Senior Housing Industry Mounts A Comeback As Baby Boomers Age In And New Construction Stalls Out

Over the course of three years, Avanti Senior Living survived a pandemic, a historic winter storm that left Texas without power for nearly six days and two hurricanes.

The Houston-area business, which offers assisted living and memory care at seven locations across the South, is fuller today than it was prior to 2020. But Avanti's recovery has been hard-fought, co-founder and Chief Operating Officer Lori Alford said, and it came only after enduring hardships that tested the company’s resilience in unimaginable ways.

“I can remember thinking, ‘I’m waiting on the locusts to show up,’” she said. “Nothing else can make this crazier.”

Avanti’s success story is hardly the norm, but, in general, the senior housing industry is beginning to claw its way back from the most disruptive period in its history.

New data from the National Investment Center for Seniors Housing & Care shows the overall occupancy rate at facilities across 31 major metropolitan areas is up more than 5% from a pandemic low of 78%. And while the industry has not yet exceeded its pre-pandemic high of 87%, stakeholders are anticipating a full recovery by 2024.

“What happened with Covid was that there was already a good amount of construction underway nationally that continued to arrive online,” NIC Senior Principal Caroline Clapp said. “Even though we’ve had a recovery of occupied units, there’s still this new supply that we’re trying to absorb.”

The pace of new builds has slowed to a drip, with units under construction cooling to 5.1% of existing inventory in the biggest metros compared to a peak of 7.8% in late 2019, according to the NIC. Construction now takes 62.5% longer than it did in 2012, with the median cycle in 2022 totaling seven to nine quarters depending on the size of the property.

The silver lining of construction delays, higher financing costs and rising interest rates is that the sector now has a chance to soak up all of the new supply that was delivered over the past couple of years, Clapp said.

“In the long run for the industry, it’s not a great story, because we have these boomers who are aging,” she said. “The industry needs more product, more diversification and new product types.”

Only two major metros nationwide — Dallas and San Antonio — have exceeded their pre-pandemic occupancies at 84.8% and 84.4%, respectively. Houston, on the other hand, has the lowest occupancy rate of any major metro at 78.5%.

Prior to the pandemic, major markets in Texas were viewed as overbuilt, which led to a lack of new facilities being added to supply, said Aron Will, who co-leads the senior housing division for CBRE Capital Markets. Fast-forward to today and both San Antonio and Dallas are seeing a boom in population growth, leading to strong demand for units that are already on the ground.

Houston’s population is also on the rise, with census data showing 45,000 new residents added to the city between mid-2020 and mid-2021. But its less diversified economy — dominated by oil and gas — and slower job growth is constraining demand, Will said.

“Have we had people move here now that the energy sector is doing pretty well again? Absolutely,” he said. “But for a long period of time, we didn’t have the same economic growth and drivers of population growth that Dallas did.” 

All three metros have growth projections for households aged 75 and older that exceed the national average, Clapp said. But unlike Dallas and San Antonio, where construction dropped off in a major way in the years leading up to the pandemic, the delivery of new units remained robust in Houston, meaning there is more space to fill in that market.

“Demand doesn’t seem to be the problem for Houston — it’s more of a supply story,” Clapp said. “All three markets have positive demand, but Houston has more supply.”

The aftermath of the pandemic has presented challenges no one saw coming, Alford said. The industry has been acutely impacted by the rising cost of debt, labor, food and energy, and in a recent NIC survey, more than 90% of respondents said increased operator expenses will be their biggest challenge this year.

“Running a senior housing community is like running a really big house with a lot of people,” Alford said. “We’re focused on trying to be smart, proactive business people … and that’s how we’ve been able to manage our expenses and continue to grow our bottom line in conjunction with our top line.”

Higher costs have led companies like Avanti to pass on some of those increases to residents via higher rates. The business is also holding off on any new construction as it waits for volatility in the economy to subside.

“During hard times comes the opportunity to pause, reflect and look forward because you’re not in the middle of fighting fires and developing like crazy,” Alford said. “That’s where you have the opportunity to say, ‘This storm will pass, what is that next iteration of development going to look like?’”

The oldest baby boomers — the segment of the population born during the birth spike that occurred in the 1940s, 1950s and 1960s — are surpassing age 80, which means the senior population in the U.S. is increasing dramatically. People are also living longer, another tailwind for the industry.

“The last cohort of baby boomers will be reaching age 65 in 2029, so there’s this major growth in the older segment of the population,” said Rogelio Saenz, a demographer with the University of Texas at San Antonio. “That’s also been intensified as we’ve seen the significant reductions in births since the Great Recession.”

Between 2019 and 2021, the number of residents in Texas age 65 and older grew by 4%, which is nearly three times as fast as the segment of the population younger than age 65, according to the American Community Survey. In Bexar County, home to San Antonio, the over 65 age group increased by 2.7%, compared to the 1% growth seen in those younger than 65. 

Demand for senior housing in San Antonio is driven by an influx of high-income individuals moving into gentrified areas of the city, Saenz said, as well as a trend of older individuals who raised their children outside of the urban core moving back into the city as empty nesters. The city is also home to three military bases, he added, and many veterans return to San Antonio after they retire.

Perpetual demand is one reason why the senior housing industry is often viewed as recession-proof. But during the pandemic, institutional groups with a lot of capital tied up in senior housing were hit hard, Will said, which left a bad taste in some investors’ mouths.

“What Covid did was weed out a lot of operators and people who were doing it for financial reasons but not because they were deeply entrenched and committed to the space,” Will said. “A lot of people working through their existing portfolios can be, in some instances, jaded by what happened.”

A recent report by Green Street showed that while the senior housing industry is still in its early stages of post-pandemic recovery, it is expected to see market revenue per available foot grow by 6.5% over the next five years, which outperforms most sectors, Will said. 

More baby boomers needing care and the desire by investors to deploy capital in less competitive sectors will also propel the industry in the years to come, he added.

“It’s been a tough three or four years, but there’s light at the end of the tunnel,” Will said. “Those that are astute and really understand the demographics and the lack of new supply are bullish on the sector in the short, medium and even long term.”