According to CBRE's recently released U.S. Seniors Housing & Care Investor Survey, while the U.S. senior housing sector will continue to be impacted over the near term as a result of the COVID-19 pandemic, investors believe the sector has turned the corner from 2020's significant challenges.
Investors responding to the survey indicate that tempered investment growth is likely in the short-term, with a full recovery to take longer. Longer term they are encouraged by an aging population--baby boomers are nearing traditional ages for seniors housing with approximately 9,000 turning 70-years-old every day--and a greater understanding of the threats posed by the pandemic.
Seniors housing investment sales activity rose by 19.2% in Q3 2020 compared to the previous quarter. "In the early stages of the pandemic, the availability of capital slowed to a near standstill, but in recent months, both debt and equity have started to flow into the seniors housing sector again, particularly for buyers and borrowers with pre-existing relationships and proven track records," said James Graber, national practice leader of Seniors Housing & Healthcare for CBRE's Valuation & Advisory Services.
The vast majority of investors (88%) expect seniors housing rents to hold firm or rise modestly over the next 12 months. More than two-thirds (70%) expect occupancy levels to increase over the next year, compared to 53% in H1 2020. These responses reflect the troubled COVID-19 period as well as guarded optimism going forward.
"Throughout the pandemic response period, operators have put in the long, hard work of understanding the threat and implementing precautions in an effort to provide a safe environment for the senior population. As a result, we are seeing a trough in census decline, with positive net absorption in a vast majority of communities at all care levels," said Mr. Graber.
Throughout the COVID-19 pandemic, seniors housing operators have reported increased costs mostly comprised of increased payroll, sanitation, and Personal Protective Equipment (PPE). Since the onset of the pandemic, 72% of operators have reported elevated net monthly operating expenses of between flat ($0) and $250 per unit. Pandemic-related operating expenses have now begun to abate, with a majority (62%) believing that current underwriting practices will be in place for 6-18 months.
Assisted Living (33%) is again viewed as the biggest opportunity for investment in the seniors housing sector over the next 12 months, followed by Independent Living (22%) and Active Adult (15%). Investor interest in Assisted Living and the re-emergence of Memory Care, which has tripled since the prior survey, show an increasing trend towards need-based care levels. Investor interest in Active Adult declined in this survey due to prospective renters being reluctant to move during the COVID-19 environment.
The outlook for seniors housing capitalization rates over the next 12 months has shifted, with the portion of respondents expecting an increase in cap rates rising to 36%, up from 13% in the prior survey--a result of the anticipated impact of COVID-19 on the sector. Over half (53%) of respondents expect no change in cap rates in the near term.
"While there can be a focus on changes in cap rates as a result of the ongoing pandemic, underwriting property fundamentals, such as elevated pandemic-related operating expenses and census projections, are having the most significant impact on net operating income expectations," added Mr. Graber.