Commentary: Senior housing in the post-COVID-19 world

Midway through the fourth quarter, 10 months into the pandemic, the impacts of COVID-19 on senior housing are generally known and operations are normalizing. While the sector has experienced material occupancy loss and elevated COVID-19-related operating expenses, new resident move-ins have returned to pre-COVID-19 levels.

This rapid bounce back of demand is indicative of the essential, needs-based nature of this property sector. Near-term headwinds remain but sector demand fundamentals and silver linings resulting from COVID-19 provide a compelling case for investing in senior housing.

Throughout the pandemic senior housing and skilled nursing have been grouped together under the long-term care umbrella. It's important to recognize the distinct differences between the two. Where the needs-based private pay senior-housing industry provides assistance with activities of daily living and socialization in a residential setting, the government-reimbursed skilled nursing industry caters to an frailer resident who requires acute around-the-clock medical care, including IV medication and/or ventilators, in an institutionalized setting. While the pandemic has had a disproportionate effect on the elderly, the implications to residents were far more severe in skilled nursing than senior housing.

According to the third-quarter data from the National Investment Center for Seniors Housing & Care, senior-housing primary market occupancy has declined 5.7 percentage points from pre-COVID-19 levels mainly due to strict COVID-19 protocols that limited move-ins and family visitation. Today, nationwide restrictions are easing, and occupancy loss appears to be decelerating. The trailing three-month decline through September was only 0.5%. As previously mentioned, demand across our portfolio has rebounded with new move-ins meeting or exceeding pre-COVID-19 levels, offsetting elevated move-out velocity.

The long-awaited arrival of the silver tsunami is finally here, setting the stage for long-term demographic demand drivers for senior housing. Between 2020 and 2025 the 75 and up population is forecast to increase by 22.9% or by 1 million-plus annually, and 48.1% over the course of the decade. This growth is more than three times the growth rate over the past decade. The result is that occupancy is poised to recover and remain steady for the foreseeable future.

In addition to the demographic tailwinds, there's a compelling case that the senior-housing utilization rate will remain steady, or likely increase because of its role in the health-care continuum, value proposition relative to alternatives and the declining caregiver ratio. First, while seniors are living longer, they are doing so with a greater number of chronic conditions requiring personal care treatment such as Alzheimer's, obesity and diabetes. Senior housing is considered part of the solution to the immense volume and cost of caring for the elderly population. Second, there is a significant value proposition relative to bringing care into the home. According to a 2019 Genworth Cost of Care Study and 2019 Bureau of Labor Statistics data, the cost for typical in-home health options are 59% to 61% more expensive relative to assisted-living communities. Perhaps more importantly, congregate care provides the benefits of 24-hour care and safety, socialization, dietary services, physical- and mental-wellness programming and transportation. Lastly, with younger age population growth not keeping pace with the elderly, there will be fewer potential caregivers to provide care for an increasingly higher-care-dependent senior population at home. U.S. Census Bureau projections forecast the ratio between 85 and up and 18-64 populations to decline 9% between 2020-2025 and 17% over the course of the decade, further lending support for greater potential demand for senior housing.

As awareness of senior housing as an essential investment asset class increases, it's critical for investors seeking to capitalize on the sector's long-term demographics and supply/demand trends to understand the operational complexities inherent to senior-housing operations.

The sector is a marriage of health-care, hospitality and real estate services operations. A typical 90-unit senior housing community employs up to 70 to 90 professionals and operates around the clock. Layer on a fragmented regulatory environment that varies state to state and the operating complexities increase. As a result, most of the existing investment opportunities going forward will be a result of dislocation caused by operational breakdowns. Therefore, operational expertise will be crucial to both underwriting and executing at the asset level.

Moreover, it is important, to align with operators that have the leadership, infrastructure and systems in place to foster a strong asset level culture to drive performance. In other words, operators need to be equally motivated to perform as owners.

As a result, some investment managers have formed their own operating platforms. Being an owner operator allows for the investment management team to maintain full control of their assets and showcase best practices across sales, employee training/retention, revenue analysis and property management.

The short-term COVID-19-induced dislocation has created an attractive investment point for investors interested in allocating into the senior-housing sector. Supported by robust fundamentals and validated through a resilient third-quarter move in data (demand), senior housing can be viewed as essential real estate. Additionally, with the advent of a COVID-19 vaccine imminent, the industry may rebound sooner than anticipated.

Blake Peeper is partner and co-chief investment officer, Orlando, Fla., and Vanessa Gil is vice president, capital markets, New York, at Bridge Investment Group. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.