There has not been a lot of good news, but given some leading indicators, the next development boom may be a bit further out than we had expected four months ago.
Our focus for the past 12 months has been on the coronavirus pandemic and what it has done to seniors housing and care occupancy rates. We are also on record as stating that getting back to pre-pandemic census levels may take up to four years, partly because we expect development to ramp up again when developers eye the post-2025 demographics.
But something else has been happening that may keep some builders away. First, the 10-year treasury rate has more than doubled in the past seven months. Yes, 1.36% is still attractive, but we were all getting used to those sub-1.00% rates.
Second, the price of crude oil has tripled since April 2020. That raises the cost of everything from travel to utilities to production. And, of course, the components of construction costs.
Speaking of construction costs, lumber prices are up nearly 50%, and a lot of wood still goes into senior living communities. All of this is to say that when buyers were comparing replacement cost to acquisition prices in the past few quarters, on a per-unit basis, buying was cheaper, and the pendulum may swing even more to acquisition prices as the cheaper bet.
As demand increases, however, acquisition prices will start rising again and equilibrium will be reached at some point. And if development does not ramp up, census levels may increase faster than we first predicted. Wouldn’t that be good news.