A “relatively sluggish” recovery of occupancy post-pandemic, as well as higher interest rates and scrutiny from lenders, have “hamstrung” the flow of deals in skilled nursing, Marcus and Millichap said in an analysis of the skilled nursing sector for the first half of the year.
The deal flow situation could be about to change, however, the firm noted, following the Federal Reserve’s lowering of interest rates in September by half a point, easing financing headwinds in both senior living and skilled nursing.
Costs also are coming down for investors looking to enter the skilled nursing space, the firm said. At $86,000, the average per bed sale price is at its lowest point since 2019, Marcus and Millichap noted.
Meanwhile, in senior living, deal flow was down approximately 25% from July 2023 through June compared with the trailing decade’s average, the firm said in an analysis of the senior living sector for the first half of the year, noting higher borrowing costs.
With the 10-year Treasury rate falling to its lowest level in September since mid-2023, however, and the Fed lowering the overnight benchmark rate by 50 basis points, financing hurdles in the sector have been reduced, Marcus and Millichap noted. “Moreover, the average senior housing cap rate rose to 8.2 percent during the year ended in June 2024 — the highest mark since 2009,” the report noted.
“The re-opening of the yield spread, along with the [senior living] sector’s strong occupancy recovery, should aid investor and lender sentiment,” Marcus & Millichap said.
Senior living construction continues to decline
Decreased construction starts in senior living continued into the first half of the year, and there appears to be no end in sight, at least in the short term, Marcus and Millichap said.
New development in independent living, assisted living, memory care and continuing care retirement communities has been on a steady downward trajectory since the second half of 2020. Marcus & Millichap noted that fewer than 32,000 units were under construction nationwide entering the third quarter. This amount marked the lowest midyear volume since 2014.
Occupancy continues to rebound
Occupancy in both senior living and skilled nursing continues to rebound from pre-pandemic levels, however, increasing for the 13th consecutive quarter from April to June, according to Marcus & Millichap’s analysis, which incorporates data from the National Investment Center for Seniors Housing & Care.
In skilled nursing, Marcus & Millichap noted, “[t]he 30-basis-point boost during those three months was nevertheless the smallest gain over that stretch.”
Senior living occupancy rates are anticipated to continue to increase, tightening the availability of senior living communities as surging demand begins, according to NIC.
The coming surge of older Americans is expected to continue the upward occupancy trend. The youngest baby boomers are turning 60 this year, with the oldest reaching age 78.
