Here’s the good news and the bad news regarding the independent living market today. The good news is that the fundamentals of the sector were stronger than ever as recent as this March, with values nearing a peak, occupancy consistently above 90% nationally, rents staying strong, and the labor problems largely avoiding IL communities. The bad news is that move-ins may be delayed for months, a recession may make selling and moving out of one’s home (and into an IL community) less feasible, and the socialization benefit of these communities may change significantly for some time.
Anecdotally, we do hear of move-ins continuing at a steady pace, depending on the locality and state. That’s promising for other parts of the country that have seen higher levels of infection and stricter social distancing policies: demand will still be there once things start to open up. And rent collection at IL communities would theoretically be less of an issue when compared with multifamily. Also, units turn over less frequently compared with assisted living or memory care, so occupancy woes may not present right away. But for a relatively low-needs-based sector, whatever short-term census problems occur may be more difficult to fix, and the long-term prospects for communal living among seniors may not be the same.
Thankfully, the sector was in objectively good health going into the current crisis, with strong census, low levels of new development, minimal labor needs and the baby boomers being a lot closer to moving into these communities than higher acuity seniors housing. When it comes to values, they were near a peak as recently as the four quarters ending March 2020, averaging $232,300 per unit in that period, down slightly from 2019’s average of $233,600 per unit according to the 25th Edition of The Senior Care Acquisition Report. While the pandemic began shutting down business and keeping people home throughout March, few deals closed during that period and did not affect the average price.
For the highest quality IL properties, those classified as “A” by their size, age and location, the average price rose to the highest level ever recorded in 2019 of $369,150 per unit, up 9% from the $339,000 per unit average in 2018. If census does drop across the country and cash flow shrinks, then we could see these values decline in the coming quarters. The average cap rate for the sector did rise by 20 basis points from 2019 to the most recent four quarters to 6.9%, but that likely is not reflective of the increased caution stemming from the pandemic. The next four-quarter period could see a more conservative lending and M&A environment pushing up cap rates.
