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 Setting the Stage for 2018

Seniors Housing, Skilled Nursing, and the Economy


Beth Burnham MaceThe $1.5 trillion, 10-year tax cut passed by Congress and signed into law by President Trump on Dec. 22 is expected to moderately boost economic growth for the next two years before slowing it down thereafter, in the view of many, but not all, economists and pundits. Longer run, the deficit-financed tax cuts will add to the government’s deficits and debt load.
Through the remainder of the decade, the fiscal stimulus associated with the tax cuts is projected to boost GDP growth from 2.5 percent per year to 2.9 percent per year, according to estimates by Moody’s Analytics and others. The impact is less than it may have been, however, due to today’s already strong economy (which has now generated more than 2 million jobs per year for seven consecutive years for only the second time in history) and the tightness of the current labor market. With a January 2018 unemployment rate of 4.1 percent, a fiscally stimulated, stronger economy could possibly push the jobless rate to its lowest level since the 1950s—near 3 percent.

Rising Wage Pressures, Interest Rates

Tighter labor markets should result in upward pressure on wage rates and inflation expectations, which in turn are likely to force the Federal Reserve to raise interest rates as it tries to prevent the economy from overheating. Many pundits are projecting three or more 25-basis points hikes in the federal funds rate in 2018, with more to follow in 2019.

It is notable that the jobless rate has fallen to a 17-year low, and wage pressures are starting to be evident. In January, average hourly earnings for all employees on private nonfarm payrolls rose by 75 cents to $26.74, or 2.9 percent from year-earlier levels. This is the most since June 2009.

A separate report from the Bureau of Labor Statistics—the Employment Cost Index report—showed that private-sector wages and salaries rose by 2.8 percent in the last three months of 2017, compared with year-earlier rates. This was the fastest growth since the recession. Eighteen states also began the new year with higher minimum wages.

It is also noteworthy that for seniors housing, average hourly earnings were up by 5.3 percent in the third quarter from year-earlier levels, while average hourly earnings for skilled nursing increased by 3.3 percent, faster than the national average for all industry sectors.

This provides hard evidence to support the anecdotes of rising wage pressures that have been permeating conversations for some time now. It also speaks to the pressures operators will be feeling in the coming year since wages and benefits often account for up to two-thirds of the expense load for many operators.

Higher interest rates will counteract some of the stimulus created by the tax cuts, with the potential for a slowing economy in 2020 and thereafter. None of this is certain, of course and, with Jerome Powell as the new Federal Reserve chair in February, the response by the Fed may be different than that which would have happened under Janet Yellen.

Longer term, the tax cuts will almost certainly result in higher debt levels and growing deficits, which in turn may crowd out other investments, potentially adding further upward pressure to interest rates.

Seniors Housing

The year 2017 will be remembered as a time when foretold challenges in the seniors housing sector came to roost for many operators. The effects of swelling inventory levels in select markets and the lack of qualified workers took their toll on the bottom line for many operators, as wage growth accelerated and rent growth weakened. At the same time, the strong return performance enjoyed by many seniors housing investors and a seemingly compelling demographic story encouraged development by multifamily operators as more entered the seniors housing sector for the first time.

In 2018, these trends are likely to continue. Construction pipelines will remain high, with growth in independent living properties likely to continue to accelerate, while assisted living development activity is expected to remain high.

Near-record low occupancy levels in assisted living will remain tested, with markets such as San Antonio providing an example of what happens to market fundamentals when rapid inventory growth exceeds demand. In the fourth quarter of 2017, assisted living occupancy levels in San Antonio fell to 73.6 percent, nearly a record low point (compared with 71.0 percent in Q4 2016) and the lowest rate among the Primary 31 NIC MAP metropolitan area markets. As a result, rent growth stalled at 0.4 percent.

Not all markets have suffered from oversupply, however. In fact, there are some metropolitan areas in which development may be welcomed, especially by consumers who may want more choice, care, and living options. Some of these supply-constrained, high barrier-to-entry markets have assisted living occupancy rates in excess of 90 percent and can be found in the West, such as San Jose, Seattle, San Francisco, Sacramento, and Portland, Ore., or in the Northeast, such as New York.

