Investors in the senior living market in the US are typically more active in assisted living facilities, as opposed to a nursing home. The two are very different stateside and provide different levels of care.
But regardless, for senior living investors, the risk associated with investing in the space has typically been a real estate one – vacancy rates. Every unoccupied bedroom is missing rental income that could be going into the bank account of the investor.
But as far as risks go, that’s arguably a small one, with the industry recently seeing occupancy rates increase for the 11th consecutive quarter to stand at 85.6% in the first quarter of this year. Whilst occupancy still lags the pre-pandemic high of 87.1% in Q1 2020, the market expects this to return to normal this year.
“The continued upward climb of occupancy along with strong absorption levels supports the NIC forecast of returning to and surpassing the pre-pandemic occupancy levels sometime in 2024,” said the National Investment Center for Seniors Housing & Care’s (NIC) Head of Research & Analytics, Lisa McCracken in a press release in April.
Good news for those investors with retirement communities in their portfolios. And, given the slow pace of new developments – the rolling four-quarter average for construction starts sits at 1.37% of total inventory, the lowest level since first quarter 2010, according to the NIC – tailwinds exist to support higher occupancy data.
“With little change in access to capital and in borrowing costs, particularly for new projects, we continue to see depressed levels of construction starts,” said Caroline Clapp, senior principal with NIC, in the same release. “We expect this trend to continue until financing conditions ease.”
That all sounds great for those private equity real estate folks. And if someone doesn’t pay, then they can just be kicked out, because unlike a typical landlord / tenant relationship, most states permit eviction in instances of non-payment of rent and sell the spot to the next person in line.
Said rent has been, historically, calculated using a combination of a spread over the mortgage and other costs, with a consideration to what the local market might bear and any competitive pressures. But with residents potentially staying longer due to increased lifespans, senior living facilities might benefit from a more nuanced approach.
That’s according to Chris Conway, Chief Development Officer at life expectancy underwriting firm, ISC Services.
“Senior living investors and operators obviously tend to price using a real estate approach,” says Chris Conway, Chief Development Officer at life expectancy underwriting firm, ISC Services. “But they’re not necessarily looking at how long they might need the kinds of services they deliver for a particular resident. The length of supply can impact the margin to the investor.”
A range of benefits can be had to the investor by taking a longevity modelling approach, beginning with increased accuracy in terms of cost projections. Taking into account resident demographics, health history, and projected lifespans allows for a more accurate prediction of future costs associated with each resident, including care needs and potential length of stay.
“Longevity modelling allows investors to set sustainable rent structures; by understanding the long-term care needs of residents, investors can price rents that factor in the increasing cost of care over time which ensures financial stability and prevents unsustainable rent hikes later. Furthermore, they can allocate resources efficiently; knowing the future needs of residents allows for proactive resource allocation. Staffing levels, medical equipment, and activity programs can be tailored to the evolving needs of the resident population, leading to cost optimization,” said Conway.
Other areas of application of longevity modelling to the senior living market include mitigating risk, for example, diversifying care options within the facility, offering flexible financial plans for residents, or partnering with long-term care insurance provider; this would also be a selling point for capital raising for any future developments.
Whether or not the senior living market pays more attention to life expectancy modelling and underwriting as an input into the pricing model remains to be seen. If it ain’t broke, don’t fix it, after all. And with the fundamentals in the market currently – an ageing population and not enough development of new facilities to absorb the demand – pointing to a solid outlook for investors, perhaps adoption will be a slower burn.
Still, for Conway, there is an air of inevitability about this.
“There are many reasons why senior living investors should consider using longevity risk as a consideration in their costs and revenue modelling,” he said. “Often, senior living facilities operate with fixed costs per resident. If residents stay longer than anticipated, it could strain their financial resources or those of the facility. A greater understanding individual life expectancy – micro-longevity – is a logical next step for a senior living investment firm to help them increase the returns on their investments.”
