After challenging times during the worst months of the pandemic, the senior housing and skilled nursing sectors are making some gains. Record-breaking absorption came as a result of pent-up demand held down by uncertainties during the past two years, a first-quarter report from Marcus & Millichap shows.

Citing the National Investment Center for Seniors Housing & Care’s NIC MAP data service, the report indicates upward of 30,000 units were absorbed in the second half of 2021. This marks a massive shift from the 44,000 units of negative absorption which occurred in the year following the start of the pandemic.

Occupancy gains were largest in areas which benefited from overall population growth, a dynamic also seen in the wider multifamily sector. However, unlike multifamily as a whole, the greatest upticks in occupancy year-over-year were witnessed specifically in the mountain and mid-Atlantic regions, though most Sun Belt markets also registered significant gains.

Rent Growth, but at What Cost?

Senior housing rents have grown a little faster on an annual basis than they did yearly between 2015 and 2019, a good sign of the sector’s strengths. However, this doesn’t paint the whole picture — costs have been rising even faster than rents. While historically high inflation has played and continues to play a major role increasing operating expenses for senior housing assets, widespread labor shortages have also driven up personnel costs.

The dire need for staffing impacts virtually every aspect of managing a typical senior housing property. A September 2021 survey conducted by the American Health Care Association and the National Center for Assisted Living found that 99% of nursing homes and 96% of assisted living facilities were facing problems due to staffing shortages. This crisis has led to the increased use in agency nurses to cover gaps — and this further drives expense growth. A report from wealth advisory firm CliftonLarsonAllen LLP highlights that contract nursing costs have exploded, increasing two to three times historical levels. And workforce shortages have also impacted occupancy growth, as many facilities have slowed admissions due to a lack of employees.

Diagnosis of the Sector

Despite these issues, growth is occurring. While it will take considerably more time for this sector to fully recover, a number of factors are also present which will benefit senior housing in the long run. Beyond population shifts, a dearth of construction activity will help drive occupancy growth. And while workforce shortages are a very serious problem, senior housing assets which require less health care elements — independent living, for example — may not be impacted as significantly.

Where Opportunities Are

These ongoing challenges have not stopped investment in the sector — just changed its composition. Investors appear largely willing to inject capital into senior housing assets, though buyer competition is fiercest for stabilized, upscale properties in expanding regions, most notably the Sun Belt. While it may be a challenge for smaller investors to pick up these types of communities, these large opportunities often beget smaller ones — often with a notable upside.

Other potentially strong investment opportunities in the sector, the Marcus & Millichap report states, include low-occupancy assets in high-growth markets as value-add plays. And other opportunities may arise from adaptive reuse plays or conversions, particularly in retooling distressed communities as centers focused on mental or behavioral health.