Market Signals 2011

The top 31 metropolitan markets experienced a peak-to-trough decline in seniors housing occupancy of 480 basis points (bps), but since has risen 110 bps as of 4Q11. The magnitude of the declines and recoveries has varied between property and campus types.

Independent living experienced a larger decline in occupancy than assisted living, declining 580 bps compared to 320 bps in assisted living. However, both property types have had occupancy rise 120 bps since establishing their respective cyclical lows.

Within independent living, individual campus types have performed quite differently. In general, a higher mix of independent living units has corresponded to larger declines and subsequent recoveries in occupancy (the percent of independent living units in CCRCs is 55%, compared to 71% in combined independent living properties and 100% in freestanding independent living properties). CCRCs experienced a peak-to-trough decline of 500 bps, compared to 570 bps in combined independent living properties and 770 bps in freestanding independent living properties. Conversely, freestanding independent living has had the strongest recovery, with occupancy rising 360 bps from its cyclical low to the current quarter, compared with 160 bps for combined independent living and 20 bps for CCRCs.

The variability among campus types in assisted living properties has been much less. Freestanding and combined assisted living properties both declined approximately 360 bps from their respective cyclical highs, although combined assisted living has experienced a slightly stronger recovery. Occupancy in combined assisted living properties has risen 160 bps from its cyclical low, compared to only 100 basis points for freestanding assisted living.

While seniors housing occupancy has been slowly recovering during the past two years, CCRCs have not yet participated in the recovery. As of 4Q11, occupancy in CCRCs was 88.9 percent, which is near where it has oscillated since early in 2010, and is currently 480 basis points below the cyclical high it established in 1Q07 at 93.7 percent. In contrast, overall seniors housing occupancy declined a comparable 460 basis points from its cyclical high to its cyclical low, but it since has risen 110 basis points after having established that cyclical low in 1Q10.

Occupancy trends between the two CCRC payment types have been similar of late. Both entrance fee and rental CCRCs have oscillated near their respective cyclical lows during the past two years. As of 4Q11, entrance fee CCRCs had an occupancy rate of 89.1 percent, which is slightly above the 88.6 percent occupancy rate of their rental counterparts.

Independent living properties currently are driving the recovery in seniors housing occupancy. In 4Q11, independent living occupancy was 88.0 percent, an increase of 20 basis points from the prior quarter and a 90 basis point increase from one year ago. Independent living occupancy was 120 basis points above its cyclical low of 86.8 percent established during 3Q10. Most of the increase in independent living occupancy is attributable to the recovery in freestanding properties.

In 4Q11, freestanding independent living occupancy was 86.4 percent, an increase of 30 basis points from the prior quarter and a 270 basis point increase from one year ago. Freestanding independent living occupancy was 360 basis points above its cyclical low of 82.8 percent established during 4Q09. Combined campus properties have also been recovering recently, albeit at a slower rate than freestanding properties, with occupancy increasing to 87.8 percent during 4Q11, an increase of 20 basis points from the prior quarter and a 90 basis point increase from one year ago. The only independent living campus type that has yet to participate in the recovery is that of CCRCs. Occupancy in CCRCs has been essentially flat for the past six quarters and continued to oscillate near its cyclical low.

There have been anecdotes suggesting a trend of late among new independent living residents towards opting for smaller units in an effort to maintain lower monthly rent. The suggestion is that among new residents who elected to move, for example, into a studio, are residents who, prior to the recent recession, would have otherwise opted for a one-bedroom unit. After examining occupancy rates by room type, there is some evidence of this trend across two-bedroom units, but not necessarily in one-bedroom or studio units. The steepest occupancy declines during the recession were seen in two-bedroom units compared to the other room unit types, with a likely reason being the differentials in price points. Conversely, there has not been any clear change in preferences between one-bedrooms and studios, as their occupancy trends have remained essentially parallel since 2006. As of 3Q11, the average monthly rent for two-bedroom independent living units was $3,151, which is significantly higher than studios and one-bedroom units, which were $2,232 and $2,563, respectively.

Across the largest 31 metropolitan markets (i.e., MAP31), seniors housing occupancy is in the early stages of recovery. As of 3Q11, seniors housing occupancy averaged 88.1%, which is 100 basis points above the cyclical low it established during 1Q10. While occupancy is 100 basis points above its cyclical low nationally, there is significant variation in the extent of the recoveries within individual metropolitan markets. There are three markets (Minneapolis, Philadelphia, and San Antonio) that have not participated at all in the recovery and established new cyclical lows in 3Q11. There are another three markets (Denver, Kansas City, and Las Vegas) that are clearly in recovery and more than 500 basis points (as of 3Q11) above their previously established cyclical lows.

