By Liam Pleven
The supply of senior housing is expanding at a rapid clip in
many major metropolitan areas across the Sunbelt and elsewhere,
raising concerns that builders are racing ahead of demand.
Analysts said the building spree could lead to higher vacancy
rates and lower rent increases for real-estate firms that own
housing dedicated to seniors.
Shares of big U.S. companies that own a lot of senior housing
have already tumbled this year as investors fret over rising
interest rates. Health Care REIT Inc.'s stock is down 11% for 2015,
while HCP Inc. has shed 14% and Brookdale Senior Living Inc. is
down 20%, through Monday's close. In comparison, the S&P 500 is
up 2.2% for 2015.
The potential overbuilding will likely add to the pressure on
companies, analysts said.
"The construction really hasn't slowed, and it's continuing to
be an issue," said Kevin Tyler, who tracks the sector as an analyst
for Green Street Advisors.
The companies have advantages that could help insulate them,
including amenities such as staff nurses and higher-quality food
that relatively well-heeled clients want, executives said. Their
diverse property portfolios also include markets with limited
construction activity.
"You've got to be able to invest in your properties" to make
sure they appeal to affluent customers who can afford to pay the
monthly rent, said Tim Schoen, HCP's chief financial officer.
The wave of Americans born after World War II who will retire in
coming years will expand the pool of potential clients, analysts
and executives note. The Social Security Administration estimates
that 9,600 people a day will turn 65 in 2015, up from 7,800 a day
in 2010.
But it is difficult to predict what type of living arrangements
they will seek out as they age, and when they may need senior
housing, particularly given longer lifespans and changing attitudes
about such types of housing.
The occupancy rate for all senior housing in 31 major markets
fell this spring for the second consecutive quarter, according to
the National Investment Center for Seniors Housing & Care,
known as NIC, an Annapolis, Md., nonprofit that tracks the
market.
Dallas, Atlanta and Chicago are among the cities where the
number of new assisted-living units under construction represented
more than 10% of the existing inventory, according to NIC data as
of the second quarter. By comparison, the same figure for those 31
major markets is 6.4%, and it was 3.4% at the end of 2011.
Many large firms have a presence in those markets. Health Care
REIT, for example, has a number of properties in each of the three
markets.
Some smaller cities, such as San Antonio, are seeing even
stronger growth, according to NIC data.
"Everybody's thinking about these 10,000 baby boomers turning 65
every day," said Aubra Franklin, chief executive of Franklin
Companies, which is planning next April to open Franklin Park Alamo
Heights, a 220-unit facility in San Antonio catering to senior
citizens which he said will feature a ballroom, a fitness area and
a pool.
He noted, however, that many elderly people are still years away
from even considering moving into communities that provide special
services to seniors.
The occupancy rate for assisted-living units--a type of senior
housing aimed at clients who are no longer able or willing to live
entirely on their own--was 88.4% in the second quarter, down 0.2
percentage point from the previous quarter and 0.3 percentage point
from the same period of 2014.
Finding renters is only one problem that can stem from rising
supply. In addition, said Beth Burnham Mace, NIC's chief economist,
"you may not be able to increase rents as quickly." Nonetheless,
she said she expects occupancy rates to rise again in the near
future.
Firms such as Health Care REIT and HCP are more exposed to these
kinds of problems than they were in the past, because health-care
real-estate investment trusts, or REITs--the corporate structure
those firms have adopted--get a growing portion of their revenue
from operating the facilities, rather than simply leasing
properties they own out to third parties.
"You can avoid the effects [of rising supply] in certain
markets, but I'm skeptical that you can avoid it on the whole,"
said Mr. Tyler of Green Street.
Write to Liam Pleven at liam.pleven@wsj.com
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