Recession-Proof REITs: Senior Housing Demand Bounces Back After Two Catastrophic Years

Real Estate

Few places seemed more risky during the early, pre-vaccine peaks of the Covid-19 pandemic than nursing homes and senior housing facilities. That includes Arbor Court Retirement of Topeka, the oldest retirement community in Topeka, Kansas.

“There was a lot of fear,” says Linda Clements, the director of business development at Arbor Court of Topeka, an independent living community for people 55 and older. Arbor Court contained the few Covid outbreaks it experienced – the 58-apartment community saw one Covid-related death. Nevertheless, like many senior housing communities, the business struggled during the pandemic to bring in new residents to fill empty apartments when residents either passed away or moved to facilities offering more medical care.

Highly publicized Covid deaths at nursing homes early in the pandemic forced many families to rethink congregate living and long-term-care plans, but experts and senior housing groups say demand is now picking back up.

In early 2021, Arbor Court had 14 vacant units, almost three times the previous record for vacancies. Once Covid-19 vaccines became widely available, however, Clements began receiving calls from potential residents once again. Now, it has just four empty apartments, with new residents scheduled to move in this fall. “I just think about how far we’ve come in a year because we pretty much are back to normal,” Clements says.

About 36% of senior housing properties (which excludes nursing homes) experienced Covid deaths in 2020, according to the National Investment Center for Seniors Housing and Care (NIC). Meanwhile at nursing homes, which typically provide specialized medical services for more vulnerable residents, the figure stands close to 61%. The communities that avoided deaths did so with strict quarantine policies and restrictions on visitors that also made families wary.

The fallout from Covid and the perceived fears around senior facilities was bad news for real estate investment trusts (REITs) and institutional investors with large portfolios that held these facilities. The NAREIT Equity Health Care index, which tracks health care REITs across all sectors, entered 2022 down 10% from its pre-Covid value. Many senior housing REITs performed below that benchmark. Some of the largest REITs in the sector — including Omega Healthcare (OHI), LTC Properties (LTC), and National Health Investors (NHI) — were down 18% to 24% over the same period.

But as nationwide occupancy among senior housing facilities creeps toward pre-Covid levels, investors could see a healthy rebound in this sector of the real estate market. Occupancy fell to 78.8% for senior housing facilities in 2020, and closer to 75% in some segments of the space, according to NIC. The overall number has crept back to 81.4%, but still has room to grow before reaching pre-COVID occupancy levels of 87.6%. Executives at Enlivant and Belmont Village Senior Living, two businesses with multi-state portfolios, predict they’ll exceed pre-Covid occupancy levels in 2023.

Some senior communities have seen a quicker bounceback in occupancy. Steve Blazejewski, a senior portfolio manager at PGIM, Prudential Financial’s asset management arm, says his senior housing portfolio is already seeing higher occupancy and revenue than before Covid. Blazejewski notes that costs, especially labor, have increased. “Compared to multifamily, for example, senior housing rents can be two to three times as high. That creates a fairly substantial income return.”

Those returns lead to high-yielding dividends for many of the largest REITs focused on senior housing, including Ventas, Sabra Health Care, and Omega Healthcare. Dividends for the largest senior home REITs ranged from 3% to 9%, as of early June. The S&P 500 dividend yield is currently 1.7%.

Experts say prospects in the space look even better long-term, as the oldest of the 70 million Baby Boomers approach their late 70s, the prime age to move into senior communities. For the last 20 years, the average person moving into a senior community has been 84 years old. But some communities have seen that number trending downward. At Belmont Village, which has locations in eight states, the average age of new residents is about 79.

The oldest Baby Boomers are 76, and they may be more open to living in communities, experts say. “This generation that we’re about to hit will be the first that lived in college dorms and communes. They went to Woodstock, and lived in sorority and fraternity houses,” says Patricia Will, CEO of Belmont Village Senior Living. “Congregate living is welcome to them,” Will says, contrasting with past generations that resisted senior communities.

Not only are Baby Boomers the largest generation to reach retirement age, but they’re healthier than their parents, and are likely to spend more time in senior housing before transitioning to communities with specialized medical services. They’re also buoyed by rising home values, as the majority of retirees pay for their senior housing by selling their homes. Baby Boomers hold more than $17 trillion in real estate wealth and carry just $3.28 trillion in mortgage debt, according to the Fed.

For investors, senior housing may become a particularly good bet if the U.S. economy slows into a recession. Fed Chairman Jerome Powell has stated that he is more concerned about reining in inflation than potentially driving the country into a recession, which some observers believe could happen with continued rate hikes. “If you believe that we’re going into a recession, whether it’s a capital “r” or a lowercase “r”, healthcare is still one of the safest places you can be. You always need health care,” says Connor Siversky, a research analyst at Berenberg Capital Markets, an investment bank based in Germany.

Indeed, since 1990, healthcare has been one of two stock market sectors to average positive gains over the last four recessions. Senior housing gained its recession-resistant reputation when occupancy numbers largely held up during the Great Recession. Meanwhile, consumer spending on healthcare has increased every year since 1968, according to the Centers for Medicare and Medicaid Services. Nominal spending on senior housing increased by 76.6% from 2005 to 2020, despite a relatively small generation aging into the senior homes demographic during that time.

One challenge for senior housing however is a tight labor market, coupled with rising costs. Some facilities are rejecting new occupants because they don’t have the employees necessary to support additional residents. The industry has also been hurt by inflation, especially increased labor costs, which is forcing many communities to raise prices.

But Will is undeterred. “We lived through the Great Recession, and the business held up remarkably well,” Will says. “We are recession resistant.”

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