We're on the verge of a senior living boom: In less than 10 years, by 2030, all baby boomers—that's about 73 million people—will be older than age 65, according to the United States Census Bureau.
With that boom comes a crisis in senior housing: a shortage of labor to provide quality care, consolidation in the industry and the reluctance of some to reconsider senior living with the tragedy of COVID-19 still a fresh and painful memory.
Investors and facility owners need help financing improvements and navigating state-by-state regulatory requirements that make it harder to consider additional locations. And they're looking to the banking industry for help.
"One reason we like this industry is it is very need-based across the board," said Jessica Johnson, managing director of healthcare banking, Western U.S. at BOK Financial®. "Overall, I think the industry has a lot of longevity. We have a short-term problem to solve for, but long-term, this is a need-based product that must continue to be supported."
Shifting priorities
Senior living facilities were among the hardest hit at the height of the COVID-19 pandemic.
"These facilities had to deal with public perception around families being unable to see their loved ones and it scared a lot of people," said Johnson. For many adults with aging parents, this fear shifted priorities.
"You started having adults considering whether they really wanted to place their parents or older family members in a senior living facility, and questioning whether placing them there increased their health risks," she said.
The median occupancy rate for U.S. nursing homes dropped during the pandemic, from 85% in January 2020 to 68% in January 2021, signaling a significant shift in the industry.
"Throughout the pandemic, many people dropped out of the workforce, so more family members had time to help with their ailing parents as caregivers," Johnson said. Now, however, the senior living industry is seeing a rise in demand as people return to the workplace and are no longer able to care for loved ones.
Labor shortages and upgrades needed
With demand for quality senior care once again on the rise, labor shortages continue to plague the industry, Johnson said.
"Traditionally, caring for the nation's elderly is a challenging job. But the pandemic, which created a lot of nursing shortages because of burnout, has exacerbated the problem of filling these roles."
About one in three registered nurses in the U.S. is planning to leave their direct patient care role, according to a November 2021 McKinsey survey. And 96% of assisted living facilities reported being understaffed in September 2021. The result has been an inability for many of these facilities to offer the right level of care for residents, reducing the number of beds and, thus, reducing their revenues.
And growing demand brings expectations for improvements in care. Many senior living facilities need investments in more indoor/outdoor spaces, wellness-driven initiatives for residents, improved air quality, and spaces that feel more like a person's home.
Developers turning to creative financing
"Some developers may have to accept lower returns in the beginning as costs remain high. Because of the skyrocketing cost of construction materials, at the same time that a major labor shortage exists, lenders are only able to loan about 65% of a project's cost, down from 75% before the pandemic," Johnson said. This requires borrowers to contribute more cash equity and can make it more challenging to get new projects off the ground.
According to the National Investment Center for Seniors Housing & Care (NIC), there was a five-fold increase in shorter-term loans—of between three to five years—to provide intermediate financing following a construction loan and before funding a longer-term mortgage, called mini perm/bridges loans.
Loans with shorter maturities carry less risk for lenders while properties build occupancy and compile a longer track record of performance.
Despite the continued growth in demand that should come as the baby boomer generation needs higher levels of care, even the development of new senior living projects has become tough.
Consolidation across regions is also on the rise. "Smaller providers are going by the wayside and there's been a rebirth of regional providers with 10-40 facilities in a three-to-four state footprint," Johnson said.
On the other end of the spectrum, some developers are going smaller: creating environments that leverage the "small-home" trend that will be easier to secure in the case of another COVID surge.
"As an industry, we have to look beyond the next 18 months as elevated expenses continue to plague new construction—but revenues haven't caught up," she explained.
To meet those challenges, the banking industry needs to get creative and step up with new funding options, Johnson said, including more creative loan structures that help bridge the gap between today's financial challenges and a more stable future operating environment.
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