As of 3Q11, two markets (Cleveland and Las Vegas) have nearly reverted back to their previous cyclical highs, signaling that their recoveries are complete. On the other hand, there remain markets as much as 1,000 basis points below their respective cyclical highs. Cincinnati has the most ground to recover; its occupancy of 83.4% (as of 3Q11) is 1,065 basis points below its cyclical high of 94.1%.

To see where your market is within its recovery, please consult the NIC MAP 3Q11 Metro Market Reports, which can be purchased in the NIC Store.

Seniors housing occupancy remained essentially unchanged during 2Q11, as concerns about economic growth likely affected consumer confidence during the quarter while the number of new units coming on-line remained tempered. This coincided with the first increase in two years in the percent of properties reporting a decline in year-over-year occupancy. In 2Q11, approximately 41 percent of properties reported lower occupancy, up nearly 2 percentage points from the prior quarter. At the height of the financial crisis, this percentage reached a cyclical high of 53 percent. Conversely, the percentage of properties reporting higher occupancy in annual comparisons has seemed to stagnate recently, oscillating near 46 percent since 2Q10. The uptick in properties reporting declining occupancy and stagnation of properties reporting higher occupancy are dynamics behind occupancy’s continued relative slow recovery.

For data and analysis on your market, please consult the NIC MAP 2Q11 Metro Market Reports which can be purchased in the NIC Store.

While seniors housing occupancy rates remained essentially unchanged in 2Q11, recovering occupancy in MAP32-100 continued to show traction. In 2Q11, seniors housing occupancy in MAP32-100 rose 30 basis points to 89.5%, which represents a two-year high. Occupancy in these secondary metropolitan markets is now 110 basis points above its cyclical low established in 1Q10, and it has risen in each of the last five quarters.

Occupancy has shown more traction in MAP32-100 than MAP31 recently, but why? Inventory growth in MAP31 and MAP32-100 has been similar since 1Q10 at 1.4% and 1.3%, respectively. Absorption, on the other hand, has been stronger in MAP32-100 than MAP31. Since 1Q10, absorption in MAP32-100 has been 2.7%, compared to 2.3% for MAP31.

In addition to showing stronger absorption recently, MAP32-100 also has shown stronger rent growth than MAP31. During 2009, year-over-year rent growth was similar in both geographies, although there has been a divergence since. Year-over-year rent growth in MAP31 slowed to as low as 0.6% in 4Q10, the same quarter during which MAP32-100 established its cyclical low, albeit 90 basis points higher than that of MAP31 at 1.5%. This spread remains in place, with MAP32-100’s annual rent growth now at 2.4% compared to 1.4% for MAP31.

As outlined in this signal, even large geographical groups can behave differently, depending on their respective market cycles. At the market level, this will be even more apparent. For analysis on your market, visit www.nicmap.org.

Previously, we examined rent growth in relation to a property’s occupancy rate. In response to continued demand of this subject matter we revisit this topic.

During the past three quarters, there has been clear divergence between the three occupancy cohorts of 90% – 100%, 80% – 90%, and below 80%. From 2009 to mid-2010, there was virtually no difference in year-over-year rent growth among properties with occupancy from 80% – 90% and properties with occupancy below 80%. During the same time, properties with occupancy between 90-100% enjoyed rent growth of approximately 60 basis points higher than the other two cohorts. Beginning in 4Q10, a divergence developed between the 80% – 90% and below 80% cohorts. Rent growth in properties with occupancy below 80% declined significantly in 4Q10 and is now 110 basis points below that of the 80% -90% cohort. The drop in rent growth for the lowest occupied properties coincides with an increase in the lower quartile’s occupancy, which speaks to the ability among those properties to increase their occupancies by lowering asking rents.

The recovery for seniors housing occupancy has been underway for the past year, with seniors housing occupancy rising 60 basis points since establishing a cyclical low in 1Q10. A large share of this rising occupancy can be attributed to properties in the lower quartile in terms of occupancy rates. Since establishing a cyclical low at 82.5% in 1Q10, the lower quartile seniors housing occupancy rate has risen 140 basis points to 83.9% as of 1Q11. During the same period, the upper quartile has risen only 50 basis points to 96.7% as of 1Q11. One reason for the occupuancy recovery within the lower quartile may be their continued lowering of market rents. In 1Q11, seniors housing properties overall realized an average year-over-year rent growth of 0.5%, an increase of 50 basis points from the prior quarter. At the same time, properties with occupancy below 80% experienced an average year-over-year rent growth of -1.6%, representing a slowing of 30 basis points from the prior quarter and moving in the opposite direction of what is occuring in the overall market.