To put it mildly, the COVID-19 pandemic hasn't exactly been a great environment for the senior housing industry. With many senior housing facilities experiencing deadly outbreaks of the virus, move-ins have plummeted, and the real estate investment trusts that own senior housing properties have been under pressure.
However, with a vaccine right around the corner, and with senior living residents likely to be among the first groups to receive a vaccine, is now a good time to take another look at senior housing REITs? In this Dec. 1 Fool Live video clip, two experts from our Millionacres real estate brand, Matt Frankel, CFP, and Deidre Woollard discuss what investors should know about the current state of senior housing and what investors should expect as a vaccine is rolled out.
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Matthew Frankel: So yeah, it's definitely good news for healthcare REITs, especially senior housing, which is really the part that's struggling the most. Just to name a few, Welltower (WELL -0.11%), the biggest healthcare REIT which specializes in senior-focused properties, they've seen their senior housing portfolio decline in occupancy from about 86% to about 78%, just since the start of this year. That's a pretty big decline. People are moving out of senior living facilities at a higher-than-average rate. People are moving in at a slower rate. If you have older relatives, now is not the time you're probably looking to put them in senior housing, if you can help it.
It's been a really tough environment for senior housing, especially the REITs that are focused on senior housing like Welltower. A vaccine coming is what they need to start to get back to business. It's not going to be all at once, by the way. It's going to take some time. I see a minimum one- to two-year ramp up in the business, once the vaccine is widely available. But yes, they haven't issued official guidance to my knowledge, but healthcare workers and nursing-at-home residents are going to be the first people to get the vaccine. It's definitely good news.
Deidre Woollard: Exactly. I wanted to bring up this stat from Nareit, which tracks these sort of thing. The year-to-date return on the, I think it's 16 or 17 healthcare REITs they tracked, was down as of the end of October by a little over 25%. Now, compare that to in 2019, the total return was up by 21%. If you are an investor in some of these REITs, it's been a challenging year. But we're also seeing some of these REITs change up their portfolios a bit. Out of senior housing, even before this, I think, to some extent, partly because, from what I've seen, there's been a glut in senior living in general because I think a lot of developers and a lot of companies thought that people were going to be ready for senior living at an age that was a little earlier than people actually demographically have decided to go to senior living, because I think people thought that people were going to start turning toward senior living around between the ages of like 75, 76, that area. It seems to be more toward when people really can't live alone anymore, more like in their early 80s.
Frankel: Yeah, the 85-and-up demographic is actually the real sweet spot for senior housing.
Frankel: To be fair, this is a group that's going to grow over time. The 85-and-up population is expected to roughly triple by 2050. This is going to be a growth market. There's going to be a need for senior housing. But when you have any high-growth commercial real estate market, their potential exists for overbuilding. That's especially true in times like this when capital is so cheap. It's so cheap for especially the REITs with high credit quality. It's so cheap for them to borrow money right now to build new properties. A lot of REITs were trying to get ahead of this growth curve, and it got a little ahead of itself. I mentioned Welltower's occupancy fell from 86% to 78% this year. Eighty-six percent wasn't a great starting point. That was already not where you want your occupancy to be. If you have 100 units in the senior housing facility, that means you have 14 of them vacant. That's not really where you want to be. That's not great economics. There have been some oversupply issues, and this has been an area of real estate that was struggling even before the pandemic.
Woollard: That is very true, and certainly the numbers that have come out during the pandemic of people being impacted. I feel like that's going to have a one- or two-year, at least, long-tail psychological and emotional impact on anyone who is considering having to put their parents in one of these homes or are looking at these places for themselves. Even after we get a vaccine, I think that that's just a human behavior thing that happens. It always takes us a while to shift. We shift one way and then we shift another way. I think there's going to be a little bit of that happening where people won't be quite ready yet.
Frankel: It's a comfort factor and there's a necessity factor.
Frankel: I mentioned Welltower's occupancy. I keep mentioning that number, but it's a good stat. It declined by about 8% since February. That represents hundreds of thousands of people when you look at the entire senior housing industry. They're not all going to come back overnight. You're not going to lease up over 20% vacancy. It's not going to be leased up overnight. This is going to take some time. It's going to be a comfort, for one, like you said. People will need to be comfortable with the safety issue, and there needs to be demand for it. Demand really needs to ramp up, and it's going to come back slowly -- the same with a lot of other types of highly affected REITs. Hotel REITs aren't going to jump back overnight. Apartment REITs in cities aren't going to jump back overnight. It's going to take some time. That's to be expected. We'll see who the winners are, but a lot of companies, as you mentioned, have been pivoting away from senior housing in recent years.