The construction of senior housing communities has faced a myriad of challenges in recent years, evidenced by a marked decline in construction starts and extended construction durations. These challenges have been apparent since the onset of the COVID-19 pandemic, and have been further compounded by labor shortages, a lack of building materials, and inflation. Additionally, the quick and large rise in interest rates orchestrated by the Federal Reserve has led to higher construction financing costs, limited availability of debt, and increased development costs. These combined factors have prolonged the time it takes to bring a senior housing project from the planning stages to the construction phase and eventually to its final delivery and eventual opening.
This analysis examines how the length of time to bring a project to its completion has changed in recent years (construction duration as measured in months) across the 140 NIC MAP All Markets.
Key Takeaways:
- The data shows that there has been a steady and consistent increase in the time it takes to construct a senior housing community from 2015 to 2023, suggesting that extended construction duration is not exclusively a post-pandemic trend.
- Median construction durations have risen from 16 months in 2015 and 2016 to 19 months in 2019 to then 25 and 24 months in 2022 and 2023, respectively.
- Heightened project deliveries and “oversupply” have played a role in the variability of construction durations and have contributed to a protracted construction process.
- Fewer construction starts and extended durations of project deliveries provide short-term support for the sector’s occupancy recovery.
- There will be a pressing need for new construction to meet future demand and adapt to evolving resident profiles and changing requirements.
- About 41% of senior housing communities are more than 25 years old, and the population age 80 and older is expected to grow by 5.1 million by 2030, equivalent to a 35% increase.
- Notable shifts in construction timelines are not uniform and vary widely by region.
Methodology:
NIC Analytics conducted an in-depth analysis to examine the length of time required to build a senior housing property, i.e., the construction duration (in months) across the 140 NIC MAP All Markets and explore the shifts taking place in construction timelines across different regions. This analysis primarily focuses on new property developments and captures a minimum of 83 construction completions annually, spanning the period from 2015 to 2023.
The construction duration represents the timeline from the moment the community broke ground to the point when the community officially opened. This analysis uses the community type designation. Senior housing communities captured in this analysis are independent living, assisted living, memory care, and continuing care retirement communities (CCRCs). Note that nursing care communities are not included in this analysis.
Prolonged Construction Duration for Senior Housing: A Post- Pandemic Challenge?
The exhibit below depicts the distribution of community construction duration in months, from 2015 to 2023, by year of opening, and demonstrates a clear and consistent trend of increasing construction durations over the time period, with a noticeable increase since the onset of the pandemic in 2020.
The analysis also reveals that the extended construction duration is not exclusively a post-pandemic trend. Even prior to the pandemic, particularly from 2016 to 2020, construction durations were on the rise. This trend was largely attributed to a period of heightened project deliveries.
During the delivery boom from 2016 to 2020, the senior housing market saw a surge in new project completions, causing a temporary oversupply of senior housing units, a moderate absorption-to-inventory velocity (AIV ratio) falling below the AIV threshold, and a decline in occupancy rates. This in turn led to a protracted construction process. Challenges stemming from the pandemic, high interest rates, and other economic factors only contributed to the observed prolonged construction duration.
The median construction durations have consistently risen since 2015, from 16 months in 2015 and 2016 to 19 months in 2019, to then 25 and 24 months at their peak in 2022 and 2023, respectively. However, construction durations are not uniform. The analysis highlights a wide range (Interquartile range, IQR) in construction durations within the senior housing sector, where some projects are completed relatively swiftly, while others take longer to reach completion. Specifically, for the senior housing projects delivered in the last three years (2021- 2023), 25% of senior housing communities were completed in less than 20 months (Quartile 1, Q1), while another 25% took more than 30 months for delivery (Quartile 3, Q3).
The variability in construction durations – influenced in part by factors such as community type and size – also highlights the differences in access to capital and financing within the senior housing sector. Notably, even amidst the challenges posed by the pandemic, elevated interest rates, increased development costs, and economic uncertainties, there remain senior housing operators who retain the ability to successfully secure financing and complete projects within reasonable and efficient timeframes.
