Starting with supply, there are a few critical observations to consider. First, based on data from NIC MAP, there is wide variation in development activity across the nation. Markets such as Atlanta have nearly 15 percent of their existing inventory under construction, while markets such as San Antonio currently have essentially no construction under way after having seen construction as a share of inventory top off at nearly 23 percent as recently as the first quarter of 2015. As a result, the swell of inventory is starting to be reduced in San Antonio as demand gradually grows to match new stock. There, the occupancy rate has inched up to 82.0 percent in the fourth quarter, after having hit an all-time low of 77.8 percent in the fourth quarter of 2017. Other markets with limited supply under development include Seattle and Las Vegas, while markets such as Atlanta and Sacramento, Calif. have significantly more.
Second, data from the fourth quarter of 2018 suggests that seniors housing construction activity may be slowing. Indeed, construction starts (i.e., units that have newly broken ground) for both independent living and assisted living properties are trending lower. In the fourth quarter, assisted living starts clocked in with the fewest units (i.e., an estimated 1,500 units) since the first quarter of 2012 for the NIC MAP 31 Primary Markets (i.e., metropolitan markets). On a four-quarter aggregate basis, starts totaled less than 9,400 units, the fewest since 2014. As a share of inventory, this amounted to 3.3 percent. The last time it was below 4.0 percent was 2012. For independent living properties, starts on a rolling four-quarter basis totaled approximately 7,300 units in the fourth quarter. As a share of inventory, this equaled 2.2 percent. The last time it was below 2.0 percent was 2014.
In addition to fewer units breaking ground, there are also fewer units under construction (measured from start to completion). In the fourth quarter, there were roughly 37,000 seniors housing units under construction (independent living and assisted living) for the NIC MAP 31 Primary Markets. That figure is down from the record high of 43,800 units in the fourth quarter of 2017, or by nearly 6,500 units. Moreover, construction as a share of inventory slipped back to 6.0 percent of open inventory in the fourth quarter of 2018, down from the record high of 7.3 percent in the fourth quarter of 2017.
All of this points to potentially improving market conditions, especially if demand continues to be robust. A strong economy, positive consumer confidence and a gradually improving housing market have supported net positive demand. In fact, in the fourth quarter of 2018, demand, as measured by net absorption, reached an all-time high for seniors housing.
It is important to note, however, that construction data is often restated—both up and down. Construction starts are the most commonly restated data points because they are particularly difficult to capture, so these numbers are likely to be modified. NIC occasionally finds out that a project has broken ground after the fact or that a property indicated groundbreaking pre-maturely. Part way through a project, a property manager may adjust their plans for unit mix based on pre-leasing patterns, unforeseen challenges or other factors. Changes to unit mix can also mean changes to a property’s majority property-type designation.
Regarding labor market conditions, like many sectors, the seniors housing sector is confronted by rising labor costs, as well as shortages of labor. Average hourly earnings for workers at assisted living properties rose by 4.6 percent in the fourth quarter of 2018, significantly faster than the 3.3 percent gain experienced by the broadly-defined private sector according to the U.S. Bureau of Labor Statistics. Anecdotally, seniors housing operators are citing even higher increases. And, in states and municipalities with rising minimum wages, growth rates may be even higher. Because labor accounts for roughly 60 percent of an operator’s total expenses, this upward pressure on labor costs has the potential to significantly impact margins and earnings.
Even with rising wages, shortages of workers remain a problem. Innovative and thoughtful operators are developing a host of solutions to combat growing scarcities of skilled and experienced staff, as well as staff that requires less professional training. These include free health insurance, free disability insurance, maternity pay options, 401(k) match opportunities and tuition pre-payment programs. Other solutions include discounts for professional training, educational opportunities, coaching and mentoring programs, clear career tracks for advancement, employment longevity perks, flexible scheduling, on-the-job training, “right staffing,” and staffing to the top of a person’s license.
In addition, reward and recognition programs, cash and gift bonus incentives, the use of technology to increase staff efficiency and workload management programs are being used. For most operators, a combination of these and other strategies are helping them retain staff, although turnover remains significant. Significant enough that a study by Argentum and Great Place to Work showed that a more satisfied staff led to a reduction in employee turnover, which in turn increased resident satisfaction, which led to an increase in occupancy, and ultimately to an increase in revenue growth.
In summary, while new supply continues to be a challenge in many seniors housing markets, there are some markets where this is less of an obstacle. And more broadly, the aggregate trends suggest some deceleration in seniors housing property development activity. Labor, on the other hand, will continue to be a challenge for seniors housing operators until either a recession reverses today’s tight labor market conditions or the labor force starts to expand. The latter could occur from a relaxation of immigration policies or an effort to entice workers back into the labor market. This could very well include older, retired workers who re-join the labor force in a desire to take care of their very own peer group, helping to change the narrative of what it means to be retired.
Beth Burnham Mace serves as chief economist and director of capital markets research with NIC.