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CREFW-Fall2014 10.15.14

A publication of Autumn issue 2014 sponsored by CRE Finance World Autumn 2014 31 Rent levels associated with each subtype are correlated with the amount of care provided. As such, independent living rents are the lowest among the group. The average asking rent for one independent living unit in the U.S. during the second quarter of 2014 was $2,803 per month. At the other end of the spectrum are units in skilled nursing facilities, where the average rent reached $7,944 in the second quarter due to intensive care from both staff and specialized medical machinery. Assisted living and memory care facilities had average rents of $3,990 and $6,558, respectively. Rent growth slowed across all four categories during the second quarter of 2014. Most notably, rent growth for assisted living fell from a robust 1.1% in the first quarter to 0.3% in the second. Rent increases for all four subtypes were between 0.2% and 0.3%. Rent growth over the past year and a half, however, has been slowest among the units providing the most care. Asking rents for memory care and skilled nursing units are up 1.8% and 2.0%, respectively, since 2012. Growth is relatively more robust for the assisted living and independent living categories, with asking rents up 3.6% and 2.7%, respectively, since 2012. This difference in growth rates is not really surprising. For one, rents at facilities providing more intensive care are much higher, so significant rent increases would be unlikely. These intensive care facilities also rely on steady payments from Medicare for many of their tenants: regulation constrains the amount by which operators can raise fees. Lastly, only the oldest of the baby boomer generation are approaching age 70, when the need for more intensive care is most prevalent. So at present, the population bulge represented by this generation is mostly pushing up demand for the units with less intensive care. Current vacancy levels among the subtypes all fall in a fairly narrow range in the high single digits. The skilled nursing segment currently exhibits the tightest vacancy among the group at 8.1%. With a vacancy of 9.7%, the assisted living category has the highest vacancy level. This was not the case just a year and a half ago. At the end of 2012, independent living facilities had the highest vacancy level of the group at 11.0%. But in the time period since, the subtype had the largest vacancy compression of the group, with vacancy dropping 220 basis points to 8.8%. Meanwhile, memory care facilities, the subtype with the lowest vacancy at the end of 2012, actually saw vacancy rise by 10 basis points to 9.3% as of the second quarter of 2014. Figure 3 Senior Housing Vacancy Rates Source: Reis Why did occupancy decline for memory care facilities in the past year and a half while occupancy increased across all three other subtypes? Supply growth certainly played a role here. Since the end of 2012, the inventory of memory care units has increased 3.1%, far outstripping the supply growth rates of the other three categories. Independent living inventory expanded at the second highest rate, which was just 1.1%, a full 200 basis points below the rate of memory care supply additions. Much of that 3.1% growth came in the second quarter of 2013, which temporarily pushed vacancy in memory care facilities up to 9.9%. In contrast, skilled nursing inventory has barely budged over the past year and a half, growing just 0.3%. Despite the large supply growth in memory care units, demand has remained strong since 2012, which limited the vacancy increase to just 10 basis points. Memory care occupied stock climbed 3.1% over the past year and a half. This was the second highest rate among the senior housing subtypes, eclipsed only by the 3.6% jump in occupied stock displayed by independent living units, explaining why independent living has had the largest compression in vacancy since 2012. Occupied stock in the assisted living and skilled nursing categories increased at roughly the same rates, 1.9% and 1.8%, respectively. Is it Time to Invest in Senior Housing?


CREFW-Fall2014 10.15.14
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