Senior living’s memory care sector, which is designed for residents with Alzheimer’s disease or other forms of dementia, provides an integral service – and one that appears likely to only grow in importance in the coming years.
The chief reason is an unfortunate one. The growing number of Americans contending with memory-related challenges. Omar Zahraoui, principal, research and analytics, National Investment Center for Seniors Housing & Care (NIC), said an NIC analysis found that approximately one in nine Americans aged 65 and older has Alzheimer’s or some other form of dementia. By 2030, NIC expects there to be an estimated 8.2 million older Americans with some form of dementia.
NIC tracks the largest 99 markets in the country, and it found that memory care’s occupancy rate fell from 83.2% to 73.8% – from “peak to trough” – at the worst of COVID-19. Demand was a factor in the drop in occupancy rate as some family members thought it safer to keep their loved ones at home, but other factors also were powerful, said Beth Mace, chief economist, NIC.
“There was a significant impact from COVID on the occupancy rate, and that stems from operators themselves choosing to limit the number of people that were moving into the property because they didn’t want to risk contagion with the existing residents,” Mace said. “And then there were also regulatory rules for senior housing that affected the occupancy rates.”
However, memory care occupancy rates have since recovered to 81.9%, according to the NIC.
“Memory care was the first segment to fully recover in terms of occupied units and a return to pre-pandemic occupied stock,” Zahraoui said.
Mace added, “The pandemic really affected occupancies in memory care, as well as in assisted living and independent living, but great strides have been made since the worst days of the pandemic.”
Demand Rebounds as COVID Recedes
The initial drop in occupancy rates meant that there was pent-up demand as the pandemic’s impact lessened. Zahraoui said occupancy and demand have improved at a faster pace compared to pre-pandemic levels, though it is difficult to project if that will continue in light of the macro challenges of labor shortages and inflation.
“So far, though, the demand improvement and occupancy gains have been notable,” he said. “Both macro and micro dynamics for memory care trends suggest strong fundamentals for the sector.”
On the supply side, Mace said, “There’s been a significant slowdown in construction of memory care properties and the number of units under construction.” In fact, Mace said that 15% of the memory care market inventory was under construction in the second quarter of 2016 – today that number is just 5.3%.
“That slowdown happened before COVID, and there was a bit of an oversupply that was really probably happening at some point in memory care, and that’s not happening today as much,” Mace said. “And as a result of that growth in inventory, the number of new units that were coming into the market during COVID also slowed pretty sharply because of that slowdown that we’ve seen in the prior years.”
Although the occupancy rate has not completed its full rebound, Mace noted that the growth in total units – even if modest in recent years – means more people are living in memory care than ever before.
“There’s never been more people in memory care units than there is today – the number of occupied units is at its all-time high,” Mace said. “That speaks to the demand.”
Challenges Center on Operators
Despite the positive occupancy signs in the memory care market, the field faces an array of challenges.
Jeff Frum, senior vice president of sales and marketing, Silverado, said one limiting factor in the memory care market’s success is the high number of quality operators. Before the pandemic, he said, many investors identified an opportunity to build additional beds to meet the demands of the anticipated sharp growth in the number of older people in the U.S.
“The demographics penciled out for an optimistic future in memory care,” Frum said.
Then the pandemic arrived.
“The industry was tested by a refining fire during the pandemic and quality operators, like Silverado, came through this experience with a stronger resolve than ever to serve this vulnerable population,” Frum said. “Many operators didn’t possess strong competencies in the clinical and behavioral complexities of advancing dementia complicated by the COVID restrictions imposed upon us by the CDC [Centers for Disease Control and Prevention] and local health authorities and couldn’t deliver the financial returns for their owners.”
As a result, Frum said, he has seen attempts to increase occupancy from some operators by reducing rates or offering rate locks and waiving administrative fees upon move-in.
“Ultimately, these are unsustainable strategies in the face of rising economic costs of labor, building maintenance and supplies from inflationary pressures and rising interest rates,” Frum said.
Memory Care Structure a Barrier
Max Slobin, vice president, senior payments advisor at KeyBank, which offers a senior living platform that owners and operators utilize for payments, liquidity, and lending, said his customers’ top-of-mind areas of interest include the trifecta of COVID; labor and rising rates; how they can maximize yield for their cash on-hand through operating accounts, non-operating accounts or excess corporate cash; and the automation of core treasury processes, accounts receivable (credit/debit cards, ACH), and accounts payable (vendor payments).
Slobin said memory care currently faces the same challenges as other seniors’ housing asset types, including independent living and assisted living.
“The challenges include unstable occupancy levels and elevated labor costs, but at amplified levels due to some of the inherent characteristics of memory care assets [e.g., shorter length of stay, smaller properties, more labor due to higher acuity of residents],” he said. “With relatively thin margins and fluctuating occupancy, memory care assets tend to have volatile net operating income. For these reasons, it’s a very challenging time to own, operate or finance memory care assets.”
In addition, Slobin said, “Many memory care assets are financed with floating rate debt, which is spiking while occupancy and labor issues are depressing net operating income. This amounts to something of a ‘perfect storm.’”
Mace noted that labor, particularly skilled nursing, remains an impediment to growth in the senior living industry. In fact, she said, Bureau of Labor Statistics figures suggest that the number of people employed in assisted living has returned to pre-pandemic levels, but the number of jobs in skilled nursing remains 13-14% below its level when COVID arrived.