While construction starts plummeted in recent years and some projects took longer to complete, providing short-term support for the sector’s occupancy recovery, there will be a pressing need for new construction to meet future demand and adapt to evolving resident profiles and changing requirements. Notably, approximately 41% of senior housing communities are more than 25 years old. Additionally, the U.S. population aged 80 and older is projected to grow by 5.1 million by 2030, a 35% increase, according to U.S. Census 2022 projections.
Separately, the 1Q 2023 NIC Lending Trends report points to a cautious lending climate, with a notable slowdown in construction requests and issuance of debt financing new construction for senior housing. The survey indicated that lenders are responding to these changing conditions by focusing on strong sponsorship and strong credits. This trend reflects a reaction to a jump in the SOFR and 10-year Treasury rates, lower loan-to-value (LTV) ratios, tighter spreads, leaner proceeds, and higher equity requirements. Additionally, new construction loan closings for senior housing remained notably weak in the first quarter of 2023 compared to historical standards, with only two other periods in the time series matching this low level — the third quarter of 2022 and the first quarter of 2021.
Extended Delivery Times for Senior Housing Projects Compared to the Pre-Pandemic Era, with Regional Timeframe Variations
The exhibit below shows the distribution of construction durations (in months) for senior housing communities by region. It provides a comparison of project completions in the three years preceding the pandemic (2017-2019) with the three years following the onset of the pandemic (2021-2023).
Prior to the pandemic (2017-2019), senior housing construction durations displayed regional variations. In the post-pandemic era (2021-2023), we observed notable shifts in construction timelines. However, these changes are far from uniform and vary widely by region.
The Mountain Region stands out with a notable increase in median construction duration, rising by 10 months from 19 to 29 months when comparing the pre-pandemic and post-pandemic periods. This is followed by the Northeast, with an increase of 9 months (from 17 to 26 months), and the Pacific, showing an increase of 8 months (from 16 to 24 months). Notably, these regions exhibited some of the shortest median construction durations in the three years leading up to the pandemic, whereas, in the last three years (2021-2023, post-pandemic), their median construction durations ranked among the highest in the country.
Conversely, the West North Central region sustained a relatively steady median construction duration, with merely a 3-month difference between the two periods, shifting from 18 to 21 months. The West North Central region had the shortest median construction duration across all regions in the most recent three years. In the Southeast and Southwest, although there were relatively small increases in construction duration during the last three years, at 26 and 24 months, respectively, they still stand comparably high in contrast to the overall construction durations seen in the pre-pandemic era.
In summary, the data suggests a widespread increase in construction durations across all regions during the post-pandemic era. The widening of the interquartile range reflects increased variability and broader shifts in construction timelines. These changes have been primarily attributed to disruptions in the supply chain earlier in the pandemic and more recently to labor challenges, inflation, increases in construction wages, and higher interest rates, collectively impacting various facets of construction financing, elevating development costs, and impeding the pace of construction starts and completions.
In future publications, NIC Analytics will explore units under construction, comparing the Great Financial Crisis with the pandemic era and examining construction in the pipeline across U.S. regions and senior housing community types.
The aim of this analysis, along with the comprehensive work conducted by NIC Analytics, extends beyond highlighting differences in construction duration and providing comparisons between the pre- and post-pandemic eras. The core message is to increase transparency and highlight that short-term challenges bolster the sector’s resilience, as demonstrated in recent years. Obstacles can spark innovation, ultimately leading to enhanced access and choice for the older adults of today and in the future.
Looking ahead, the senior housing sector is at the precipice of transformative change. The fundamentals are evolving, with favorable demographic trends but a “higher-for-longer” interest rate environment, and those operators who can assess and embrace these changing trends, adapt with agility, and drive innovation will undoubtedly experience remarkable growth in the future.