Market Signals 2012
4Q12 Market Signal: Solid Recovery and No Current Construction
While the Detroit metropolitan market has had its share of economic woes, its seniors housing market has performed well since the recession. Detroit’s seniors housing occupancy has rebounded strongly and is now above pre-recession levels. As of the fourth quarter of 2012, Detroit’s occupancy was 91.0%, more than 500 basis points above its cyclical low. Detroit’s recovery has been fueled by minimal inventory growth and steady absorption. During the past three years, absorption has averaged 1.5% annually, compared with annual inventory growth of only 0.2%. Looking forward, inventory growth will continue to remain tempered in the near-term.
Detroit’s independent living and assisted living markets both have seen strong improvement, recovering 460 and 700 basis points, respectively, since their cyclical lows..
As of the fourth quarter of 2012, Detroit’s independent living and assisted living occupancies were 91.7% and 88.8%, respectively. Detroit’s independent living occupancy is currently 150 basis points above its pre-recession peak, while its assisted living occupancy is still 210 basis points below its respective pre-recession peak. The markets for both property types have enjoyed largely unabated recoveries since 2009, as each has experienced minimal inventory growth and steady absorption. Since occupancy bottomed during the second quarter of 2009, Detroit’s independent living and assisted living inventories have grown by only 0.3% and 1.4%, respectively. Demand has far outpaced supply during this time, with the number of occupied units in independent living and assisted living growing by 5.5% and 10.1%, respectively. No units for either property type are scheduled to open In Detroit during the near-term..
The sustained improvement in occupancy has likely afforded the resumption of annual rent increases. As of the fourth quarter of 2012, Detroit’s annual asking rent growth for independent living and assisted living was 3.0% and 3.7%, respectively. Annual rent growth for each property type is exceeding the current pace of inflation and outpacing aggregate rent growth for the top 31 metropolitan markets, which stand at 2.3% and 2.0%, respectively. .
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4Q12 Market Signal: Will New Supply Impact Denver’s Fundamentals?
From 2006 through 2009, the Denver metropolitan market experienced a surge in the development of seniors housing properties. Denver’s inventory grew by 33% from 2006 through 2009, far outpacing growth in other major metropolitan markets. The onset of new supply, which coincided with the economic recession, caused Denver’s seniors housing occupancy to fall from 94% to 82% – a decline of more than 1,200 basis points. Since 2010, the market steadily absorbed the supply that completed during the recession, and occupancy rebounded to 90.8% as of the fourth quarter of 2012.
The development wave during 2006 through 2009 was primarily in independent living properties, with a large share of the units within CCRCs. CCRCs accounted for 60% of the inventory growth in independent living during this time, as four new CCRCs opened. There were also three combined and three freestanding independent living properties that opened during this period. Denver’s independent living occupancy dipped below 80% during 2009 but climbed to 89.7% as of the fourth quarter of 2012. Looking forward, growth in the independent living inventory may put slight pressure on occupancy in the near-term, as construction currently represents 2.8% of existing independent living inventory. However, the construction is limited to expansions within two existing CCRCs, Clermont Park and Wind Crest. Clermont Park is adding 74 independent living units, and Wind Crest is adding 56 assisted living units, 32 memory care units, and 44 nursing beds.
New development is concentrated in Denver’s assisted living market. As of the fourth quarter of 2012, assisted living construction represented 6.6% of existing inventory. There were three new properties under construction, each located in distinct submarkets and their scheduled openings were staggered throughout this year. Three properties in lease-up concurrently could put downward pressure on Denver’s occupancy. Since 2010, Denver’s assisted living annual absorption has averaged 140 units. Given the scheduled opening dates for the new supply, Denver’s pace of assisted living absorption will need to accelerate to maintain its current occupancy level.
Properties Currently Under Construction in Denver
While there is some minor near-term supply pressure, particularly in assisted living, the outlook for demand is encouraging. Demographics continue to remain in Denver’s favor, with the number of 75+ households expected to grow an average of 1.9% annually through 2017. In addition to strong demographic growth, Denver’s and the broader state’s economies are doing well. The Federal Reserve of Philadelphia’s Leading Index for Colorado suggests the state’s economy will expand 2.2% during the first half of 2013, well above growth predictions for the national economy. Denver’s unemployment rate fell to 7.6% as of December, and its level of employment is nearing its pre-recession peak. According to Zillow Real Estate Research, Denver’s housing market should also continue to strengthen, with home prices forecast to rise by 2.3% during 2013.
