Insights in Seniors Housing & Care
The tendency of stability is to breed stability.
In the November 2023 NIC Insider newsletter, NIC Analytics published an in-depth analysis examining the length of time required to build a senior housing community, i.e., construction duration (in months), and explored the shifts taking place in construction timelines across different regions.
The analysis showed 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. Notably, median construction durations have risen from 16 months in 2015 and 2016, to 19 months in 2019, to 25 and 24 months in 2022 and 2023, respectively. Additionally, the analysis suggests that heightened project deliveries and “oversupply” have played a role in the variability of construction durations and have contributed to a protracted construction process. Challenges stemming from the pandemic, high interest rates, higher financing construction costs, limited availability of debt, and increased development costs have all contributed to the prolonged construction duration.
In this article, NIC Analytics explores the senior housing construction cycle across the 99 NIC MAP Primary and Secondary Markets, drawing comparisons between the trends observed during the Global Financial Crisis (GFC) and the recent pandemic. The analysis further explores units under construction and construction as a percent of inventory across all U.S. regions.
Key Takeaways:
Senior Housing Units Under Construction: Trends, Shifts, and Economic Drivers.
GFC Downturn. The exhibit below shows the stark impact of the GFC in 2009 and 2010, with senior housing units under construction plummeting by -43% and -10%, respectively. These years saw significant economic challenges, including a severe liquidity crunch, plummeting property values, and a sharp decline in real estate investment. This crisis eroded confidence in new construction projects, as financial institutions faced substantial losses, and credit markets tightened, making funding for new developments challenging.
Post-GFC Recovery. The period between 2010 and 2015 witnessed a notable growth in units under construction in the senior housing sector, signaling strong market fundamentals and recovery. This resurgence, although starting from a relatively lower base, was driven by regained market confidence and an improved capacity for new construction and expansion in senior housing. Key to this revival were favorable senior housing market conditions, characterized by a balance of supply and demand dynamics and increased occupancy, which encouraged new developments.
Construction Peak and Delivery Boom. Between 2015 and the onset of the pandemic in 2020, the senior housing sector experienced a consistent positive growth in units under construction. However, this period also witnessed a deceleration in the pace of new construction, suggesting that many units reached completion and were delivered to the market. This trend indicates a typical cycle in housing markets in general, where a construction boom is often followed by a phase of heightened deliveries, as depicted by the deceleration in the pace of units under construction.
Pandemic Disruption and Economic Headwinds. The COVID-19 pandemic ushered in significant disruptions, starting in 2020 with a -13% decline and continuing with -4% in 2021 and -8% in 2022. This downturn reflects the uncertainty and challenges faced by the senior housing sector amid the global health crisis. The relative stabilization in 2021 indicates the market’s resilience, managing to level off after the initial shock, despite not returning to positive growth. However, the further decline of -8% in 2022 and -15% in 2023 can be largely attributed to an increasingly challenging lending environment, exacerbated by high interest rates, inflation, and volatile capital market conditions. These factors have impacted the financial viability and the overall feasibility of new construction projects within the senior housing sector.
Overall, these trends reflect the sensitivity of the senior housing construction pipeline to broader economic conditions and market dynamics. Additionally, the fluctuations in the number of units under construction serve as a proxy for the overall confidence in new senior housing projects and capital environment. These changing trends can also act as indicators of different phases within the senior housing market cycle, notably signaling periods of stabilization when the pace of construction activity shifts towards positive, or green territory.
Crises, inherent in the nature of capitalism, impact the senior housing sector. Following the GFC, the sector experienced an extended period of stability, exemplifying the principle that “the tendency of stability is to breed stability.” There remains a reason for tempered optimism, the sector’s strong fundamentals, along with favorable long-term demographic trends, suggest a positive outlook for the future. In the short term, a healthy equilibrium between supply and demand will serve the sector’s ongoing recovery for achieving sustained and positive growth.
As Mark Twain aptly noted, “History doesn’t repeat itself, but it often rhymes.” This adage resonates with the pattern identified in the interconnectedness of economic health, investor confidence, and senior housing construction activity in signaling periods of stabilization and unhindered growth. In light of this, an important question arises:
When do industry stakeholders expect senior housing construction starts to bottom out?
NIC MAP Vision has been conducting a poll during its last three data release webinars (1Q23-2Q23-3Q23), seeking industry expectations on when senior housing construction starts are likely to bottom out.
The results indicated that a sizable proportion of respondents, approximately 40% across all three quarters, anticipate the bottoming out of senior housing construction starts in the first half of 2024. However, there is a slight shift in sentiment over time, with a gradual increase in the number of respondents who expect the nadir to occur beyond 2024 – rising from 15% in the first quarter of 2023 to 17%, and then to 20% in subsequent polls. This shift suggests a trend of diminishing confidence in a quick construction market correction amid challenging capital market conditions and lending environment. Despite this, the consensus in all three polls points towards mid- or late-2024 as the most likely period for senior housing construction starts to reach their lowest point.
As background, a separate occupancy poll conducted by NIC MAP Vision indicated that senior housing occupancy is expected to fully recover and return to pre-pandemic levels by the second half of 2024. These results somewhat align with the construction poll question results and occupancy outlook analysis conducted by NIC Analytics. These forward-looking insights provide combined perspectives on both construction trends and occupancy rates in the near future – fundamentals of the senior housing market.
