‘conversation Is Changing’: Higher Occupancy Reveals New Challenge For Senior Living

Market dynamics and a lack of new supply are starting to impact how providers can capitalize on incoming demand – a phenomenon NIC Senior Principal Omar Zahraoui called the “great tightening,”  

Six in 10 senior living properties in the 31 primary markets tracked by NIC re now operating above 90% occupancy. Another 16% fall between 85% and 90% occupancy. This means that more than three-quarters (77%) of all senior living properties are operating above 85% occupancy, according to a new report released on Monday by Zahraoui.  

The current moment is not about “simply replacing occupancy lost during the pandemic,” and the conversation is shifting from recovery to available senior housing capacity and where future supply can keep up, Zahraoui told Senior Housing News on Monday. The biggest takeaway for senior living providers should be “that the occupancy conversation is changing.”

“The next challenge is converting occupancy into sustainable operating margins while managing labor and other operating costs,” Zahraoui told SHN. “At the same time, communities approaching full occupancy will need to manage demand and waitlists more strategically.”

As these markets tighten and make occupancy growth more difficult, Zahraoui said operators are increasingly partnering with ownership groups that value data and analytics to identify their next growth move.

“Better market intelligence leads to better decisions at the local level,” Zahraoui said.

Around three-fourths of communities in Boston (75%), Tampa (73%) and San Francisco (70%) have occupancy above 90%. But high performance is not limited to “a handful of markets” outside of typical large metropolitan areas, Zahraoui noted. In July, NIC reported that nearly half of the primary markets had exceeded 90% occupancy and that the nationwide average occupancy was 89.9% in the second quarter.

New supply remains limited all the while. Average senior living occupancy grew 0.4%, with 16,000 new units under construction in the second quarter. The number of occupied units increased by 3,700, rising to 639,650 in the second quarter from 635,962 in the first quarter of this year.

Properties operating above 85% occupancy have less flexibility to “accommodate incremental demand.” As available senior housing inventory becomes limited, those seeking services or lifestyle changes are left with few options, one of which is joining a community’s waiting list.

With occupancy gains becoming increasingly difficult as the remaining supply fills with people seeking new senior living options, operators that “understand where occupancy is concentrated,” along with how many properties are approaching full occupancy, will be able to continue making gains in census growth.

“As operating costs continue to rise, particularly labor, insurance and other expenses, the conversation is increasingly turning toward operating performance and margins,” Zahraoui wrote. “Strong occupancy creates opportunity, but it does not automatically translate into stronger financial performance.”

But for investors and developers, these signs of a lack of new supply and unmet demand are “strengthening the case for new development.” Factors such as demographic demand, replacement costs and projected investment returns support starting new projects after cycles dominated by mergers and acquisitions activity.

With “many markets” shifting toward a period of low supply and sustained, strong demand, there will not be a turnaround overnight. Development projects typically take multiple years to secure proper entitlements and financing before shovels go into the ground. However, high occupancy alone is not a development thesis in and of itself, Zahraoui said.

“The opportunity is market-specific and depends on where strong demographic demand, limited capacity, replacement costs and achievable returns align,” he said. “New communities can take years to deliver. Today’s development decisions will shape the market’s ability to meet future demand.”

Senior housing properties have also “quietly accomplished something remarkable,” Zahraoui wrote, noting that over the last four years, senior housing has led major commercial real estate sectors in year-over-year occupancy growth. 

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