The seniors housing industry outlook for 2011 remains positive despite challenges from the recent recession:
- Demographic trends show strong growth in the elderly population aged 65+ which will drive demand.
- Occupancy rates held up relatively well through the recession compared to other property sectors. Rates have stabilized or are improving in 2011.
- Capital markets for seniors housing debt remain accessible with Fannie Mae, Freddie Mac, and HUD as major lenders, though CMBS lending is still limited.
- New construction activity is at historic lows, ensuring continued occupancy growth as the large baby boom generation enters retirement.
2. 2011 SeniorS houSing outlook
Types of Seniors Housing
The following chart summarizes the primary types of seniors housing.
CCrCS And
Item SenIor ApArtmentS Independent LIvIng ASSISted LIvIng nurSIng HomeS
CombInAtIonS
State Licensing Not Required Not Required Required Required Required
Not in most
Most states Most states
states, but
State Approvals require a CON have some
Not Required Not Required there are a
Needed to Build or application for state approval
few with CON
Medicaid funding requirements
requirements
Private pay or Primarily private
Section 8. Many pay, some
Predominantly
Low Income Primarily private Medicaid and
funded by
Resident Funding Housing Tax Private pay pay, some Medicare in
Medicaid and
Credits and have Medicaid Waiver assisted and/
Medicare
rent and income or nursing
restrictions components
Majority of
CCRCs require
Primarily rent by
About 3/4 rental Primarily rent by an entry fee for
Primarily rent by the month, a small
Payment Type by the month, 1/4 the day, virtually independent
the month percentage are
entry fee none are entry fee living, and some
entry fee
require for
assisted living too
Typically 200+
60 to 250 units 80 to 200 units, 40 to 100 units, 100 to 200 beds,
units/beds, many
Typical Size average is +/-200 average is +/-125 average is +/-75 average is +/-120
in the 300 to 500
units units units beds
range
Typically 1 to 3 Typically 3 meals Typically 3 meals Varies by care
Meal Service Limited meals per day per day included per day included types within the
included in rent in rent in rent community
All provided in All provided in
senior apartments independent living All provided in
Varies by care
Typical Services Transportation plus meal service, plus laundry and assisted living
types within the
Provided and activities housekeeping, assistance with plus 24-hour
community
and 24 hour activities of daily nursing care
monitoring living
Another type of care is Alzheimer’s/Dementia care, which continuing care retirement community. A true CCRC includes
is normally provided using an assisted living license and independent living, assisted living and nursing care, but the
is generally considered a subset of assisted living. Many term is also often applied to any entry fee facility even if it
properties feature a combination of care types, such does not offer the full spectrum of care.
as assisted and independent living. CCRC stands for a
1 integra realty resources ShhCp
3. 2011 SeniorS houSing outlook
Demand Trends
There is no denying that the demographic trends impacting Much of the forecast growth will occur between 2010 and
the seniors housing sector are positive. As of the 2000 2030, when the “Baby Boom” generation enter their elderly
Census, there were 34.1 million elderly Americans (those years. This is most apparent when comparing growth
aged 65 and older), making up nearly 13% of the total rates. Between 2010 and 2030, the overall US population
population. The elderly population is expected to more than is forecast to grow at an annual pace of 0.9% per year. But
double by the year 2030 to 72 million, to make up 19% of growth in all three elderly sectors is much stronger: 3.0%
the total population. As of the 2000 Census, there were 3.8 per year for the 65+ population; 2.9% per year for the 75+
million Americans aged 85 and older, just over 1% of the population and 2.1% per year for the 85+ population. These
total population. This population is expected to more than strong rates of growth will lead to growing demand for
double by 2030 and become 2.3% of the total population. seniors housing.
In 2050, as many as one in five Americans could be elderly.
