The senior living industry is undergoing a transformative shift, driven by increased interest rates, operational changes, advancements in healthcare and technology, and changing demographics. To understand this complex landscape, it is crucial to examine it through multiple lenses.
Depending on the lens through which you look, the senior living industry has a vastly different view. On the capital side, many debt providers struggle to write new loans until they can “right” the ship on deals that the interest rate and margin compression storm created. That storm is showing up in significantly reduced new construction starts and a decrease in M&A volume. The bid/ask spread is slowing acquisitions, and new construction is difficult to pencil. Equity suffers from the same storm and is struggling to deploy capital at its required return rates.
As we look through the owner lens, the aforementioned interest rate and margin compression storm is still blowing, and debt coverage is the foremost challenge. Valuations are hard to settle on due to low M&A volume, and cap rates are just as hard to pin down. This has created big challenges trying to recapitalize an asset.
However, the view from the operations side is much different. Occupancy has increased for the last eight quarters and is on pace to meet or exceed pre-pandemic levels in many markets. Rents have seen record increases, and labor costs are flattening, making way for an ease on margin compression. That is not to say there are not headwinds (food costs, insurance, etc.), but they are beginning to ease.
As healthcare begins to integrate with senior living, we see coordinated resident care planning providing better health outcomes. Senior living communities can ensure residents receive prompt and comprehensive care, reducing the need for hospitalization and enhancing overall quality of life. Technology is enhancing the senior living industry, from telehealth services to smart home devices, innovating and enhancing safety, connectivity, and convenience for both residents and caregivers. Moreover, data analytics is being used for business intelligence, playing a role in optimizing operations and improving the quality of care.
Finally, if we step up to a 30,000 ft view of the industry, what stands out the most is the demographics. There is no denying the demand for seniors housing that is here and rapidly increasing year over year. We will get through these challenges, and the demand will keep the industry in growth mode for years to come.
From ERDMAN’s lens, we see growth all around us. Our development team is making progress on several sites around the country. Our architecture, engineering, and construction teams are growing and innovating as our clients expand and renovate their existing assets. We have aligned ourselves with partners who are financially balanced through all of this and still able to embark on new communities across the country or grow existing communities. To say we have a positive view of the Senior Living industry is an understatement. ERDMAN is excited for a great future.