10/23/2024 - Originally Published by Senior Housing News
| By Jack Silverstein| October 18, 2024
When senior living occupancy remained strong in 2008 and 2009, the industry came away with a new reputation: recession-resilient. From 2005 — a few years before the Great Recession — until 2020 and the onset of the COVID-19 pandemic, senior housing saw a 76.6% increase in nominal spending.
Now, as occupancy returns to pre-pandemic levels, that recession-resilient reputation is proving itself once again.
“Being an industry driven by need has really helped senior living as an asset class to thrive, removing a lot of the dips and turns you might see with other asset classes,” says Josh Walker, Vice President of Investments for Inspired Healthcare Capital, or IHC. “That’s despite the fact that the Baby Boomer ‘silver tsunami’ that we’ve all been waiting for hadn’t fully materialized even to that point yet.”
That stability is the reason that IHC focuses on senior living, with more than $1.5 billion of assets under management. While nothing can ever be called “recession-proof,” four KPIs show just how strong senior housing can be.
KPI #1: Supply and demand inefficiency
The first indicator might be the most obvious. According to National Investment Center for Seniors Housing & Care (NIC), the 80+ population is set to rapidly increase through the end of the decade: 3.7% by the end of this year, 12% by 2025, 25% by 2027 and over 40% by 2030*. NIC projects the need for an additional 806,000 units by 2030, with 2023 growth only on pace to fulfill about 40% of that need.
A recession could challenge a senior’s ability to sell their house before moving into senior living, but home sales are still an option. Additionally, seniors pay for senior living through not just home sales but retirement savings, they are less reliant on either economic cycles or current income to cover rent and services.
Combine that with the gap between housing supply and housing demand and you have a durable industry, even in the face of a recession.
“We’re at a pretty unique time where the growth of the 80-plus population materially exceeds inventory growth,” Walker says. “The high-rate environment has definitely contributed toward limiting new development. At the same time, that Baby Boomer population continues to age. All we really have is our existing stock with very few additions.”
KPI #2: Occupancy
The story of senior housing’s resilience in the face of a recession is often told in relation to 2008, but we don’t have to venture that far to see the industry’s strength. Just as it did following the Great Recession, senior housing has rallied since the pandemic, rising for 13 straight quarters through 2024 Q3, per NIC data**.
Senior housing occupancy for the 31 NIC MAP Primary Markets rose from 85.8% in Q2 to 86.5% in Q3, with IL, AL and memory care all approaching pre-pandemic occupancy levels. That is tremendous absorption in that short amount of time since the pandemic.
KPI #3: Cap rates
Senior housing shows less fluctuation than other asset classes, because it is needs-driven and delivers essential services. This has allowed companies like IHC to adjust to rents accordingly, even when faced with abnormal food and labor inflation in 2022, citing increases as high as 10% that year. As such, cap rates tend to be higher in senior housing than asset classes that rely on cap rate compression.
“I actually pulled a Vision LTC report from the beginning of 2019 right up until 2023, and cap rates have stayed relatively consistent,” Walker says. “They averaged between 7% and 8%. Obviously, there have been some recent increases but that’s more of a product of interest rates rather than anything else.”
What makes senior housing more than just a real estate investment, and hence different than multi-family, is that it is an operations-intensive business
“To serve our investors and residents best, we need efficient and effective operations,” says Luke Lee, founder and CEO of IHC. “This is why we started our own operator, Volante Senior Living, which has grown tremendously in number and expertise over the years.”
KPI #4: NOI growth
Investors with Inspired Healthcare Capital have seen this resilience directly.
In 2018, IHC launched a portfolio of assets primarily in the Pacific Northwest, and full-cycled it in 2024. Despite battling the COVID-19 storm, one of the most aggressive rate tightening cycles in the Fed’s history and the highest inflation in decades, the fund still achieved a 15.23% IRR for all investors.
It’s an example that IHC believes is indicative of the industry’s durability.
“That’s more case by case because there’s been some fluctuations due to wages going up, and coming out of that inflationary environment,” Walker says. “That being said, we do anticipate stronger NOI growth given that there is still some room for rate increases according to recent research, while the inflationary environment on the expense side has gone down quite a bit, or at least stabilized.”
Senior housing has become an essential service in America, catering to the unique needs of an aging population, most of whom are Baby Boomers. Regardless of economic conditions, the need for these services remains consistent. Senior housing properties can withstand a recession, even a global pandemic, because ultimately, seniors will need the care and are willing and able to pace inflation in order to meet their demands and expectations.
This Views article is sponsored by Inspired Healthcare Capital. To learn more about investment opportunities, visit ihcfunds.com.
When not covering senior news, Jack Silverstein is a sports historian and staff writer for SB Nation’s Windy City Gridiron, making regular guest spots on WGN and 670-AM, The Score. His work has appeared in Chicago Tribune, RedEye Chicago, ChicagoNow, Chicago Daily Law Bulletin, Chicago Magazine, and others.