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4Q12 Market Signal: Strong Independent Living Absorption Fueling Recovery in Dallas
As of the fourth quarter of 2012, seniors housing occupancy within the Dallas metropolitan market was 86.2%, a decrease of 10 basis points from the prior quarter but 360 basis points above its level this time a year ago. As depicted in Figure 1, occupancy has risen 520 basis points since establishing its cyclical low during the fourth quarter of 2009.
Independent living experienced a strong development period within the Dallas market in the years leading up to the financial crisis, which contributed to the decline in occupancy, shown in Figure 2. During the three-year period ending in the fourth quarter of 2009, independent living occupancy declined 740 basis points. During this time, the independent living inventory grew at an annual pace of 4.6%, compared to 1.6% for absorption. Since the fourth quarter of 2009, independent living occupancy has risen by 670 basis points, as inventory growth has tempered to a 2.2% annual rate, and absorption accelerated to an annual rate of 5.0%. There were independent living 427 units under construction as of the fourth quarter 2012, which represents 2.8% of existing inventory. As of the fourth quarter of 2012, 321 of these units are scheduled to complete during 2013, which would represent an increase in inventory of 2.1%.
As shown in Figure 3, assisted living absorption in Dallas has proven to be more stable over time than that of independent living. In the three-years ending in the fourth quarter of 2009, assisted living occupancy declined 250 basis points. During this time, assisted living inventory grew at an annual pace of 5.4%, compared to 3.9% for absorption. Since the fourth quarter of 2009, assisted living occupancy has risen by 130 basis points, as the annual rate of inventory growth slowed to 2.9%, while the annual rate of absorption remained at 3.9%. Dallas’s assisted living market is poised for significant near-term growth, as there were 653 units under construction as of the fourth quarter of 2012, which represents 8.1% of existing inventory. As of the fourth quarter of 2012, all 653 units are scheduled to complete during 2013, indicating a significant acceleration in inventory growth.
While Dallas may have near-term supply pressure, particularly in assisted living, the outlook for demand is encouraging. Demographics continue to remain in Dallas’s favor, with the number of 75+ households expected to grow during 2013 by 2.2%, the 7th highest growth rate forecasted across the top 100 metropolitan markets. In addition to strong demographic growth, Dallas’s economy is doing well. Dallas’s unemployment rate has fallen to 6.1% as of December, and Dallas’s level of employment has surpassed its pre-recession peak. Dallas’s housing market has strengthened as well. For the most part, Dallas escaped the housing bubble, as home prices are only 4.6% from their pre-recession peak and have risen 4.6% from a year ago. As of the third quarter of 2012, Zillow Real Estate Research expects Dallas home prices to rise by 1.3% during 2013.
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3Q12 Market Signal: Inventory Growth Tempering Occupancy’s Recovery in Chicago
The Chicago metropolitan market continues to feel the effects of robust inventory growth on its occupancy. As of the third quarter of 2012, Chicago’s seniors housing occupancy was 84.4%, an increase of 20 basis points from the prior quarter, but a 90 basis point decline from a year ago. Chicago’s occupancy had risen modestly from the first quarter of 2010 through the fourth quarter of 2011; however, inventory growth has suppressed its recovery during 2012.
During the first three quarters of 2012, Chicago’s seniors housing inventory grew by 3.9%, as a number of new properties have opened. Several new CCRCs have opened: including Park Place of Elmhurst, with 283 units; The Admiral at the Lake, with 292 units; and GreenFields of Geneva, with 241 units. Assisted living inventory also grew, with the opening of Avalon Springs, a 135-unit assisted living/memory care/nursing care property; Three Oaks Assisted Living, an 85-unit assisted living/memory care property; and Victory Centre of Vernon Hills, a 120-unit assisted living property.
During the first three quarters of 2012, independent living faced more downward pressure due to inventory growth than did assisted living, as its occupancy declined by 150 basis points compared to a 20 basis point increase in assisted living. However, in the near-term, assisted living occupancy will encounter more downward pressure than independent living. During the next four quarters, assisted living inventory is poised to grow by 7.7%, as 550 units scheduled to complete. Independent living is poised to grow by 1.2%, as 251 units are scheduled to complete during the next four quarters.
