I recently had the opportunity to attend the ASHA Annual Meeting in Scottsdale, and the mood was both reflective and forward-looking.
Looking back. Current economic conditions were compared to 2000 and 2001 when tech spending dropped off a cliff following a run-up in tech purchases in preparation for “Y2K.” The tech industry today is undergoing a similar reckoning as the world reopens and pandemic restrictions are eased. Business and consumer spending have been redirected to other sectors. Predictions were made for a slowdown in 2023 that mirrors the 2000-2001 slowdown – rather than an outright recession – although interest rate sensitive sectors such as real estate will be impacted to a greater extent.
What hasn’t changed. Higher expenses and competition for labor continue to be top of mind. On a positive note, occupancies have rebounded from the depths of the pandemic – improving revenues – and many operators have been able to push through rate increases. These positive tailwinds, however, have not been enough to offset the rise in labor, debt, and other expenses. Interestingly, it was noted that, while necessary, rate increases are unfortunate as the industry is vying to make housing for older adults more affordable.
Looking ahead. Capital providers and developers are hitting the pause button on new projects due to high construction costs and erosion in operating margins. A positive note was that construction was an issue of concern before the pandemic, but the lower level of development in 2022 and 2023 is helpful for occupancy recovery. Also positive is that concessions are beginning to abate. Given the increase in the cost of capital, however, there may be greater investment opportunities on higher quality assets that have the ability to push through rent increases. If the Fed keeps rates at an elevated level, the buyer pool will shrink due to the lower availability of debt, and regulators are pushing banks to get loans paid down.
On valuations, cap rate estimates are up roughly 75 basis points from a year earlier to around 6%. Almost all appraisal activity is for current assets – not acquisitions – and there is concern that a pick-up in distressed sales could impact valuations for well-performing assets.
Value-based care drew great interest and excitement about senior housing’s ability to improve health, lower costs, and provide better care for older adults with the support of a trusted health care partner. Longer stays and value-based revenue, coupled with lower expenses, can improve NOI, and one case presented showed an increase of 5-15%. Attendees throughout the conference agreed that senior housing deserves a seat at the policymaking table to get the best results in value-based care.
Other efforts on the affordability and margin front include engaging residents in volunteerism and ensuring that services are priced correctly, which also helps to reduce acuity creep. Labor availability should normalize due to higher wages and less competition from other sectors. Diversity efforts are expanding with training programs at the less experienced levels, while also casting a wider net for Board of Director openings. Sustainability also drew great interest as the industry continues to implement day-to-day improvements such as utilizing Energy Star technology and earning a WELL certification.
Technology is being carefully adopted, but it needs to be interoperable from Day 1, seamlessly jibing with a community’s existing technology, and it needs to prove useful. For example:
On the opposite side of the table, age tech vendors want to know operators’ long-term IT strategies so that technology can best drive those plans forward.
The senior housing industry has endured much in recent years, and the ASHA Annual Meeting showed that our sector continues to work hard and to persevere in improving housing and care on the behalf of older adults.