“Labor shortages have been plaguing this industry for quite some time, especially skilled nursing,” Mace said. “One of the trends that we’re seeing in memory care is much more person-centered care protocol – so really understanding what an individual needs and trying to focus on that as opposed to some more generic plan that would be applied to a group.”
And, of course, she added, the more person-centered care product is going to require labor and more staff. “So, it’s a bit of a conundrum, because I think the care for individuals with dementia, the more personalized you can make it the better, but that, of course, takes more programming and more personnel to do that,” Mace explained.
Frum agreed that the staffing crisis particularly causes complications for those operators with a model of care that includes 24-hour licensed nurses.
“Eliminating contract labor has been a huge focus as well as managing the overtime burden on our existing staff,” he said. “Recruiting caregivers and nurses to meet the growing demands of our census will be critical. Forging partnerships with local CNA schools and integrating nursing students in our memory care communities have proven helpful in recruiting talent. We have all felt the pain from the inflationary pressures from rising fuel prices affecting food and supply costs. We have also experienced a collateral impact on rising wages for our valued employees.”
Memory care’s expense for customers also creates challenges. “It’s expensive,” Mace said. “And it’s difficult for families to be able to sustain those levels of payments for a long period of time unless you have a decent amount of wealth. That’s an issue certainly for memory care. Memory care requires a lot of personal contact and support and labor.”
It’s “a tough nut to crack,” she said. “As you provide care, it gets more expensive to the very people that need the care, and I don’t think that we’ve figured it out broadly,” Mace said. “There are ways to make your team more efficient these days with more technology to help in terms of freeing up staff to do more person-to-person care, but it’s an ongoing challenge for our industry and that includes memory care.”
Focus on Innovation
Frum said memory care operators who can differentiate themselves through innovation, outcomes and marketing will be able to take advantage of the current market.
“There are many exciting technologies on the horizon that will support improved clinical management of the care needs of our residents. Innovative engagement programs, like Nexus at Silverado that has been shown to improve cognition by 60% for those in the earlier stages of dementia,” Frum said. “And, increasing our sphere of influence by telling more effective stories of the lives we change on our digital platforms.”
Frum noted that memory care primary is a health care business.
“There is a tremendous opportunity for operators to tap into the reimbursement world offered by Medicare by delivering a medical model of palliative and hospice care,” Frum said. “If we track our clinical outcomes and deliver results that matter to payers, like reduced emergency room visitation rates, hospital admission and readmission rates then doors are open for creative partnerships with insurance payers, PACE [Program of All-Inclusive Care for the Elderly] programs, and other at-risk post-acute health care partnerships.”
Mace said there have been notable advances in the understanding of how to care for people in memory care, including potential preventive actions that can help slow the progression of memory loss. Memory care operators work with universities and seek to better understand how they can create better environments for their residents.
“All of this is leading to them offering a better product,” she said.
Mace said the memory care field is marked by operators who are pursuing innovative methods to help their residents. For instance, she points to the use of such tools as creative arts therapy, occupational therapy, music, dance storytelling and other physical activity to help draw people out and provide stimulation.
“It’s an exciting time for the memory care industry in the sense that a lot of new innovation is happening,” Mace said. “We’re seeing new approaches to staffing, new approaches to dining, technology advancements, and there’s also been a lot of work done in the area of diagnostics.”
Looking ahead
Experts see plentiful opportunities in memory care. For instance, Slobin pointed to staffing.
“The biggest opportunity is to lease up assets [pre-leasing prior to move-in] and begin to transition away from temporary agency labor expense by filling personnel positions with long-term employees,” he said.
Meanwhile, Frum sees short-term prospects with REITs, banks, and other investor groups needing to find quality operators to replace those who have failed to successfully pull through the pandemic.
“The longer-term opportunities for both standalone memory care facilities and those within buildings are from the growing clinical need for long-term care for those with memory-impairing diseases,” he said. “Supply will not meet the future demand for memory care in this country. The operators who will benefit most from this aging demographic will be those that differentiate themselves in the clinical and behavioral outcomes they produce, and the increased revenue per occupied unit they deliver for their investors.”
Frum said Silverado is bullish on the future role of senior housing operators in the post-acute health care space.
“There is a growing recognition of the value we provide in controlling the overall cost of health care for our seniors from third-party payers in at-risk agreements with Medicare,” he said.
Memory care’s future seems certain to be busy because of the unfortunate need for it.
“The memory care market is a needs-based business and will remain stable for the foreseeable future, supported by an aging population and no cure on the horizon for this horrific disease,” Frum said. “Although near-term economic conditions are challenging a family’s budget to pay for long-term care, inflationary pressures have increased home values providing some flexibility.”
Mace said memory care typically is less affected by the broader economic environment than independent living is.
“Memory care in assisted living tends to be more need based, whereas independent living tends to be more choice based,” Mace said. “So, if I look at the broader macroeconomic environment, there’s a lot of prognosticators out there saying that we’re gonna go into a recession sometime in 2023 or early 2024. We know that the housing market has weakened a lot because of that interest rate increase we’ve seen in the last year, consumer confidence is kind of shaky right now, the stock market’s kind of shaky – so all those macroeconomic considerations do affect demand for senior housing. But it tends to affect more choice-based independent living than need-based memory care.”
Mace said an emphasis on early diagnosis and wellness could help slow the symptoms of those with memory care issues, but “unfortunately, the prevalence of memory care symptoms will continue and will continue to create strong demand for this sector for some time to come.”
Ultimately, Slobin said, “The aging of the population will continue to create a need for these facilities and illustrate the social value they provide.”
