2020 will be an interesting year, one that continues to bring challenges to our country, industry and investors. Occupancy levels for skilled nursing facilities and assisted living communities softened slightly in the second quarter of 2019 for the second year in a row, averaging 87.8 percent nationwide as reported by National Investment Center for Seniors Housing & Care (NIC). The decline places occupancy at its lowest level since the first quarter of 2010 (86.9 percent). To put in perspective historically, the current occupancy in 2019 is 2.3 percentage points below its most recent high of 90.2 percent in the fourth quarter of 2014. A major contributor to declining occupancy has been the result of inventory growth in 2018 that remained consistent with previous years and continues to outpace absorption.
There are some promising signs for improved occupancy, such as a slowdown in new construction starts, and no clear indication that industry headwinds will abate much in the next 12 months as developers continue to face rising construction costs, tighter capital availability, slow demand growth and threat of higher interest rates.
With a 2018 year-over-year growth rate of 5.6 percent, inventory growth is pushing above the 30-year average annual growth rate of 4.4 percent. The onset of the credit crisis in mid-2008 caused a severe contraction in construction lending for senior housing projects. However, major construction lenders have returned to the sector. During 2018, the total senior housing pipeline (construction versus inventory) was about 1.44 percent. New senior housing construction activity across the primary and secondary markets peaked during 2018 in Q2 at 8,310 units/beds. There were approximately 5,425 units/beds of new construction starts in Q4 of 2018.
On a positive note, demand in the coming decade will eventually outpace inventory. According to NIC, the number of Americans 65 and older will increase from 47.8 million in 2015 to 79.2 million by 2035, because of the emergence of Baby Boomers into the age of retirement. Yet, the new year should also bring a sense of promise. In many ways, it’s an exciting time for senior housing, especially for companies that can weather near-term challenges and seize opportunities while the competition struggles.