As COVID-19 vaccine distribution continues to ramp up and cases continue to decline, few commercial real estate markets are poised to be as dramatically impacted as seniors housing. Initially one of the hardest hit by the pandemic, seniors housing has seen safety and stability return for residents and operators as a result of the vaccines. According to the NIC, case counts within Skilled Nursing Facilities are down 98% since December 2020 and about 97% of skilled nursing facilities across the U.S. reported no new COVID-19 cases among residents for the week ending March 28. This level has continued through April with less than 1,000 cases in nearly 14,000 skilled nursing facilities. Additionally, other sources have reported a similar decline in cases in assisted living and memory care facilities. This incredible headway on the return to normalcy is a bright spot for the industry and a strong signal for positivity in the seniors housing real estate market.
Over the past two weeks, our teams have begun to travel to in-person meetings. The mood in these meetings across all of our clients has been consistent. Our teams and our clients are beginning to feel a sense that the worst has passed and we are approaching the future with a sense of measured optimism.
We’ve seen steady increases in occupancy over the past two months on the heels of the vaccine rollouts and with this slow but steady increase, we’re seeing facilities start to turn around operations. The levels of government assistance have mitigated, to an extent, the most difficult circumstances the industry has faced. Those government subsidies may be keeping owners from selling their facilities when occupancy is at an all-time low.
This confluence of circumstances may account for the dip in M&A activity in the first quarter—down 39% to 77 announced transactions according to the Senior Care Investor. That level is down from both the fourth quarter of 2020 (127 publicly announced deals), and also from the first quarter of 2020 with 104 transactions. At the same time, financing for permanent sources (Fannie, Freddie, HUD) has been limited because of the industry wide lower occupancy.
Most of the industry doesn’t believe the subsidies will continue, so figuring out how financing adapts and responds will be key. On the operator side, most facilities still aren’t where they’d like to be, relative to the pre-COVID-19 environment. Given the optimistic outlook for the industry to rebound, especially in the nearer term for need-based facilities, many owners may continue to be selective on opportunities to sell. Similarly, those looking for financing want terms that reflect a property leased back up to pre-COVID-19 levels.
Overall, the industry still needs some time for property operations to return and for the public to continue regaining trust, but we’re picking up speed in the right direction every day. We expect to see that growth truly take off over the summer as the return to occupancy and improved core performance unleash the pent-up demand. We look forward to continuing to work with our clients to help them find the right solutions for their portfolios.
-Steve Ervin, SVP and Head of FHA and Seniors Housing Finance