Fresh analysis shows that in assessing the attractiveness of the assisted living market (and other seniors housing segments), it is important to consider not only supply and demand scenarios but also to realize the relationship between rent growth and occupancy for additional insight.

Lana Peck, a senior principal at the National Investment Center for Seniors Housing & Care (NIC), outlined the rent growth-occupancy factor, charting her analysis for assisted living over a four-year time frame—from third quarter (3Q) 2015 through 3Q 2019—for the NIC MAP® 31 Primary Markets in aggregate—and then looking at the relative performance of individual markets.

“The four-year time frame provides a recent look-back at the time series’ peak assisted living rent growth, inventory growth and absorption, and the time series’ low occupancy rate,” she said.

Amid other considerations, the chosen time frame seeks to avoid possible confusing effects of the Great Recession (2007-2009) on the market fundamentals.

What the research found was for the 31 Primary Markets rent growth averaged 3.0 percent over the 2015-2019 period in question, while the occupancy rate averaged 86.5 percent.

Nine markets had higher than average annual rent growth (ranging from 5.6 percent in San Jose, Calif., to 3.0 percent in New York City) and higher than average occupancy (ranging from 93.3 percent in San Jose, Calif., to 88.3 percent in San Diego). Eleven markets experienced lower than average rent growth (ranging from 1.5 percent in Detroit to 2.7 percent in Denver) and lower than average occupancy (74.6 percent in San Antonio to 86.2 percent in St. Louis).

Meanwhile, six markets saw lower than average rent growth (ranging from 2.5 percent in Tampa, Fla., to 3.0 percent in Minneapolis) and higher than average occupancy (89.4 percent in Pittsburgh to 86.9 percent in Tampa, Fla., and Riverside, Calif.).

Peck said five markets had higher than average rent growth (ranging from 3.3 percent in Phoenix and Cincinnati to 3.0 percent in Houston) and lower than average occupancy (ranging from 86.1 percent in Cincinnati to 77.9 percent in Las Vegas).

“The strongest-performing markets, which were those with the highest assisted living average annual asking rent growth rates and highest average all occupancy rates for the four-year time frame included San Jose, Portland, Ore., Sacramento, Calif., New York City, Los Angeles, San Francisco, Baltimore, Seattle, and San Diego,” she said.

Many of these healthy markets have limited supply due to constraints caused by issues like significant land development regulations, physical constraints on geographical expansion, and extended entitlement processes and/or premium prices on land due to scarcity.

Peck said building seniors housing may also not be considered the highest and best use of land, with other types of real estate taking priority. “Investors and developers in markets with these characteristics tend to have a long-term hold strategy and are typically rewarded with the ability to maintain or command higher rents because of relatively more restricted competition,” she said.

At the other end of the scale, the weakest-performing markets, which are those with the lowest assisted living average annual asking rent growth rates and lowest average all occupancy rates for the four-year time frame included Detroit, Orlando, Fla., Miami, San Antonio, Dallas, Chicago, Kansas City, St. Louis, Atlanta, Philadelphia, and Denver. Peck said these markets have something in common, which requires something beyond a simple answer.

“There may be a variety of influences, including but not limited to demand fluctuations, several consecutive quarters of sustained construction, price pressures from new seniors housing inventory competition or oversupply, lost market share to alternative options for housing and/or care such as age-restricted multifamily apartments, home health services, co-housing, aging-in-place technology, and adverse local economic conditions,” she explained.

Peck said that despite the recent softening in assisted living occupancy and rent growth over the four years, some markets have seen high rent growth matched with high occupancy, some have experienced low rent growth matched with low occupancy, and others had high occupancy and low rent growth, or low occupancy and high rent growth.

Some of what Peck calls the potential “connecting factors” to these relationships include that markets with either
1.) strong absorption of new inventory;
2.) a lull in cyclical construction; and/or
3.) high-barrier-to-entry markets with limited new stock often have higher occupancy rates. These markets “can typically command higher rates of annual rent growth,” she said.

“In contrast, saturated markets—and markets with sustained construction cycles—may experience suppressed rent growth and lower occupancy rates for multiple years until demand catches up with supply.”

Under such conditions, operators may find it hard to attract enough residents to fully lease-up a market’s new and existing units. They also may react to occupancy pressures by wholesale cuts in rents or by offering concessions to offset and moderate revenue lost to vacancies.