Forecast Population Growth
500,000
450,000
400,000
Population (Thousands)
350,000
85+
300,000 75 to 84
250,000 65 to 74
45 to 64
200,000 20 to 44
150,000 Under 20
100,000
50,000
0
2010 2015 2020 2025 2030 2035 2040 2045 2050
Year Source: US Census Bureau
Elderly Population - Percent of Total
25%
20%
% of Total Population
15% 65+
75+
10% 85+
5%
0%
2010 2015 2020 2025 2030 2035 2040 2045 2050
Year Source: US Census Bureau
2011 SeniorS induStry outlook 2
4. 2011 SeniorS houSing outlook
Sector Overview
While not entirely immune to the recent recession, the as steeply through the recession as did occupancy levels in
seniors housing market outperformed the primary property other real estate sectors and has recovered well since the
sectors through the recent recession. The chart below initial drop.
outlines the key seniors housing metrics used in analyzing
the overall market performance, as of fourth quarter 2010. With new construction near historic lows and the seniors
While seniors housing rent growth and new construction aged demographic continuing to grow, we anticipate positive
inventory have slowed or remained flat, many other real growth in both rents and occupancy for 2011 over all of the
estate sectors have seen negative trends in each category. seniors housing categories.
Furthermore, seniors housing occupancy levels did not fall
Seniors Housing
Majority Nursing
Property Type Majority Majority Assisted
Aggregate Care
Independent Living Living
All Occupancy 87.6% 87.1% 88.4% 88.3%
YoY Rent Growth 0.0% 0.2% -0.2% 3.1%
Quarterly Absorption 1,173 744 448 -1,357
Quarterly Inventory Growth 1365 745 620 -304
Units/Beds Under Construction 9,291 6,127 3,164 2,472
Construction vs Inventory 1.8% 1.9% 1.7% 0.4%
Inventory 502,326 320,051 182,275 569,850
Penetration 10.6% 6.7% 3.8% 12.0%
Source: NIC
Occupancy Levels
Of the three types of seniors housing, the independent living sector have seen the greatest challenges in independent
sector was negatively impacted by the recession to the living occupancy levels. It appears that occupancy may have
greatest degree. In the 31 largest MSAs, independent living bottomed, as public operators such as Capital Senior Living
occupancy levels fell from a high of 92.4% at the beginning and Brookdale are reporting stabilization or improvements
of the recession (the fourth quarter of 2007) to 87.8% in in occupancy in their portfolios.
the third quarter of 2010. This decline of 460 basis points
was much more significant than in the other sectors. The Occupancy levels in the assisted living and nursing care
average assisted living occupancy fell only 150 basis points, sectors held up much better through the recession. These are
from 90.9% to 89.4% over the same period, and nursing more needs-based product, and seniors and their caregivers
care occupancy levels fell 160 basis points from 90.3% to found ways to finance the move to assisted living or nursing
88.7%. care even in the face of the most severe economic downtown
since the great depression. It should be noted that while
Independent living is more of a lifestyle decision than a needs- independent living is almost entirely private pay, nursing
based decision, and seniors and their children have simply care is predominately funded by Medicaid and Medicare,
delayed or foregone this lifestyle change in the face of a and Medicaid funding in assisted living is becoming more
challenging housing market and economy. Not surprisingly, prevalent.
the markets with the most significant issues in the housing
3 integra realty resources ShhCp
6. 2011 SeniorS houSing outlook
Capital Markets
Seniors housing industry loan performance remains high absence of CMBS lending is impacting the industry to a
in comparison to other commercial real estate sectors, degree. In the past, CMBS loans funded large acquisitions,
although non-performing loans as a percentage of total such as the Fortress acquisition of Holiday Retirement, and
loans have increased to approximately 2.5% as of the third Carlyle Group’s acquisition of ManorCare. However, there
quarter of 2010, according to NIC. The main providers of are rumors that the CMBS seniors housing market will be
debt for seniors housing continue to be Fannie Mae, Freddie opening up in the near term, albeit at lower leverage levels
Mac, and HUD. All of these GSEs offer attractive leverage than in past cycles. We anticipate that liquidity will remain
and terms depending on the seniors housing type. While a at or near current levels for 2011 and expect loan volume to
big chunk of the lending is being provided by GSEs, there increase or remain constant as well.
are still local and regional banks getting deals done. The
Loans Placed in Quarter ($M)
2500.00
Volume in Millions
2000.00
1500.00
1000.00
500.00
0.00
00 001 001 002 002 003 003 004 004 005 005 006 006 007 007 008 008 009 009 010
20 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q
Source: NIC
New Construction
The inventory of seniors housing grew at an annual rate of 1.7% in the third quarter of 2010, which is a slowdown from
the levels seen a few years ago. For more than three years prior to the second quarter of 2010, inventory was growing in
excess of 2% annually.
