Texas Seniors Housing still a sound investment amid COVID-19
Commentary by Elena Bakina, PhD, CCIM
During the first half of 2020, the Seniors Housing and Care industry has experienced devastating effects from the COVID-19 pandemic. The mortality rate among people older than 65 has been much higher than younger generations and has forced states to close visitations at the communities temporarily. The hardest affected are skilled nursing facilities (SNFs) versus Seniors Housing Communities, but they are expected to recover quickly due to demand. However, not all Seniors Housing Communities and SNFs were affected equally. In fact, many were not affected by COVID-19 at all. Operators have had to deal with isolation, safety, staffing, increased operating expenses and many other issues caused by the pandemic.
Loneliness, or lack of socialization, is one of the prime reasons people are moving into Seniors Housing Communities. During the pandemic, this same issue has risen in the communities as well. Technology plays a significant role in helping senior residents to not feel isolated. Communities need faster internet with access to WiFi in every room as standard amenity. Many communities are reporting that their internet usage increased by 20-25% during the pandemic. A growing number of residents are now using video calling, as well as participating in virtual events, and plan to continue after the pandemic. All extra steps taken by the operators made seniors feel safe and cared for, preventing increased move outs.
Increases in operating costs started long before the pandemic and will continue after it due to the rise of staffing costs, added expenses for safety and technology. Labor shortages as the result of the pandemic will go away, but the challenge of hiring qualified staff will continue to be one of the major issues for the operators. Despite all these challenges, the industry fundamentals in the U.S. and Texas remain positive in the long term. Prior recessions have shown that, because of its needs-based nature, seniors housing is better equipped than other sectors to handle economic turmoil. Although the demographic wave of baby boomers is still at least eight years away, it is coming. As a result, there is a lot of capital that continues to flow into the sector.
The U.S. Census reports that seniors represent 10% of Texas’ population and that 25% of them are living alone. Approximately 25% of seniors 60 and older received food stamps in the last year. Further, the census reports that about 10,000 baby boomers turn 65 every day and that trend will continue over the next 15 years, increasing the need for seniors housing.
2019 U.S. Census data shows that seven of the nation’s fifteen 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 first half of 2020. Annual absorption was -0.2%, 310 basis points lower than in Q1 2020 and up 300 basis points from a year ago.
NIC also reported a decrease in the number of units absorbed in Texas during the first half of 2020, -1,605 units; however, on a biannual basis there were 283 seniors housing units absorbed. The highest demand on an annual basis was in the Houston metro where 285 units were absorbed, followed by Dallas (145 units). In contrast, both Austin and San Antonio recorded negative net absorption over the year of 30 and 320 units, respectively.
In Houston, inventory grew by 574 units and in Dallas by 155 units. Austin and San Antonio both recorded negative growth in the first half of 2020, shrinking by -114 units by -36 units, respectively.
Major metros in Texas reported seniors housing occupancy rates decreased during the first half of 2020. All of the major markets recorded a decrease in occupancy between Q4 2019 and Q2 2020.
Seniors Housings annual rent growth rate continued to increase in 2020 in all Texas metros, growing 1.3% over the year. IL and AL Majority average monthly rent rose 0.6% in Austin, 1.6% in Dallas, 1.4% in Houston and 1.0% in San Antonio between Q2 2019 and Q2 2020. The Texas average monthly rental rate for seniors housing is $3,843.
Nursing care trends are not as healthy as seniors housing trends. Inventory growth for Texas fell by -0.2% on an annual basis. Annual absorption declined by -6.9% and the occupancy rate declined over the year by 490 basis points from 73.6% to 68.6%.
At the end of the second quarter of 2020, the Texas nursing care average asking monthly rental rate of $7,129 was 5.4% higher than the average rental rate in the second quarter of 2019.
The 2020 Emerging Trends in Real Estate report by Price Waterhouse Cooper (PwC) continues to rank Seniors Housing among top subsectors for investment and development. Private equity returns for Seniors Housing properties continues to outpace those of other real estate sectors except for industrial. For the past seven years, Seniors Housing has been ranked number one among all types of Apartment Investments. This year’s report ranked it second after moderate/workforce apartments.
The average cap rate for Seniors Housing properties in Texas has decreased to 5.84% at the end of Q2 2020, marginally below the national average of 5.9%. The average cap rate for SNFs in the U.S. saw a sharp decline from its highest point of 12.2% in Q4 2018 and reached a historical low 8.6% in Q2 2020.
Despite market uncertainty, the limited supply of new acquisitions and historically low-interest rates fuel buyers’ competition and,consequently, push cap rates down. On the other hand, many buyers have a difficult time securing financing. Lenders are looking for buyers to have strong financials and more equity upfront.
According to NIC MAP, our Seniors Housing data source, there were 4,605 Majority IL units under construction in Texas primary markets in Q2 2020, followed by 1,425 Majority AL and 446 Majority NC units. Dallas and Houston continued to have high volumes of the Seniors Housing construction. Houston had 2,473 units under construction in Q2 2020, the third-highest in the U.S. Dallas’s construction volume (2,138 units) is fifth in the country. Senior population growth and an abundance of debt capital spur these new developments.
Senior 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 $194 to $249 per square foot, while mid-level independent living projects range from $168 to $198 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 $168 to $268 per square foot, while mid-level independent living projects range from $146 to $221 per square foot.