Senior living sector slow to recover from COVID-19

In the years preceding the COVID-19 pandemic, the senior living sector was hot. Many anticipated the need for additional investment in a sector that was viewed as recession-proof. After all, there will always be a need to house seniors, and America’s aging population will push demand on a sector in need of additional supply.

Today, the senior living sector is still a hot topic of discussion, but the discussion is very different. Due in part to the impact of COVID-19, rather than future supply needs and unlimited growth potential, the focus has shifted to ask – how did we get here and what does the future of the senior living sector look like?

How did we get here?

As the calendar turned to 2020, most signs pointed to continued growth in the senior living sector. In fact,

• Beginning in 2020, an additional 33,000 units per year would need to be added to meet peak demand, according to a JLL market research report completed before the COVID-19 pandemic. That was nearly double the construction levels at the time, which demonstrated the heightened opportunity for developers and investors.¹
• The same JLL report, found that the senior housing sector posted its highest transaction volume in four years during the first quarter of 2020.¹
• A SHN 2020 Senior Housing Outlook Report of senior living executives were predicting optimism and increased occupancy for senior living facilities in 2020. The survey showed that concerns about occupancy were falling. Only 21% of respondents felt that occupancy issues were the greatest challenge heading into 2020.

When the pandemic began in March 2020, senior living operators were ill-prepared for the dramatic consequences, and they were faced with industry-wide challenges. The impact was immediate and drastic. Initially, there were two repercussions: a reduction in occupancy and an increase in personal protective equipment (PPE) expenses. Over time, senior living facilities encountered two more substantial challenges – staffing and increasing operating costs.

1.      Occupancy

Not surprisingly, occupancy levels at senior living facilities declined immediately following the onset of COVID-19. This decline was caused by deaths in facilities (due to COVID-19 or other causes), and the creation of isolation areas that led to facilities taking beds offline. At the same time, facilities struggled to  admit new residents due to shifts in consumer behavior as well as per recommendations by the CDC². As the chart below shows, while occupancy rates have increased, they have not yet reached pre-pandemic levels³.

While current occupancy rates are above the pandemic lows, they are still between 3 and 4 percentage points below pre-pandemic levels and may be reaching a potentially new “stabilized” level.

2.      PPE      

PPE use was a hot-button issue during the pandemic. Because of the imbalance in supply and demand for PPE, costs became exorbitant. Skilled nursing facilities and assisted living centers treating COVID-19 patients experienced a 1,064% increase in costs for required PPE since the onset of COVID-19.⁴ A McKnight’s Long-Term Care News survey of nursing home owners, administrators and top nurse managers in December 2020 showed that PPE was the No. 3-rated concern heading into 2021 when it was not even in the Top 10 a year before.⁵

3.      Staffing

Not surprisingly, labor is typically the largest operating expense for senior living operators, accounting for about 60% of standard operating budgets before COVID-19. Senior living operators have long struggled to generate and maintain margins as reimbursement rate increases from providers tend to be lower than labor rate increases. COVID-19 helped drive the cost of labor even higher.⁶

A recent American Health Care Association (AHCA) industry provider survey indicates that only 1% of nursing homes and 4% of assisted living facilities report being fully staffed. Moreover, over 50% of assisted living providers say they have faced moderate-level staffing shortages since June 2021, while another 30% indicate high-level staffing shortages.

The departure rate among full-time front-line senior housing employees in communities polled by Activated Insights was 29%, which is higher than the departure rates in the grocery industry (13%) or hotel and retail sectors (18%), according to the data that those industries furnished as part of their Great Place to Work surveys. The departure rate in senior housing may be attributable to a few factors: long, hard hours that are required, the fear of potential exposure to COVID-19, or vaccine hesitancy. Regardless of the reason, senior living operators are facing a labor crisis.

To meet regulatory standards, and more important, to provide necessary care to residents, operators are paying premiums to temporary agency staff to meet their demands. As an example, agencies are now charging some skilled nursing facilities in New York up to $70 an hour for certified nursing assistants⁷, whereas pre-pandemic, those roles would be in the $20 per hour range. There is also anecdotal evidence of workers leaving their jobs to join staffing agencies to then work at the same facility for a substantial premium, resulting in an identical level of care for a much higher cost. This is not sustainable for many facilities operating on thin margins.

