the seniors housing inventory grew by 2,099 units. Over the past 4 quarters, the inventory has grown by 11,826 units or 2.4%. This level of growth is near recent cyclical highs when annual inventory grew by 2.6% in 2Q08 and 3Q08. These recent levels of growth are indicative of many projects that began in 2007 and 2008 that are opening in 2009 and 2010.

Going forward, it is not until 4Q10 when inventory growth is expected to fall well below the 2,000 unit per quarter growth threshold. As of 1Q10, 4,845 seniors housing units are expected to open over the next 2 quarters. This number is subject to change as project open dates are adjusted and new projects enter the pipeline. So, while the prospects for a significant downturn in supply growth for seniors housing properties are indeed intriguing, they may be medium term prospects, rather than short term.

Each quarter, NIC MAP provides insights, trends and analysis on over 12,300 properties on the 100 largest MSAs. To update your analysis of seniors housing properties in your market(s), please visit www.nicmap.org.