The Federal Reserve concluded its June 2024 FOMC meeting with a decision to maintain the federal funds rate at its current range of 5.25% to 5.50%, marking the sixth consecutive time the rate has been held steady since July 2023. This decision reflects the Fed’s cautious approach to managing inflation, which remains a central concern despite recent signs of easing.
Economic and Inflationary Environment
The latest Consumer Price Index (CPI) report showed a year-over-year increase of 3.3% in May, slightly down from April’s 3.4%. Core inflation, which excludes volatile food and energy prices, also saw a modest decline, rising 0.2% month-over-month compared to 0.3% in April.
The labor market remains resilient overall, with U.S. employers adding 272,000 jobs in May, significantly surpassing the forecasted 185,000. Healthcare was the largest category of labor growth during the month, with the addition of 68,300 positions. Nationally, the unemployment rate ticked up to 4%, the highest since January 2022, ending a 27-month streak of sub-4% unemployment. This increase, coupled with a decline in job openings to their lowest level since February 2021, suggests a cooling labor market. While there has been some improvement in recruitment and retention efforts within the senior housing and care space, elevated wage expenses remain a pressure point on margins.
Fed Chair Jerome Powell emphasized that while there has been “modest further progress” toward the 2% inflation target, the central bank is not yet convinced that economic conditions warrant a reduction in borrowing costs. The Fed now projects only one rate cut in 2024, a significant revision from earlier expectations of multiple cuts.
Impact on the Senior Housing & Care Sector
The senior housing and care sector, historically known for its recession-resilient nature, continues to navigate the higher interest rate environment. Until borrowing rates begin to come down and there is greater access to capital, new development activity will continue to be stifled. The upside to this trend is that with limited new competition coming onto the market and record levels of demand, occupancies will continue to rise.
The transaction environment will also remain in limbo as acquisition opportunities will be largely limited to those who can tap into cash buyers or alternative investors, such as private credit. The debt markets continue to be challenged due to a combination of more stringent regulatory requirements for loans and also various lenders working through a degree of distress within their portfolios.
Despite the challenges posed by rising interest rates, the sector benefits from strong demographic tailwinds, with an aging population driving heightened demand across the next two decades. The Federal Reserve’s cautious stance on interest rates, coupled with a resilient labor market and easing inflation, presents a mixed but manageable outlook for the senior housing sector. Most professionals, both capital providers and operators, remain bullish on senior housing and expect that in the coming months, with anticipated reductions in borrowing rates, the sector will be able to move forward to meet the needs of the growing older adult population.