4.      Inflation

In addition to labor, most other costs are increasing quickly and substantially. For example, the prices for food in August 2022 were 11.4% higher than in August 2021, representing the highest food cost inflation since August of 1981.⁸ While food may be a small component of an operator’s overall cost base, an 11% increase brings down budget margins and puts more pressure on an organization. This is just one example, and many other costs ranging from utilities to insurance are likewise increasing due to the current inflationary economy. While many other organizations ranging from retail to restaurants can potentially and deliberately pass on costs to consumers, senior living facilities are subject to longer-term provider agreements or rental agreements and can not necessarily increase revenue in line with costs quickly.

What does the future look like?

According to the AHCA, 89% of U.S. nursing homes were operating at a profit margin of 3% or less during 2020. This combination of higher costs and decreased revenue is expected to cause a loss of $94 billion in the long-term care industry between 2020 and 2022. After factoring in the costs of sufficient PPE, additional staffing, and staff retention needs, and added COVID-19-related physical improvements and new procedures, long-term care providers were predicted to spend another $30 billion in 2021 just to operate their facilities. With these challenges, many owners and operators will continue to struggle to generate sufficient cash flow to cover operating expenditures, capital expenditures, and debt service obligations.

Based upon the challenges outlined above, we anticipate that unfortunately, many senior living operators are going to struggle financially in the near-term, and potentially much longer. As displayed in the chart below, since COVID-19, senior living bankruptcies have increased dramatically. Filings in the past 21 months (i.e., between January 2021 and September 2022) are at the same level as in the previous five years combined.

The year 2020 could have been much worse, but economic stimulus funds coupled with lender hesitation led to many operators kicking the can down the road. These numbers likely are not fully representative of the toll that COVID-19 has taken on the industry because few stakeholders want to be a part of a senior living bankruptcy during a global pandemic. As the pandemic recedes into the background, stimulus funds dissipate and lenders become more aggressive, it is likely that there may be more bankruptcies to come.

All is not lost for senior living operators though. In a time of crisis, there can be opportunities for growth and disruption. Some ideas include the following:

• Setting – It is natural for ideal healthcare settings to transform over time and across cultures. A generation ago, in the U.S., it may have been appealing to retire in a traditional senior care community. However, it is time to acknowledge that there may be a shift in consumer behavior toward alternative settings, such as micro-care centers, and at-home care. Given today’s challenges, operators may be more willing than ever to consider a pivot to non-traditional settings.
• Operational excellence – Winston Churchill famously said, “Never let a good crisis go to waste.” The COVID-19 pandemic accelerated disruption in the senior living space, but that disruption created the conditions in which organizations now can pursue operational improvements they may have been previously fearful to implement. Senior living operators may find this an optimal time to introduce operational improvements to reduce costs and enhance the employee and resident experience. Facilities that can attract and retain the best talent, while remaining economically viable, will be able to provide the best resident experience.
• Technology – Although liquidity may be constrained for many, the organizations that have access to capital may be able to implement technology solutions that enhance the employee or resident experience, drive occupancy, or cut costs. Some key opportunities include the following:
  • Driving demand virtually – With occupancy rates at historic lows, senior living communities must be resourceful in how they attract and retain residents. Today, there are many well-established technologies driving virtual tours. There are multiple types of tours, such as, slideshows, video tours, 360-degree tours, and the now popular Zoom or FaceTime tour.
  • Automation – Identifying areas to automate, both clinically and non-clinically, can allow facilities to free up staff time to focus on more value-added and satisfying work. For example, some communities have invested in robots to run food between the kitchen and the dining room so that staff can spend more time with residents¹⁰. Automation can provide multiple benefits, including improving staff morale and retention, while also decreasing a reliance on agency staffing.  
  • Wearable technology – Not so long ago, residents had to push a button on a chair to call a nurse to care for them. That nurse would then have to look up the patient file to determine the best course of treatment. Today, there are wearable technologies available that merges patient activity and nurse call data with electronic medical records enabling care teams to look for trends in a resident’s status and customize treatment plans¹¹.
• Partnership opportunities – Many independent facilities or smaller operators may have an opportunity to partner with others – including strategic as well as financial (i.e., private equity-backed) buyers. We anticipate more mergers and consolidations as larger players can better leverage fixed overhead and purchasing, and private equity continues to invest in the sector. The fourth quarter of 2021 demonstrated the highest senior living transaction volume on record, and while the first quarter of 2022 was down from prior quarter, it was still 51% higher than the same quarter in 2021.¹²

