Senior Housing’s Recovery Slowed by Supply Growth, but Demand Should Outpace Supply Over Next Decade

After seeing significant occupancy declines in 2020 due to pressures created by the coronavirus pandemic, occupancy in the senior housing industry has steadily recovered over the past two years. Senior housing fell from around 88% at the end of 2019 to a low point around 79% in the first quarter of 2021, but that figure has since recovered to 83% as of the end of 2022. Industry utilization has fully recovered to prepandemic levels with approximately 7.5% of all the over 80 population in the US living in a senior housing facility as of the end of 2022 despite dipping to 7.0% at the nadir of the pandemic. Therefore, the reason occupancy has not fully recovered to prepandemic levels is due to continued supply growth, with newly developed buildings contributing 3% additional units per year in 2020 and 2021 despite the decline in demand those years.

However, we believe that the senior housing industry will see many years of demand growth exceeding supply growth, which should eventually lead to occupancy over 90% for the industry. The over-80 population is seeing accelerating growth as the baby boomer generation ages and will go as high as 6% year-over-year growth in the upcoming decade. Construction starts fell significantly during the pandemic and supply growth has significantly slowed in the past few quarters, leading us to believe that supply growth will be below historical average for the next two years despite accelerating demand. Increasing occupancy levels should allow the REITs to push rate growth, which should support revenue per available unit growth of approximately 5% per year over the next decade. Additionally, while EBITDA margin growth may be slow, revenues should outpace expense growth and the REIT senior housing portfolios should eventually return to operating EBITDA margins around 32%. Combined, we think the healthcare REITs Ventas VTR and Welltower should see double-digit funds from operations growth for most of the next decade.