Units Under Construction
16000
Majority IL
14000
Majority AL
12000
Number of Units/Beds
10000
Majority NC
8000
6000
4000
2000
0
4Q2005
1Q2006
2Q2006
3Q2006
4Q2006
1Q2007
2Q2007
3Q2007
4Q2007
1Q2008
2Q2008
3Q2008
4Q2008
1Q2009
2Q2009
3Q2009
4Q2009
1Q2010
2Q2010
3Q2010
4Q2010
Source: NICMAP
5 integra realty resources ShhCp
7. Capitalization Rates
Historically, seniors housing capitalization rates have moved indicates that capitalization rates have fallen since then, and
in lockstep with cap rates for other asset classes (the sole are now in the 7% to 8% range for high quality independent
exception being SNF cap rates which have remained in a and assisted living assets in major markets. Nursing home
fairly narrow band). This is shown in the graph that follows. capitalization rates continue to be in the 12% to 15% range,
depending upon age, quality and location.
As seen, apartment capitalization rates have started to
decline in recent quarters, as investors have gotten more REITs have announced several large deals recently using
aggressive and long term financing rates have fallen to Taxable REIT Subsidiaries. The largest such deal is the
historical lows. The most recent quarter that has been planned acquisition of Atria by Ventas in a deal valued at
reported for seniors housing capitalization rates is the first $3.1 billion. The reported capitalization rate on the stabilized
quarter of 2010. Sale and pending sale data collected by IRR portfolio is a low 6.5%.
Cap Rate Comparison
14%
13%
12%
11%
Average Cap Rate
10%
9%
8%
7%
6%
5%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010
Skilled Nursing 13.10%12.70%12.70%12.80%12.60%12.30%12.00%12.00%12.80%12.70%12.75%13.10%13.00%13.30%13.20%13.30%13.40%13.10%13.10%
Assisted Living 8.90% 8.70% 9.20% 8.70% 8.80% 8.50% 9.00% 9.10% 8.80% 9.00% 9.20% 9.30% 9.40% 9.50% 9.60% 9.90% 9.80% 9.80% 9.80%
8.Independent Living 8.20% 8.30% 7.70% 7.70% 7.70% 7.90% 7.40% 7.30% 7.60% 7.80% 8.70% 8.70% 8.10% 8.50% 8.80% 8.80% 8.90% 9.40% 8.60%
Class A Apartments 6.06% 6.01% 5.98% 5.97% 5.89% 5.80% 5.76% 5.75% 5.79% 5.75% 5.86% 6.13% 6.88% 7.49% 7.84% 8.03% 7.85% 7.68%
Skilled Nursing Assisted Living Independent Living Class A Apartments Source: NIC & Korpacz
2011 Forecast
It appears that occupancy levels for assisted living and New capital is likely to continue to flow into the sector. The
nursing bottomed in 2010, while independent living is still REITs that focus on seniors housing have built large war
searching for a floor. Absent a setback in the economic chests of funding, and will need to deploy it over the next few
recovery, we anticipate occupancy levels in all three years. In addition, a number of institutional and opportunity
sectors will rise throughout 2011. There is a low level of funds have been raised and are seeking opportunities to
new construction underway in the seniors housing market, invest this capital. While 2009 and 2010 saw very few sales
but demand will continue to grow. Thus, it is likely that transact, there have been several recent very large sales
occupancy levels and rent levels will increase for several announced and this is likely a sign of things to come. Due to
years as supply tightens. sound sector fundamentals and the opportunities for income
growth, we expect to see capitalization rates decline relative
to levels seen in 2009 and early 2010.
2011 SeniorS induStry outlook 6
8. Charles a. bissell, Mai, Cre
700 e. Campbell road
Suite 265
riChardSon, tx 75081
phone: 972-960-1222 x102
offiCe: 972-960-2922