As the assisted living market is mired in a difficult operating environment, plagued with overdevelopment in some markets, heavy discounting and stubbornly low census, independent living continues to show its resiliency. According the our rolling four-quarter pricing multiples, a product of The Seniors Housing Acquisition & Investment Report, investors paid an average of $272,300 per unit for independent living properties in the last four-quarter period ending this September. That represents a 6% increase from the average of the four quarters ended June 2019 of $257,800 per unit, and a 14% jump from the calendar year 2018 average of $238,100 per unit.
So, what could cause such a drastic increase? First, we should note that the IL market is much smaller than the assisted living M&A market, and a few transactions entering or leaving the four-quarter period statistics can make an outsized impact on the averages. Nevertheless, the average is representative of what has been sold in the last year, and that has been mostly high-end communities in strong markets, which investors have marked as very safe investments. And why not? There has not been anywhere near the level of construction in the IL market compared with assisted living, keeping the national average occupancy above 90%, according to NIC MAP. Labor costs and scarcity have hit assisted living communities’ bottom line hard, but independent living does not have the same staffing requirements. Finally, we know it is still years away, but IL is a lot closer to seeing Baby Boomers move into its communities than assisted living is.
All of these lower risk factors, and the abundance of cheap capital, have also pushed the average independent living cap rate down to 6.2%, from 6.5% in the previous four-quarter period and from 7.2% in 2018. There are of course risks facing the sector. If a recession is potentially around the corner, would the less needs-based independent living market see fewer seniors want to sell their homes and move, if they don’t have to yet? Will the fast-growing active adult sector usurp independent living, especially if it is able to attract younger seniors and perhaps add more services in the future to retain its aging residents? Who knows for sure, but for now, independent living is riding high.