Uncertain economic conditions played a major role in investor activity within the commercial real estate market this past year. Treasury rates more than doubled from 2021 to 2022 resulting in increased borrowing costs and limited capital markets activity, particularly in the second half of the year. The economy also had an adverse effect on construction activity due to rising interest rates and material and labor costs.
Despite the challenging economic landscape, however, strong demographic tailwinds and the potential for higher yields are driving demand in the seniors housing sector.
Stabilized occupancy reached a historic low of 80.3 percent across primary and secondary markets as the pandemic took hold (first quarter 2021). Since then, primary markets have grown 410 basis points to 84.4 percent in fourth quarter 2022. Stabilized occupancy in secondary markets has grown to 85.9 percent.
While occupancy is still lagging from the peaks seen prior to COVID, a few key factors indicate the market is trending in the right direction. For example, the juxtaposition of high and net positive absorption with below average inventory growth has fostered robust occupancy in seniors housing. In fact, primary markets in fourth quarter 2022 marked the seventh consecutive quarter of positive net absorption.
Prior to the pandemic, seniors housing rents were consistently increasing around 2 to 3 percent. After eight quarters of declining growth, the pace of rent growth picked up and accelerated throughout 2022. By the end of the December, primary and secondary markets rents were up 4 percent on an annual basis, compared to just 1.5 percent at the beginning of 2021.
The JLL survey also showed that 68 percent of investors anticipate an increase in capitalization rates over the next 12 months. While this will lower sales volumes in the short-term, the expected revenue growth of the seniors housing sector and anticipated growth in the 75-plus population bodes well for its long-term stability.
According to JLL research, the 80-plus population in the U.S. is expected to grow by more than 50 percent in the coming decade, compared to the overall population growing at roughly 4.7 percent. As such, there will be an enormous wave of pending demand for additional seniors housing and nursing care facilities, providing ample opportunity for developers, owners, and investors in the sector long-term, particularly in the Sun Belt Region.
The rate of growth for seniors housing has varied, however, with some markets, including El Paso, Texas, and select Florida markets, seeing limited growth over the past decade presenting a potential opportunity to increase the rate of growth of seniors housing to match the projected population growth.
While challenges remain, the underlying fundamentals of the seniors housing sector remain strong. Rising occupancy rates and rents coupled with a slowdown in new product coming online will drive demand throughout 2023 and beyond.
Investors will continue to seek out alternative commercial real estate options such as seniors housing due to their potential for higher returns. The bid/ask spread will remain a challenge, though, as purchasers are facing rapidly rising costs of capital compared to sellers’ expectations, much of which were formed in a low interest rate environment.
Pre-pandemic borrowing rates and yields could provide a guide for going forward and as expectations adjust, transaction volumes should pick up.
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