With seniors housing (which includes independent living and assisted living) prices rising and cap rates shrinking in 2017, we would accordingly expect a decrease in the average expense ratio. That was not the case, as we recorded a 30-basis point increase from 72.1% in 2016 to 72.4% in 2017, according to the 23rd Edition of The Senior Care Acquisition Report. We are now approaching the average expense ratio seen during the Great Recession, when it averaged 73%.

The industry has certainly improved significantly operationally since the Great Recession, but what has changed has been the increased acuity at both assisted living and independent living communities. Increased care costs, and increased memory care, can seriously affect a community’s margin and bottom line. But, if an operator can in turn raise rents, they can actually become more profitable. In 2017, higher labor costs combined with declining occupancy pushed the expense ratio higher. Independent living communities, which typically operate at much lower expense ratios (around 60%), also accounted for a smaller share of the M&A market (15% of all seniors housing properties sold, compared with 21% in 2016), helping to explain the increase.