While Chicago’s independent living market is scheduled to grow only modestly during the next four quarters, its soft for-sale housing market may hinder its recovery. Home values have risen 4.4% since bottoming in March, but Chicago is still waiting for appreciation on an annual basis. Chicago has not had an annual increase in home values since April 2007 and is the only metropolitan market of the 20 tracked by S&P/Case-Shiller that has not registered any annual appreciation at any point since the housing bubble collapse. Zillow Real Estate Research forecasts Chicago’s home values will remain under pressure in the near-term, with their current forecast calling for a 0.7% decline during 2013.
Chicago’s assisted living market is poised to face significant supply pressure during the next four quarters, as inventory is currently scheduled to grow by nearly 8%. This amount of growth is not uncharacteristic for Chicago, as inventory has grown at an average 5.4% annual rate since the fourth quarter of 2005. For the most part, demand has been able to keep pace with inventory growth, as annual absorption has averaged 4.7% during this time. However, due to the continued expansion of inventory, the recovery in occupancy is likely to stall during the next four quarters. Assuming the current completion schedule, even if absorption maintained its strong third quarter of 2012 annual absorption rate of 5.9%, occupancy would remain essentially flat near 85% during the next four quarters.
3Q12 Market Signal: Strong Fundamentals in Boston’s Seniors Housing Market
The Boston metropolitan market continues to remain one of the strongest seniors housing markets, with high occupancy and strong rent growth. As of the third quarter of 2012, Boston’s seniors housing occupancy was 92.6%, an increase of 50 basis points from the prior quarter and 20 basis points from a year ago. Asking rent growth also continued to remain strong, with asking rents rising by 3.7% during the past year. Boston’s market fundamentals remain comparatively strong, ranking first and second, respectively, in terms of occupancy and annual rent growth with the top 31 metropolitan markets (MAP31) during the third quarter of 2012.
Supply-demand fundamentals have been improving since the fourth quarter of 2009 when Boston’s occupancy established its cyclical low at 89.1%. The sharp decline in occupancy that quarter was largely the result of inventory growth—a net increase of 793 units during the quarter. The properties opening that quarter included the opening of New Bridge on the Charles, a 607-unit entrance fee CCRC; Brightview Concord River, an 84-unit assisted living/memory care property; and Windsor Place of Wilmington, an 80-unit assisted living/memory care property. While the market occupancy was heavily influenced by these property openings and their subsequent lease-up, the market’s “typical” property was able to maintain high occupancy rates. As since in Figure 2, the market’s median occupancy shows that the “typical” property in Boston remained at or above 95% in the current market cycle.
Inventory growth in Boston has been more tempered recently, with average growth of 93 units since the first quarter of 2010. The combination of tempered inventory growth and strong absorption has allowed occupancy to recover within both independent living and assisted living properties, with occupancy rising by 400 and 260 basis points, respectively, since the fourth quarter of 2009.
Furthermore, based on projects that have broken ground, inventory growth should remain tempered during the next few quarters. As of the third quarter of 2012, there were 411 units under construction, with all of these units within assisted living properties and only 73 of these units scheduled to complete during the fourth quarter of 2012. Inventory growth of 411 units in Boston’s assisted living market would translate to a 5.2% increase in inventory; while Boston’s independent living inventory is not anticipated to grow during the next few quarters.
While scheduled inventory growth appears to be at manageable levels, especially for Boston’s independent living market, economic and demographic indicators are a mixed bag. On the demand side, projected demographic growth in 75+ households in Boston is slightly slower than MAP31 at 0.7% and 1.1%, respectively. As of September 2012, Boston’s employment has risen by 2.7% in the past year, well above the1.5% pace for the United States overall. The most recent Case-Shiller home price data shows that as of August 2012, Boston’s home prices have risen 1.7% in the past year, only slightly below the 2.0% pace for the Case-Shiller Composite-20 index. While recent home price appreciation has been comparable to national benchmarks, according to Zillow Real Estate Research, Boston’s housing market is projected to underperform in 2013, with home prices in Boston projected to fall 0.1% in 2013, compared to a 1.7% increase for the United States.
Even if the projected slowing in Boston’s housing market comes to fruition, the lack of scheduled inventory growth should maintain a relatively balanced supply-demand dynamic for Boston’s independent living market. Boston’s assisted living market is slightly more at risk for declining occupancy because of the pending 5.2% increase in inventory; however, the market has been able to absorb that level of growth in the past, during a time of even more economic uncertainty.