Regional Construction Trends and Recovery Patterns in Senior Housing
The regional distribution of senior housing units under construction shows that the West Coast and the Eastern part of the country are more active in developing senior housing projects. “This could be indicative of factors such as demographic shifts, development-friendly regulations, or well-balanced supply and demand dynamics in these areas.” However, a cross-check of this distribution with the absorption-to-inventory velocity (AIV) ratio analysis reveals several insights:
The Pacific region is at the forefront of senior housing construction, representing 19% of the total units under construction across the 99 NIC MAP Primary and Secondary Markets, which is 5.3% of the region’s existing inventory. The Pacific region experienced the most notable impact during the peak of the pandemic, with the lowest AIV ratio and the highest occupancy decline among all regions, and as of the third quarter of 2023, its recovery in terms of occupancy is still trailing behind other regions.
There are indications of a slowdown in the progress of existing senior housing construction projects. The Pacific region stands out with a notable increase in median construction duration, rising by 8 months from 16 to 24 months when comparing the pre-pandemic and post-pandemic periods. This increase suggests that many projects have stalled or are taking longer to complete than initially planned. Looking ahead, this trend could lead to a potential risk of oversupply in the region. If these projects contribute to a sudden increase in new supply without an equivalent rise in demand, the Pacific region may be challenged to effectively absorb newly added units.
The Mid-Atlantic and Southeast regions are both experiencing a robust construction environment, accounting for 19% and 17% of the total units under construction, respectively. Both regions also experienced notable occupancy declines during the pandemic, however, they are nearing recovery with positive AIV ratios (above the AIV threshold) and noteworthy occupancy increases. while the construction as percent of inventory is relatively high in these regions, at 7.5% for the Mid-Atlantic and 4.7% for the Southeast, it has not led to a situation of new supply outpacing demand and negatively affecting the recovering occupancy in recent years.
Additionally, the median construction duration in both regions has seen relatively small increases, suggesting that projects are still being completed in a timeframe comparable to the pre-pandemic era. This indicates an efficient delivery of new units, aligning well with the current demand without causing an imbalance in the market.
The Southwest region presents a more balanced scenario, accounting for 11% of total construction activity, which is equivalent to 4.9% of the region’s existing inventory. Having achieved pre-pandemic occupancy levels, the Southwest region exemplified a balanced market with the highest positive AIV ratio across all regions, indicating that the rate of construction and subsequent deliveries (new supply) are well-aligned with the market absorption.
In the Mountain region, which accounts for 7% of construction activity and represents 4.2% of the region’s existing inventory, there has also been a successful recovery in occupancy rates. This suggests that the pace of construction and new supply are well-aligned with market absorption. However, delays in project deliveries are likely more common in the Mountain region, with the median construction duration increasing by 10 months – from 19 to 29 when comparing the periods before and after the pandemic. This slowdown in construction completion may have supported the occupancy recovery in the Mountain region, by preventing more new deliveries/supply during a critical recovery time.
The Northeast, East North Central, and West North Central regions have relatively lower construction activity in comparison to their existing inventory. Additionally, these regions are in varying stages of occupancy recovery. A key factor to their continued recovery will be maintaining a market equilibrium where the pace of new deliveries aligns closely with demand.
In terms of construction duration, the Northeast exhibited some of the shortest median construction durations in the pre-pandemic era. However, in the post-pandemic period, its median construction duration ranked among the highest in the country, like the Pacific and Mountain regions.
In conclusion, this regional analysis of senior housing construction cycles, constructions durations, AIV ratios, and occupancy recovery across the U.S. regions reveals different trends and patterns. From the busy construction environment in the Pacific and Mid-Atlantic to the strong recovery in the Southwest and the Mountain regions, to the more measured pace in the Southeast region, each region presents its unique set of challenges and opportunities. Key to the success in each region is aligning construction activity and new supply with market absorption, a balance made more delicate in the face of pandemic-induced disruptions and changing economic conditions. Delays in construction deliveries, while posing challenges, have in some cases supported occupancy recovery by preventing a rapid influx of new supply.
As the senior housing market continues to navigate post-pandemic recovery and economic fluctuations, regional nuances and market focused analyses using NIC MAP Vision data will be valuable in providing the actionable insights needed to effectively drive and sustain growth in senior housing.
Look for future blog posts from NIC to delve deep into senior housing construction.
Omar Zahraoui, Principal at the National Investment Center for Seniors Housing & Care (NIC), is a seniors housing research professional with expertise in providing quantitative analysis and insights on seniors housing & care market data; building new products and reporting capabilities, including dashboards and proformas for clients and internal stakeholders; and implementing new processes and data solutions. Prior to his current role, Zahraoui worked as a data analyst, at Calpine Corporation, supporting the development of new-business strategy initiatives, analyzing sales and financial data, and developing statistical modeling of consumers’ behaviors to drive business performance. Zahraoui holds a Bachelor’s degree in Business Administration with concentrations in Finance and Management, a Master in Corporate Finance from IAE Lyon School of Management at Jean Moulin Lyon III University in France, and a Master of Science in Management Information Systems and Data Analytics from Pace University.
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