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Seniors Housing Construction Cycle Drivers and Market Impacts

Beth Burnham Mace, Chief Economist, Director of Capital Markets Outreach

 Business cycles.  Real estate cycles.  Development cycles.  Timing is everything.  Buy low.  Sell high.  Understand your markets. Understand your competition.  Understand your specific competitive position in your specific market.  These are all part of the lexicon for real estate professionals, owners, investors and operators.  Know when to get in.  Know your exit.  Understand if your capital is intended for a long-term hold or short term flip.   Recognize when a property is part of a core investment strategy or an opportunistic one.

 These days, it’s more important than ever to understand cycles, timing and strategies.  The economy and the seniors housing market are in or near their seventh year of expansion dating back to 2009 and 2010, respectively.  Since its low point in 2010 and through the end of 2014, occupancy rates steadily rose in the seniors housing sector as demand easily outpaced inventory growth.  These improving seniors housing market fundamentals, along with a compelling investment thesis stoked interest in the sector among investors, lenders, operators and developers.

 As a result, the transaction market for seniors housing properties has been robust, with record numbers of deals and dollar volumes changing hands on the existing property acquisition front.  Renovation and rehab activity on existing properties has also been keen.  And development activity has been heating up.  Initially, during the early years of this decade, new construction was supply-driven and was filling a void of new product offerings in the years following the Great Recession—“pent up supply needs,” so to speak.  This was a time when credit was difficult to obtain, especially for development.

 In the years since, however, that gap has largely been filled, and new development today is increasingly driven by style design changes, new product offerings and the intention to create quality living options to meet the market demands of aging adults.   A relatively affordable and plentiful stream of capital has also fueled recent activity.  Eight years of low interest rates, supported by a very accommodative Federal Reserve monetary policy, has lowered the cost of capital for new development and made returns even more compelling.

 As a result, there has been a significant rise in development activity in the seniors housing space.  There were roughly 44,000 units of seniors housing under construction as of the third quarter in the nation’s largest 99 metropolitan areas, equivalent to 5.2% of existing stock.  Since NIC began tracking the data in 2008, that’s the most units under construction and also represents the highest rate of construction as a share of existing inventory. 

 Development activity is greater for assisted living than independent living and not all markets are experiencing the same degree of activity.  Indeed, 34 geographies represent nearly 80% of all construction activity.  This means that 65 metropolitan markets represent a smaller 20% share of activity.  Nashville had the highest rate of construction at 24% of its existing inventory, while Chicago had the most number of units under construction (nearly 3,000).

 Looking ahead and using actual starts data through the third quarter, it is expected that construction activity will remain relatively robust for the next 12 to 24 months.  Time will tell if there is a natural check-and-balance that will limit this development cycle thereafter from overheating.  Developers tend to be an optimistic lot and often think that they have the best product offering in the best market and will manage to thwart any competitive threats.  Such thinking could easily create excess supply, and result in falling occupancy rates, rents and values. 

 That said, there is greater transparency in the seniors housing sector today.  Information about market fundamentals and capital market conditions from sources such as NIC, as well as active REIT participation in the sector and Wall Street analyst coverage allows investors, operators, lenders and borrowers to better understand current conditions and may provide a more disciplined capital market.

 With no certainty about the future and recognizing that today’s supply and demand fundamentals are more challenged than they had been earlier this decade (with occupancy levels at 89.9% in the third quarter of 2015, down from 90.3% at year-end 2015), operators, developers and capital providers are well advised to be diligent and honest in their business models and pro formas and to run sensitivity tests on return expectations.  The key for success in meeting return and valuation expectations will be creating and maintaining product offerings that appeal to both today’s and tomorrow’s growing elderly population as well as their adult children with best-in-class services, care, hospitality and housing.


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Topics: Research

About the Author

Beth Burnham Mace

Beth Burnham Mace is the Chief Economist and Director of Outreach at the National Investment Center for Seniors Housing & Care (NIC). Prior to joining the staff at NIC, she served as a member of the NIC Board of Directors for seven years and chaired NIC’s Research Committee. Ms. Mace was also a Director at AEW Capital Management and worked in the AEW Research Group for 17 years. Prior to joining AEW in 1997, Ms. Mace spent ten years at Standard & Poor’s DRI/McGraw-Hill as the Director of the Regional Information Service. She also worked as a Regional Economist at Crocker Bank, the National Commission on Air Quality, the Brookings Institution and Boston Edison.

Ms. Mace is a member of the National Association of Business Economists (NABE), the Urban Land Institute (ULI), ULI’s Senior Housing Council and New England Women in Real Estate (NEWIRE/CREW). In 2014, she was appointed a fellow at the Homer Hoyt Institute and was awarded the title of a “Woman of Influence” in commercial real estate by Real Estate Forum Magazine and Globe Street. Ms. Mace is a graduate of Mount Holyoke College (B.A.) and the University of California (M.S.). She has also earned The Certified Business Economist™ title (CBE) from the National Association of Business Economists (NABE). Ms. Mace is often cited in the Wall Street Journal, the New York Times, Seniors Housing Business, Seniors Housing News and McKnight’s Senior Living and has a bi-monthly column in the National Real Estate Investor.
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