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3Q12 Market Signal: Market Fundamentals Differ Between Property Types in Baltimore
As of the third quarter of 2012, Baltimore’s occupancy was 91.0%, which is 110 basis points above its cyclical low. Baltimore’s occupancy has experienced a slightly slower recovery than the average MAP31 recovery to date, as Baltimore’s occupancy remains 380 basis points below its pre-recession peak, compared to 310 basis points for MAP31. While Baltimore’s recovery has been tempered to date, the lack of any significant scheduled near-term inventory growth, by itself, is favorable for continued gains in occupancy.
Somewhat unique to Baltimore is the large delta between independent living and assisted living occupancy rates. As of the third quarter of 2012, independent living occupancy was 93.2%, compared to 86.5% in assisted living, a difference of 670 basis points. The 670 basis point difference between independent and assisted living occupancy is second only to St. Louis within the top 31 metropolitan markets. While the delta has widened a bit recently, prior to the recession, this difference was still north of 500 basis points, suggesting this delta is structural rather than cyclical.
A potential explanation of this phenomenon is the unique mix of independent living properties in Baltimore. Approximately 90% of the units within majority independent living properties reside within CCRCs, which is the highest proportion within the top 31 metropolitan markets. Even though overall CCRC occupancy continues to oscillate near its cyclical low, Baltimore’s CCRCs have escaped the overall lackluster performance in CCRCs recently. One reason for the lack of recovery in CCRCs is due to the sizeable amount of new inventory that opened near the time of the financial crisis, as many of those projects have had difficulty filling units. Baltimore has experienced no CCRC inventory growth since 2006, shielding the market somewhat, from the supply pressures that were felt elsewhere. The majority independent living CCRCs in Baltimore have not been completely immune to the economic downturn, however, as their occupancy did decline 460 basis points from peak to trough but never fell below 92.5%.
During the next few quarters, the minimal inventory growth in Baltimore creates a favorable supply-side scenario for increases in occupancy. On the demand side, projected demographic growth in Baltimore and MAP31 are similar at 1.1% and 1.3%, respectively, although recent economic data has been somewhat soft. While Baltimore’s economy generally was more insulated than most due to its proximity to Washington D.C., its recent recovery has been tempered. As of September 2012, Baltimore’s employment has risen by only 0.5% in the past year, somewhat below the 1.5% pace for the United States. In addition, according to Zillow Real Estate Research, Baltimore’s housing market also has underperformed slightly in the past year and is projected to continue to do so in 2013. As of September 2012, the Zillow Home Price Index for Baltimore has fallen 1.1% during the past year, compared to a 1.5% increase for the United States. In 2013, Zillow projects Baltimore’s home values will continue to underperform, only increasing by 0.7%, compared to a 1.7% increase for the United States.
The softness in Baltimore’s economic data may begin to explain its relatively recent soft seniors housing absorption. Baltimore’s absorption has been comparatively soft, with annual absorption as of the third quarter of 2012 at 1.4%, compared to 2.2% for MAP31. Much of the underperformance is due to weak absorption in independent living properties, where CCRCs make up the bulk of the inventory. CCRCs have helped to sustain relatively high occupancy in independent living properties, but absorption in these properties continues to remain slow. Since Baltimore’s market is dominated by CCRCs, which continue to experience slow absorption, and that coupled with comparatively weak economic data, overall absorption is unlikely to accelerate materially in the near term. The combination of slow absorption and minimal inventory growth will likely lead to somewhat small increases in seniors housing occupancy during the next few quarters, although the respective property types may trend differently.
2Q12 Market Signal: The Impacts of Inventory Growth on Atlanta’s Seniors Housing Market
As of the second quarter of 2012, Atlanta’s occupancy was 88.7%, which is 530 basis points above its cyclical low. However, it remains 380 basis points below its previous cyclical high. Atlanta’s occupancy experienced a peak-to-trough decline of 910 basis points during the recession, with the decline coinciding with the inventory growth that occurred during the height of the recession.
A large portion of Atlanta’s inventory growth during that period was within independent living. As a result, independent living occupancy was more impacted than assisted living, with peak-to-trough occupancy declines of 1,560 and 770 basis points, respectively. In hindsight, the warning signs were evident, as independent living construction as a percent of existing inventory reached 25.8% during the first quarter of 2007.
The new independent living construction resulted in inventory growth of 32% from 2006 through 2009, which put significant downward pressure on occupancy. More recently, during the last three years, inventory has remained essentially flat, which has allowed the market to absorb the excess inventory. As of the second quarter of 2012, Atlanta’s independent living occupancy was 88.6%, which is 860 basis points above its cyclical low.
