Senior housing has faced its fair share of challenges over the years, but its resilience is unwavering, and current conditions, albeit complex, offer promise and opportunity for operators, developers and lenders. According to data released by NIC MAP Vision, senior housing fundamentals are shifting into a very favorable state due to demographic, economic and sectoral trends. Unprecedented demand generated by the aging super-cycle, the critical shortage of senior housing supply caused by low construction activity, absorption rates rapidly rising, and rent rates outpacing labor costs all contribute to optimism in the industry. Senior housing stakeholders are in a prime position to capitalize on strong market fundamentals and reignite growth strategies.
Current Market Optimism and Revenue Prospects
In 2023, absorption rates doubled the average of any pre-pandemic four-quarter period, and 1Q24 saw a 60% increase compared to 1Q23, which was a historic number in its own right. Plus, sequential occupancy growth and net absorption continue growing at historic levels, even before the age wave has fully hit. Remarkably, occupancy is currently within 1–2% of pre-pandemic levels. In addition to history-making absorption rates and strong occupancy, the market is seeing trends in rent growth outpacing labor costs and inflation, shifting once-compressed margins to expanding profit margins. All these factors signal robust demand and positive operating trajectory. Underlying these statistics is the rapidly expanding 80+ population, which is projected to explode by the end of this decade. The first Boomers turn 80 next year, and there will be nearly 16 million “new” 80+-year-olds by 2050.
For a variety of demographic, economic and sectoral reasons, including the largest aging population in U.S. history, dislocated debt markets suppressing investment and development activity, and pandemic-induced development deficits, consumer demand is expected to exceed available inventory for decades to come. The current development pace is 26,000 annual units. The highest inventory growth we’ve seen in the 21st century is approximately 56,000 annual units. Starting in 2025, we need to develop just over 100,000 units per year to meet the expected need by 2030 – a 400% increase from current levels. Senior housing is experiencing unprecedented demand growth, creating a need for historical levels of inventory growth at a time when investment in new development is near historical lows. This trend is only going to magnify in the coming years.
Improved Operating Margins and Operational Efficiency
The normalization of labor markets is another positive development. The availability of workers and staff drives positive operational performance, as well as optimal service quality and affordability — all key criteria for prospective residents and their families. COVID drastically reduced the labor pool for many industries, including senior housing, creating operational issues and expensive staffing challenges. Rents are rising while operating expenses and inflation are moderating, also contributing to profit margin expansion. The perfect storm of burgeoning demand, depressed supply growth, increasing rent growth and declining expense growth create ample opportunity for lenders, developers and operators.
Strategic Growth and Development Opportunities
In 2021 and 2022, soaring wage growth increased operating expenses, contributing to declining margins, but, in 2023, that trend reversed. Operating expenses declined across the board, while occupancy recovered after COVID at astounding rates, creating margin expansion, which should persist as demand growth continues to outpace supply growth. Expanding margins are the bellwether of strong fundamentals in the senior housing industry, and current trends should inspire confidence and optimism among senior housing operators who are now well positioned to embark on new developments.
Also contributing to this landscape that is ripe with opportunity is the construction slowdown caused by high interest rates and a capital markets freeze. Challenges getting financing for new deals led to a 40% decrease in transactions in 2022, and another 40% drop in 2023. In addition, the rate of new construction fell to just 0.2% of total inventory in 2023 — a rate nearing lows not seen since the Great Recession in 2008.
This critical shortage of senior housing developments amidst rapidly growing demand has created a generational investment opportunity for industry stakeholders. With the existing gap between demand, from the rapidly growing 80+ population, and supply, of senior housing developments, there are unique near-term development opportunities and the chance to fulfill a critical societal need. This demand-driven dynamic is certain to continue as the aging population in America continues to grow faster and larger than ever before, presenting long-term growth opportunities within the industry.
The senior housing industry faces many challenges, but within those challenges is significant optimism and opportunity. Strong market fundamentals, specifically increasing occupancies and margin expansion, put senior housing stakeholders in a powerful position to reignite their growth strategy. Leveraging current conditions, including historic absorption rates, labor pool improvements and favorable rent growth trends, is essential to continue driving growth and meeting future demand.
For more detailed analysis and insight, take a closer look at NIC MAP Visions’ Senior Housing Market Outlook, a helpful guide for investors making strategic decisions and asset allocation plans.
About the author: Arick Morton is Chief Executive Officer of NIC MAP Vision, the most trusted analytics and insights partner for the senior housing industry, giving operators, lenders, investors, developers, and owners unparalleled market data. NIC MAP Vision AI allows clients to utilize NIC MAP Vision’s industry leading supply and demand data from more than 35,000 senior housing communities nationwide, with rate and occupancy data provided for 140 markets – offering a one-source solution for senior housing stakeholders.
