Even before the COVID-19 pandemic, the senior housing industry had dropping occupancy rates. Out of 31 primary markets from the National Investment Center for Seniors Housing & Care (NIC), 15 saw a year-over-year decline in senior housing occupancy across all care types. Occupancy decreased from 88% in the fourth quarter of 2019 to 87.7% in the first quarter of 2020, setting the pre-COVID-19 baseline.
Before the novel coronavirus, providers started enacting a number of strategies to stay attractive despite increasing competitive and occupancy pressures. One strategy is often a value-add project, like a renovation or repositioning, to help the community sharpen its competitive edge.
Value-add projects are great for investing in senior housing. Successful projects can:
- Bring the existing asset in line with newer communities
- Entice new residents
- Help improve retention of residents and staff
- Generate faster rent growth
The trick is identifying which markets and properties would benefit from these projects.
Senior Market Analyst
Three Indicators of Markets That Could Benefit from Value-Add Projects
Here’s what to look for when finding markets that have opportunities for value-add projects to maximize return on investment.
1. Slipping Occupancy Rates in Stable-to-Growing Markets
Occupancy rates can be a quick and easy way to identify markets where communities need investment. If a property’s occupancy rates are consistently slipping over a three- to five-year period, the property might lack features seniors are looking for, and an investment could boost marketability.
To use occupancy rates, try comparing a community’s trends with its local market area. A market area that has stable or growing occupancy rates is one with consistent-to-strong demand. That means the property has ample market opportunity to take action.
Defining Market Areas
Before analyzing a market, it’s important to define a market area. At its core, a market area is the geographic area where most prospects and residents live before moving into a community. The industry benchmark is 70% of residents reside in the market area prior to move-in.
However, there isn’t a one-size-fits-all approach. A more rural area could have a larger market area than a densely populated urban area. Destination-style settings would have a more regional market area.
Existing communities are at an advantage because they can learn where residents lived prior to move-in and where their families currently reside.
2. Rebounding or Stable Occupancy Rates in Markets with Inventory Growth
When you look at the pace of inventory growth compared to absorption, which is the annual change in occupied units, market-level senior housing occupancy rates can be deceptive. Even in markets with declining occupancy, there are often more residents than there were the year before.
You can identify these markets by first finding markets with new communities over the last three to five years. Assess if the occupancy rates were stable (best-case scenario) or if they fell as new units entered but then rebounded (most-likely scenario).
Finding Key Differentiators
There are winners in every market. Markets with higher levels of new inventory growth often face occupancy pressures as prospective residents have more choices. Existing communities may need to update their properties to better match what’s offered in new communities. A tip in using inventory growth is determining who wins in a market and why.
For example, when you compare similar communities that have occupancies over 90% to those with occupancies under 80%, you might see that ample outdoor space and multiple dining venues are characteristics that differentiate top performers in the market.
New communities might also be offering robust amenities and attracting attention to the market from prospects. Tailoring a community’s renovation to what wins in the market bolsters marketability and ROI.
3. High Entry Barrier Markets with Stagnant Rental Rates but Healthy Occupancies
In high barrier-to-entry markets, stagnant rental rate growth and healthy occupancies can indicate the market has pent-up demand for senior housing. Entry barriers protect the market from new competitors and could include:
- Limited land for new development
- Cumbersome entitlement processes
- Construction costs
- State-level regulations
Markets with healthy occupancies indicate there is a stable, consistent and often growing demand for senior housing. On one hand, stagnant rental rate growth could indicate a highly competitive market, which can drive prices down.
But because occupancies are healthy in these markets, it’s more likely these markets didn’t realize the investment opportunities in existing properties. Since there are entry barriers that protect the market from new competitors, these properties are great opportunities.
An investment in a building addition or renovation could produce higher rents. Since supply is limited and demand is strong, consumers would be willing to pay more for an attractive, refreshed housing product. The trick to using rental rate growth is comparing a community’s rate growth with its market as a whole, the market’s winners and against alternative settings.
Increasing Value in the Community
It’s also important to consider consumers’ willingness to pay. The renovation must create a community that meets prospects’ needs. To justify higher rents, the renovation needs to be a better option than:
- Other providers
- The prospect’s home
- An adult child’s home
- Downsizing to an all-age townhome or apartment community
If value grows, so will rent. Following a market study, survey research is helpful in getting detailed and market-tailored information about desired services and amenities, unit sizes, payment options and willingness to pay.
Focus groups and in-depth interviews are also helpful in crafting brand, messaging and lifestyle considerations in the project because they clarify the motivations, attitudes, perceptions and behaviors that drive prospects. This ensures a project is delivering on its value proposition and improving the lives of older adults.
The Bottom Line
While we’re waiting to see the final impact of the COVID-19 pandemic on the senior housing real estate market, we know there will be markets ready for value-add projects, and these indicators are a great way to start analyzing the markets. For more insights into emerging trends during the pandemic, explore our COVID-19 series.
When you’re ready to tackle a value-add project, rely on Aptura. Our leading senior housing analytics will give you the information you need to make smarter investment decisions.
Connect with our team or call 1-888-876-0987 to get started today.