Advances in healthcare and technology, delaying independent and assisted living housing needs
Commentary by Elena Bakina, PhD, CCIM
The Seniors Housing industry continues to adapt to the changing demands of the aging population, looking for a new way to better serve different social, income and demographic groups of the senior population. Some developers build intergenerational campuses with multifamily, active adult and seniors housing communities. Others focus on delivering communities for low- and middle income seniors. A number of developers have found their niche in building communities that welcome various social, ethnic and religious groups of seniors. Many developers continue to look for opportunities in high barriers to entry markets and urban areas. A recent ULI and PwC report listed top U.S. real estate markets to watch in 2020. Austin is number 1 on that list and Dallas/Fort Worth is number 6. WalletHub research ranked several Texas cities among the top ten in 2019 in the country as the best real estate markets. The diversified Texas economy continues to attract seniors housing developers and investors.
Austin-based Seniorcare.com has published the senior population increases that occurred between 2010 and 2013 for the 25 largest cities in the U.S. The number of seniors in Dallas and San Antonio grew by 6%, in Houston by 5% and in Austin by 8% which is the highest growth recorded among those markets. In comparison, New York City and Los Angeles both grew by 3% and Chicago grew by 2%. However, Texas ranked 48th in 2018 among all states by percentage of population 65 or older.
2019 U.S. Census data shows that seven of the nation’s 15 fastest growing cities are located in Texas and the state is the third fastest-growing state in the country in terms of percentage gain of housing units (11.3%) and first in terms of the largest numeric increase (1.1 million).
The oldest baby boomers are in their mid-seventies now and this category of seniors help drive today’s IL development boom. In the past, the 75+ population has been entering IL communities in large numbers, but that’s not the case anymore. Seniors are staying active longer, and industry players are now running feasibility analyses on the 80+ population. It’s difficult to predict when we will see a large number of Baby Boomers start renting IL and AL communities. Advances in healthcare and technology may push this process beyond 2025.
Supply and Demand
The National Investment Center for Seniors Housing and Care (NIC) reported a decrease in the number of units absorbed on a net basis in the primary U.S. markets during the fourth quarter of 2019. Annual absorption was 2.9%, 20 basis points lower than in Q3 2019 and up 20 basis points from a year ago.
In contrast, there was a slight increase in absorption for Texas seniors housing units. On a biannual basis there were 1,634 seniors housing units absorbed during the second half of 2019 compared to 1,133 seniors housing units absorbed in the first half of 2019 in Texas major metros. The highest demand was in the Dallas metro where 658 units were absorbed, followed by Houston (471 units), Austin (359 units) and San Antonio (146 units).
In Dallas, inventory grew by 658 units, in Houston by 244 units, in Austin by 173 units and San Antonio grew by 15 units during the second half of 2019. Houston’s inventory growth declined by 151 units over the last six months when compared to the first half of 2019.
Major metros in Texas reported seniors housing occupancy rates increased during the second half of 2019. All of the major markets recorded an increase in occupancy between mid-year and year-end 2019.
Seniors housings’ annual rent growth rate has been on the rise in 2019 in all Texas metros, growing 2.9% over the year. IL and AL Majority average monthly rent rose 5.8% in Austin, 3.1% in Dallas, 2.8% in Houston and 0.1% in San Antonio between Q4 2018 and Q4 2019. The Texas average monthly rental rate for seniors housing is $3,751.
Nursing care trends are not as healthy as seniors housing trends. Inventory growth for Texas grew by 0.3% on an annual basis. Annual absorption was flat and the occupancy rate declined over the year by 20 basis points.
As of the fourth quarter of 2019, the Texas nursing care average asking monthly rate of $6,707 was 1.3% higher than the average rate in the fourth quarter of 2018.
According to Real Capital Analytics data, sales volume in Texas increased 32.3% to 1.6 billion between 2018 and 2019. The average cap rate at the end of Q4 2019 in Texas was 6.8%, 60 basis points above the national average of 6.2%.
The most active investors in the U.S. over the past 6 months were private investors with a 40.5% share, followed by institutional investors with a 33.5% share. In contrast, REITs (listed) represented a 23.6% share in Texas. Welltower topped the list of buyers adding 15 properties to its portfolio over the last 12 months. The top seller in 2019 was Sabra Health Care REIT, selling 22 properties.
According to NIC MAP, there were 5,210 Majority IL units under construction in Texas primary markets in Q4 2019, followed up by 1,783 Majority AL and 432 Majority NC units. Dallas and Houston continued to have high volumes of the seniors housing construction. Dallas had 2,910 units under construction in the second half of 2019, the second-highest in the U.S. Houston’s construction volume (2,381 units) is fifth in the country. A strong economy, senior population growth and abundance of debt capital spur these new developments.
Seniors living construction costs have been on the rise in the U.S., including Texas, as a result of labor shortages and the rising prices of building materials. Developers have seen hard costs increase anywhere between 7-10% annually. According to The Weitz Company’s national construction data, mid-level assisted living projects development costs range from $176 to $228 per square foot, while mid-level independent living projects range from $147 to $185 per square foot. In Texas, construction costs are still lower than the national average. The highest construction costs among Texas major metros are in Houston where mid-level assisted living projects range from $156 to $202 per square foot, while mid-level independent living projects range from $135 to $161 per square foot.