The senior housing sector is no stranger to change, consistently evolving to meet the needs of an aging population. However, recent data reveals a concerning slowdown in the construction of new senior housing projects, signaling a complex set of challenges and opportunities for those involved in the industry—whether operators, developers, or investors. This article examines the factors contributing to this slowdown and its potential long-term implications on the senior housing market.
The Current State of Senior Housing Starts
Post-pandemic economic recovery has been uneven, with inflation, the threat of a recession, and rising interest rates creating uncertainty for developers and investors. This uncertainty, coupled with ongoing supply chain disruptions and labor shortages, has made it increasingly difficult to predict costs and returns, leading many to hesitate in starting new projects.
The Federal Reserve’s interest rate hikes have further compounded the issue, driving up borrowing costs and making new developments less attractive. As a result, banks and lenders have tightened their lending practices, making it harder to secure financing for new construction. The introduction of stricter capital reserve requirements by bank regulators has also contributed to this trend, as higher-risk loans are subjected to greater scrutiny and require more capital reserves to mitigate potential losses.
These combined factors have led to a significant slowdown in senior housing construction, at a time when demand is high. In 2023, the number of new construction starts fell to a thirteen-year low, with fewer than 15,000 units initiated—the lowest since the aftermath of the Great Financial Crisis in 2010.
Prolonged Construction Timelines
Adding to the concern is the increasing length of time it takes to complete new projects. Between 2017 and 2023, the average construction timeline for senior housing projects extended from 21 months to 29 months. This elongation, highlighted in NIC MAP’s blog "Rising Construction Durations in Senior Housing: Beyond the Pandemic Effect," complicates efforts to meet the growing demand for senior housing.
Where’s the Bottom?
Unfortunately, the decline in new construction starts has persisted into 2024, suggesting that the trough has not yet been reached. Preliminary data from the second quarter of 2024 shows that senior housing construction starts are averaging 2,579 per quarter—down from a quarterly average of 3,617 in 2023. The second quarter of 2024 saw only 1,300 new starts, which, even with potential revisions, may mark the lowest quarterly figure since the prelude to the Great Financial Crisis.
What Lies Ahead?
The decline in new construction starts during 2022, 2023, and continuing into 2024 is a warning of a future inventory shortfall. Given the lengthy construction cycle in senior housing—from planning to completion—the full impact of today’s slowdown will not be felt immediately. However, as early as next year, the industry is likely to experience a significant squeeze in available units, with the situation worsening each year until new developments ramp up.
This shortage is expected to increase competition for available spaces, driving up costs for residents. Operators will need to adopt a long-term strategic approach, considering options such as expanding existing facilities, renovating, or repositioning assets to meet the anticipated demand.
The imbalance between supply and demand could lead to higher prices and fewer choices for seniors, particularly as the baby boomer generation continues to retire. Longer wait times for placement in preferred facilities and alternative living arrangements may become more common as the availability of new units declines.
For investors, this supply-demand gap presents a significant opportunity. Existing properties are likely to appreciate in value and perform well, with high occupancy rates and strong margins due to the limited competition. This environment offers lucrative returns for those already invested in the market.
Operators, too, stand to benefit from the current dynamics. Higher occupancy rates and the ability to command premium prices can improve financial stability and profitability. With fewer new facilities entering the market, established operators have a competitive edge, allowing them to leverage their experience and reputation to solidify their market position.
Conclusion
The declining trend in new construction starts, continuing into 2024, suggests a significant decrease in new inventory beginning in 2025. As demand remains strong, the senior housing market is likely to shift from a situation where supply meets demand to one where demand far outpaces available inventory.
The gap between high demand and shrinking supply is poised to widen in the coming years, depending on when capital becomes more accessible and developers regain confidence in launching new projects.
As these trends continue to unfold, it is crucial for industry stakeholders to recognize the urgent need for new inventory and capital investment to support the growing aging population. To explore the broader implications and financial requirements to address this challenge, consider reading more on the topic in The Analysts Corner, "The Impending Age Wave."
Krone Weidler, Founder & Principal
Cadre Healthcare Realty Advisors
1095 SE 177th Place, Suite 404-M14
Summerfield, FL 34491
C: (813) 842-2365
O: (866) 355-3594
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