Whatever happens in the coming years, the conversation will likely pivot back to a need for additional opportunities for seniors. As the chart below shows, the share of the U.S. population that is 65 and older is projected to increase from 15% to 24% between 2015 and 2060.

U.S. population projections, by age group share of total population 2015 - 2060¹³

As was said previously, there will always be a need to house seniors, and America’s aging population will only push demand on a sector in need of more facilities. However, we collectively have to figure out how to make financial ends meet while providing the necessary care. 

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Sources:

1. 2022 Senior Housing Outlook_ Pre-Covid Occupancy and Margins Likely Out of Reach, Investors Still Bullish - Senior Housing News
2. ‘Bullish, Encouraging’ Data Show Senior Housing Occupancy Up, Bucking Seasonal Trends - Senior Housing News
3. 20210601 NIC Final Report and Executive Summary FINAL
4. February 2022 - National Investment Center
5. Seniors Housing & Care Impacts, Advocacy Efforts and Financing Solutions to Support Growth – Capital Funding Group
6. Forbes, ”Staff Shortages are Hammering Long-Term Care Facilities, Home Care Agencies and Families,” Sept. 22, 2021.
7. Seniors Housing News, “77% of Assisted Living Providers Say Staffing Crisis is Getting Worse,” Sept. 22, 2021.
8. American Health Care Association, “Long Term Care Closures Mount as COVID-19 Exacerbates Financial Shortfalls,” Nov. 19, 2021.
9. McKnight’s Long-Term Care News, “Long-Term Care to Lose $94 Billion Due to Pandemic: Forecast,” Feb. 10, 2021.
10. American Health Care Association, “Protect Access to Long Term Care for Vulnerable Residents.”
11. Why Senior Living Fares Worse Than Other Service Industries on Worker Turnover - Senior Housing News
12. U.S. Bureau of Labor Statistic

1. https://www.globest.com/2020/06/22/will-pre-covid-19-senior-housing-trends-help-fuel-a-post-pandemic-recovery/?slreturn=20220314113105
2. https://www.cdc.gov/coronavirus/2019-ncov/community/retirement/residents.html
3. https://www.mcknightsseniorliving.com/home/news/senior-living-occupancy-increases-for-third-quarter-in-a-row-led-by-assisted-living/ and https://www.mcknightsseniorliving.com/home/news/business-daily-news/senior-living-occupancy-on-track-for-gain-for-5th-consecutive-quarter/
4. https://www.mcknights.com/news/analysis-ppe-costs-increase-over-1000-during-covid-19-crisis/
5. https://www.mcknights.com/news/staffing-census-ppe-are-leaders-biggest-concerns-for-2021-new-provider-survey-shows/
6. https://seniorhousingnews.com/2020/04/06/covid-19-could-cost-senior-living-industry-57-billion-as-operating-expenses-ratchet-up/
7. https://skillednursingnews.com/2022/04/nursing-homes-pay-exorbitant-agency-costs-to-comply-with-staffing-minimums/
8. https://www.ers.usda.gov/data-products/food-price-outlook/summary-findings/
9. Source: Debtwire’s Restructuring Database
10. https://seniorhousingnews.com/2022/03/03/rise-of-robots-workforce-covid-pressures-lead-to-bolder-tech-investment-in-senior-living/
11. https://www.verywellhealth.com/intrex-wireless-tech-senior-living-5219775
12. https://seniorhousingnews.com/2022/04/13/senior-living-ma-activity-slows-in-q1-after-record-q4/
13. https://www.marketingcharts.com/demographics-and-audiences-49490