The Truth Behind Senior Housing ‘Supply Surges’

October 21, 2015, Tim Mullaney, Senior Housing News - With dipping occupancy feeding fears of senior housing oversupply, scrutinizing a market carefully before developing a new property is essential. And conventional wisdom has singled out some metro areas, such as San Antonio, as especially risky bets. But taking a longer-term—and bigger-picture—perspective reveals some surprising trends and a more nuanced take on some markets with shaky reputations.

To undertake this type of longer-term analysis, real estate services firm Rockwood Pacific teamed up with Phil Downey at Senior Housing Analytics. They looked at data from a variety of sources, including the National Investment Center for Seniors Housing & Care (NIC), the Department of Commerce and the U.S. Census Bureau, to analyze supply and demand patterns in 30 of the nation’s largest metropolitan markets over the last 25 years.

“This is a long-term analysis, so it’s not meant to be a substitute or compete with the latest stats coming out of NIC about changes in occupancy,” Frank Rockwood, co-founder of Rockwood Pacific, told Senior Housing News. While it probably won’t help developers decide whether to pull the trigger on a project tomorrow, he said the analysiscould help guide a longer-term strategy, such as a five- to ten-year plan about where a company wants to be in deep and where not as deep.

One question that the analysts tackled had to do with “supply surges.” Certain markets—including Denver, Houston and Minneapolis—currently are experiencing surges in the number of new openings to existing inventory, according to NIC data.

It turns out that there is a discernible pattern in which some markets more frequently experience supply surges than others. And markets that frequently experience assisted living surges also tend to experience independent living surges.

The analysis assigned a “surge score” to particular metros based on the frequency and magnitude of high new openings ratios over the 25-year time horizon. Among the metros most prone to surges: Boston, Denver, Houston, Atlanta, San Antonio and Riverside, Calif.

There is a mixture of reasons—“good and not so good”—that these markets tend to have frequent supply surges, Rockwood said. One good reason: they tend to be high-growth population centers, suggesting that supply is increasing to keep up with demand. One not so good reason: these locations simply have lower barriers to entry.

“You can build a project more easily, but that’s going to be the same for lots of other folks in the same market,” Rockwood said. “I’m making an assumption about what the market looks like, but a lot of other folks down the road are getting a green light too, and that can mean a supply surge that means the assumptions you based your analysis on have changed.”

Los Angeles, Seattle, Phoenix and Orlando were on the other end of the spectrum, having the lowest surge scores. This means that they have a good track record of not having a lot of new supply hit the market at the same time. There were some surprises here, notably Phoenix.

The analysts had a theory that surge scores would roughly correlate with where a city falls on an index created by the University of Pennsylvania’s Wharton business school, which identifies how difficult it is to build residential housing in various markets. This arguably should be a reasonable proxy for how easy it is to build senior housing projects as well, Rockwood said.

Phoenix is a relatively easy place to build, according to the Wharton index, but it has not experienced frequent senior housing surges.

The result is unexpected, but perhaps suggests how perhaps a metropolitan area might be too large a tract to get a real sense of the state of senior housing supply, Rockwood said. Anecdotally, it seems that most of the senior housing product in Phoenix is concentrated in one area: Scottsdale.

“[Scottsdale] might actually feel high risk from a supply surge standpoint,” Rockwood said. “But that might mean there are other areas of Phoenix that are even lower risk. I’m speculating, but it gets at the submarket idea.”