The last two years have been extremely hard on senior housing. The shared living arrangements and close proximity of residents and workers within senior housing communities put the elderly residents -- who are most at risk of illness or death from COVID-19 -- in a vulnerable position.
Occupancy levels in senior housing facilities across the nation fell from 88% at the end of 2019 to 74% by the end of 2020. But high vaccination rates among the elderly and lower case numbers this year are helping senior housing make a comeback.
Although share prices are rebounding for many healthcare real estate investment trusts (REITs), five of the six main senior housing REITs are still trading below pre-pandemic levels. Given the industry's impending recovery and the growing number of aging residents who may need senior housing, investing today could pay off big in the long run.
A silver tsunami is coming
The baby-boomer generation is now transitioning into the golden years. By 2030, the roughly 73 million boomers will be 65 years and older. Although around 73% of senior households, which include those aged 65 and above, are expected to maintain homeownership, there's still an alarming number of aging seniors who will need places to live.
The National Investment Center for Senior Housing and Care (NIC) says 105,000 additional units are needed per year between 2030 and 2040 to meet the housing needs for roughly 18% of the population aged 80 and older. Demand is clearly there, but inventory is not. At least not yet.
Transaction volume for senior housing and nursing care was up 61% in the first quarter of 2022, the first positive quarter for activity since the start of the pandemic. Welltower (WELL 0.56%), the only senior housing REIT to have its share price exceed pre-pandemic levels to date, has spent $1.2 billion year to date, acquiring 2,700 housing units. Ventas (VTR 1.15%) has invested $500 million a year to date across four developments. LTC Properties (LTC 0.98%) added eight facilities to its portfolio year to date, for a total of 560 beds.
Momentum is building again for this sector, but it's still got a long way to go.
Image source: Getty Images.
The opportunities are there, but the challenges are, too
As of Q1 2022, senior housing occupancy levels have rebounded to 80%, a positive sign that the worst may be over for this sector. However, there are a number of new challenges to overcome.
Labor shortages continue to be a huge problem for senior housing communities. Attracting and retaining skilled workers is a tough feat in today's job market as people search for more flexible work options or more competitive salaries. This is forcing a number of senior housing providers to rely on temporary staffing and pay higher salaries to try to attract help.
Salary bumps combined with inflation, which has caused expenses to rise, are thinning the net operating margin for many senior housing operators. However, even with current labor challenges and thinning margins, there is a lot of upside for this industry over the next 10 to 20 years.
Despite continued market volatility, 2022 should be a strong year for senior housing REITs. Investors looking for long-term growth potential or competitive dividend returns should definitely consider investing. Healthcare REITs have certainly surpassed the lows at the peak of the pandemic but are still well below value, making right now an ideal time to buy.
As always, make sure you conduct your due diligence. Some healthcare REITs have higher amounts of debt with unstable dividend ratios, making a dividend cut in the near future a possibility.
