Dry Powder, Low Interest Rates, and the Coming Silver Tsunami Point to Strong Fundamentals for the Sector
As the large baby boomer generations ages, demand for seniors housing is likely to intensify. The 65-year-old and up population has increased from 35 million in 2000 to 49.2 million in 2016, according to the U.S. Census Bureau. This demographic increase, coupled with supply and demand fundamentals, points to positive growth for the seniors housing sector overall.
According to CBRE's Summer 2019 Seniors Housing & Care Investor Survey, investor interest in seniors housing remains strong. Some 60 percent of survey respondents expect to increase the size of their portfolios over the next 12 months. Moreover, the survey noted that an even greater number — some 68 percent — expect capitalization rates to remain stable over the same period.
In its Q2 2019 Health Services Deals Insights report, PwC projects skilled nursing dealmaking to continue throughout the second half of 2019. “Long-term care saw the most deals, continuing a long-term trend," the firm notes. For factors driving deal activity, PwC points to capital availability, low interest rates, and cost pressures for existing providers.
Fragmented Market Spells Opportunity
The sector is also very fragmented with an abundance of smaller owners and operators. Zach Bowyer of CBRE told National Real Estate Investor that the 10 largest skilled nursing operators make up only 14 percent of total supply.
Approximately 32 percent of U.S. nursing homes are operated by single-property owners and another 31 percent is operated by a small chain with two to nine properties, according to data from NIC.
Where there is fragmentation, potential investors may see opportunity. The National Investment Center for Seniors Housing & Care (NIC) cites reimbursement rate pressures, competition from other types of senior care, and high personnel costs as playing a role in decisions for smaller operators to exit the market and divest.
Demand Expected to Exceed Supply
Skilled nursing facilities are also poised to benefit from an anticipated bed shortage. NIC's 2019 Skilled Nursing Data Report showed an increasing demand and a shrinking bed supply is driving an uptick in occupancy. Occupancy in U.S. skilled nursing facilities reached 83.7 percent in the first quarter of 2019, representing the first year-over-year increase since January 2015, according to data released in June from NIC.
Beth Mace, chief economist at NIC, said, “With the influx of older seniors, we may start to see skilled nursing shortages as facilities close, but the numbers of potential occupants rise."
With the elderly population growing, interest rates declining,capital at the ready, and smaller skilled nursing facility players exiting the sector, now is the ideal time to invest in skilled nursing facilities.