What the Assisted Living Construction Boom Means for the Midwest

    • 3 August 2018– Oscar Gonzalez is photographed at FNB Wintergarden.
    • Oscar Gonzalez

      Vice President, Healthcare Banking
      Mar 30 2020
With 10,000 Baby Boomers turning 65 every day, a silver tsunami is on its way, and The National Investment Center for Seniors Housing and Care (NIC) predicts a potential housing shortage could be imminent. According to a recent report released by NIC, an increase of 1.5 million senior housing units is necessary to meet demand by 2040.

However, while demand for senior housing overall may be on the rise, some local markets are knee-deep in an overabundance of assisted living facilities, where a new construction boom that has outpaced demand.

Welcoming the Silver Tsunami with a Wave of Construction

For the next decade, the size of the 80+ population is anticipated to grow at a rate of two percent a year, and then at an escalated rate of 3.4 percent for the early part of the following decade, according to NIC. This approaching silver tsunami has revived an interest in senior living construction.

Since the Great Recession, construction of assisted living facilities has boomed in many areas due to the expected resiliency of the market. At present, assisted living and memory care centers make up 22 percent of senior housing, according to the NIC Senior Housing and Care Trends report, but in many localized areas, construction has grown disproportionately.

In Denver, for example, construction rates peaked to 22 percent of inventory in late 2017 and into the following year, according to the NIC report. Even as recent as the second quarter of 2019, new construction accounted for nearly 65 percent of the number of assisted living centers in Adams county.

With the crest of the silver tsunami wave still years away, existing centers, as well as those currently under construction, run the risk of low absorption rates, with too few seniors ready for the advanced amenities assisted living centers provide.  It’s a trend that likely won’t be reversed any time soon as the largest wave of Boomers won’t turn 75 until 2021. Since most seniors aren’t expected to enter assisted living accommodations until they are well into their 80s, we could be 10 years away from peak absorption rates.

We’ve already seen regional occupancy in NIC’s North West Central region fall. In cities such as Des Moines, Iowa and Kansas City, Missouri, occupancy rates hover right around 85 percent. On the other hand, areas such as Wichita, Kansas and Omaha, Nebraska have seen absorption rates well over 90 percent.

With regional differences like these, it’s easy to see that local market opportunities do still exist. However, whether you are looking at a strong market where absorption rates or high, or a market confronting oversaturation, assisted living centers are facing new competitive threats and will need to bank on a unique set of differentiators to fill future vacancies.

Attracting Seniors: Assisted Living of the Future

There are many things on the minds of families as they search for an assisted living facility for a loved one. Of course, top of mind is safety and care, which may be increasingly difficult to provide given the healthcare workforce shortage.

Currently, 72 percent of chief nursing officers indicate they are already short skilled nurses. As a result, facilities must rely on staffing agencies to fill voids, an expensive proposition especially when serving a demographic on a fixed income.

Of course, all skilled care comes at a price, and according to NIC, the cost of employee salaries has been rapidly outpacing asking rents. In areas where competition is high, successful facilities will need to find ways to reduce costs and become affordable to more people.

The average cost of assisted living care in the U.S. runs in the $4,000 range per month. For couples who must both reside in assisted living, the expense may be far more than the family bargained for when contemplating retirement. Even if one adult remains independent, the cost of sustaining two households can quickly drain funds.

It’s a problem that innovators are seriously considering. The Welltower Group, for example, is finding ways to offer high-end amenities for seniors in assisted living at a cost easily covered by Medicare.

“What I’m trying to do with the welltowerLIVING model is mimic what goes on in a $10,000-a-month senior living community for $1,000 a month,” said Welltower CEO, Tom DeRosa at the Chief Executives for Corporate Purpose (CECP) Investor Forum in New York City.

Part of Welltower’s plan involves cutting labor costs by encouraging wellness and partnering with outside health systems. Each community in the Welltower plan houses only two to three full-time employees.

Food is another area where costs run high. To reduce these expenses, assisted living facilities can partner with specialized vendors that provide high-quality frozen meals tailored to the needs of the aging. A relatively new startup called Luvo, for example, offers custom-tailored frozen entrees at a cost of $3 a meal.

While much of the learning may be done on the fly, cutting costs will be the way of the future for assisted living facilities. Over 14 million middle-income seniors are expected to hit the market by 2029, so centers that can offer affordable rents will be far more likely to remain competitive in the tight local market.

About the Author

Oscar is the Vice President of Healthcare Banking at FNBO, where he joined in 2007 and has held numerous commercial banking positions. He grew up in Mexico City where he attained his Bachelor's in Economics and interned at the Central Bank. He then moved to Spain and obtained his Master's in Banking and Finance, and finally moved to the United States and received his MBA with a concentration in corporate finance.

The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.