Investment Returns Still Strong, But Decelerating

For many institutional investors, seniors housing has been and continues to be a lucrative investment, offering both steady income and strong appreciation. In the third quarter, the total annual return for seniors housing was 12.72 percent, according to NCREIF.

The total return overshadowed the broader NCREIF Property Index (NPI) return by nearly 6 percentage points (with a return of 6.89 percent). Despite the relatively strong showing, the total annual return for seniors housing has been trending down since mid-2014, when it peaked at 20.37 percent. This pattern can also be seen in the broader index. On a 10-year basis, total returns for seniors housing exceeded the NPI by more than 400 basis points.

The seniors housing investment performance measurements reflect the returns of 102 seniors housing stabilized properties, valued at $4.9 billion in the first quarter. This is the highest market value for this property type since 2003, when NCREIF first started reporting data for seniors housing, and this marked the first quarter that the property count of the NCREIF universe of seniors housing exceeded 100 properties.

Skilled Nursing: Opportunities and Challenges

While recent headlines have highlighted a number of businesses that are modifying their investment strategies related to skilled nursing properties, a number of other investors are doubling down or entering the space in less conventional ways.

Investor interest remains relatively strong, with $6.2 billion of transactions comprised of 655 properties exchanging hands in the year ending in the fourth quarter of 2017. Meanwhile, pricing remains reasonably strong, averaging $84,000 per bed, although this is below the recent high in late 2016 of $100,000 per bed based on a four-quarter moving average.

Investors must consider an array of factors when financing, selling, and purchasing skilled nursing properties. In addition to the economic and capital market considerations discussed earlier are demographic considerations, as large numbers of baby boomers and their parents continue to age. Long term skilled nursing care and short-term rehabilitation services both stand to benefit from this significant trend.

The slower implementation of new value-based care and bundle-based payment models by the Centers for Medicare & Medicaid Services in 2018 should also provide near-term support to operators of skilled nursing properties. However, bundled payment models and the newer Bundled Payments for Care Improvement Advanced models (BPCI Advanced), with their greater emphasis on health outcomes and less focus on fee-for-service options, will present a longer-term test for the sector.

Other challenges facing the sector include labor shortages and rising wage rates (as discussed earlier), shifting Medicare and Medicaid reimbursement models, more acutely ill patients, aging buildings, narrowing of post-acute provider networks, and rising competition from home health and other sectors.

Occupancy Straits

The skilled nursing sector also faces continued occupancy reductions resulting from shorter lengths of stay, as well as some daily rate pressures through the greater penetration of Medicare Advantage plans, which can affect operators’ profitability. NIC’s Skilled Nursing Data Report for the third quarter of 2017 shows that the share of managed Medicare plans continues to rise, while revenue per patient day continues to fall, ending the third quarter at $431 per day, down from more than $490 per day in 2012.

For some capital providers, investing more intensely in operations or big data systems—such as electronic health record systems—that create economies of scale and nurture new business opportunities and partnerships is a strong way forward. For others, investing in ancillary and home care services seems more compelling.

Meanwhile strong operators are acknowledging today’s challenges and working to maintain and create the most cost-effective, care-intensive option possible for both today’s aging seniors in need of long term care as well as their adult children, who often need short-term care and rehab services while recovering from joint replacements and other afflictions common to baby boomers.

In conclusion, 2018 should prove to be a year of interesting opportunities amidst ever changing circumstances—circumstances that will be shaped by the economy, supply and demand market fundamentals, the cost of capital, a changing regulatory environment, technological advances, and evolving synergies between a broadening array of providers of care and housing for America’s elders. Indeed, the rules of the game are changing from these factors as well as from acuity levels that are rising with the aging population, while the pressure to decrease health care costs continues to escalate.
Beth Burnham Mace is chief economist and director of outreach for the National Investment Center for Seniors Housing and Care (NIC). She can be reached at
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