Atlanta’s assisted living occupancy was more insulated than that of independent living, but it still experienced a significant decline. Inventory growth was a key factor for the differing performance, as assisted living inventory increased by only 8% from 2006 through 2009, compared to the 32% increase of independent living. As of the second quarter of 2012, Atlanta’s assisted living occupancy was 88.8%, which is 560 basis points above its cyclical low.
1Q12 Market Signal: Occupancy Recovering in Majority Independent Living Properties
Occupancy in majority independent living properties is now 150 basis points above its cyclical low, but remains 430 basis points below pre-recession levels. As of 1Q12, majority independent living occupancy was 88.3 percent, an increase of 30 basis points from the prior quarter and a 100 basis point increase from a year ago. The current recovery has been driven by robust absorption coupled with tempered inventory growth. In the past year, the pace of annual absorption was 2.2 percent, which is twice the 1.1 percent pace of annual inventory growth.
Stabilized properties have experienced a more muted recovery.
The strongest recent performance is concentrated in not-yet-stabilized properties that opened during the past couple of years. Stabilized occupancy has seen a more muted recovery. As of 1Q12, occupancy in stabilized majority independent living properties was 88.9 percent, an increase of 10 basis points from the prior quarter and a 70 basis point increase from a year ago. While stabilized occupancy is now 90 basis points above its cyclical low, occupancy in all properties has climbed 150 basis points from its cyclical low.
The recovery has been concentrated within freestanding and combined properties.
Freestanding properties experienced the largest occupancy declines within majority independent living, with a peak to trough decline of 900 basis points. Conversely, freestanding properties have also experienced the strongest recovery, with occupancy having recovered 450 basis points since its cyclical low. In other words, freestanding independent living properties have gained back half of the occupancy that was lost since the onset of the recession. Properties on combined campuses—those combining care segments (e.g., independent living and assisted living)—experienced a less severe decline than freestanding properties, but their occupancy still declined 570 basis points from peak to trough. Since establishing a cyclical low, occupancy in combined properties has risen by 230 basis points. CCRCs are yet to participate in the recovery, with their occupancy holding essentially flat near its cyclical low. While occupancy in CCRCs has not yet begun to show upward momentum, as of 1Q12, it remains the highest of majority independent living properties at 88.8 percent, compared to 88.3 percent and 87.1 percent for combined and freestanding properties, respectively.
Most metropolitan markets are currently recovering.
Most of the nation’s largest (or primary) metropolitan markets have been participating in the recovery. During the past year, 24 of the top 31 metropolitan markets experienced increases in their stabilized occupancy rates. The markets showing the most improvement during the past year were Las Vegas, Portland, Cleveland, Riverside, San Francisco, and Dallas, with each metropolitan market having stabilized occupancy increase by at least 200 basis points during that time. The markets with declining stabilized occupancy in the past year were Phoenix, Sacramento, Pittsburgh, San Antonio, San Jose, and Los Angeles.
1Q12 Market Signal: Different Occupancy Measures Provide Further Insights
Seniors housing occupancy in the top 31 metropolitan markets continued to show steady improvement during the most recent quarter. As of 1Q12, occupancy was 88.4 percent, an increase of 20 basis points from the prior quarter and an 80 basis point increase from a year ago. These increases were not caused by gains in stabilized properties, but more so by the lease-up of unstabilized properties.
As of 1Q12, the occupancy rate in stabilized properties remained essentially unchanged at 89.0%, while occupancy for unstabilized properties was 57.4%, an increase of 580 basis points from the prior quarter. Although there are a relatively small number of unstabilized properties, since the distribution of occupancy is left-skewed, this small group can have a significant impact on the aggregate average figures.
Because of this skewed distribution for the average occupancies, an alternative approach is to examine the median occupancy rate, which has a reduced sensitivity to outliers, i.e. very low occupancy rates. As of 1Q12, the median occupancy rate for all properties was 92.0%, essentially unchanged from the prior quarter and a 60 basis point increase from a year ago.
While these different measures of the aggregate MAP31 occupancy demonstrate that the supply overhang has begun to wane with the lease-up of unstabilized properties, the trends vary across the individual markets. To determine the degree to which the supply overhang persists within your individual markets, access these occupancy metrics for those markets from NIC MAP.