According to the recent edition of the Healthcare REIT Pulse, put out by RBC Capital Markets, the firm is encouraged by the fundamentals in the senior housing space. According to the report, the property type’s long-term growth prospects, but near-term supply concerns should continue to weigh on the space.
“Top-line results have been moderating over the past 12 months as we estimate year-over-year (YOY) market revenue growth in the top 100 MSAs dropped to 2.4% in 2Q17 from 3.7% in 2Q16. Additionally, the REITs’ (HCN, HCP, and VTR) operating portfolios have also displayed moderating trends with the median same NOI growth rate falling to 2.9% in 1Q17 from 5.5% in 1Q16,” the report says. “The big three are all also guiding to lower results in 2017 with the median growth rate expected to trend lower to 2.3% from 3.3% in 2016.”
Overall, RBC “expects headwinds will persist through 2018, but the space should begin to benefit from stronger tailwinds albeit in ~2022 when the demographic trends shifts in the space’s favor.”
But trends were likely impacted by the flu season peaking a few weeks later than normal, the firm says. “The average occupancy rate in the top 100 MSAs fell 50 bps sequentially despite 2Q typically being a slightly stronger seasonal quarter with the rate historically improving closer to ~5 bps on average since 2010. The rate also dropped 100 bps year-over-year (YOY) to 88.7%. Rent growth was still solid at 3.6%.”
As for construction activity, the pipeline continued to trend lower in the top 100 MSAs and dropped for four consecutive quarter to 5.6% in 2Q17 from 6.2% in 1Q17 and 6.9% in 2Q16, the firm says. “Additionally, activity has meaningfully dropped off in the AL and MC sub-sectors with the pipeline falling 240 bps and 500 bps, respectively, compared to 2Q16. However, while the trend is still relatively modest, the IL activity has held steady with the pipeline only dropping 60 bps.”
The report points out that the overall senior housing pipeline is still significant and inventory growth should continue to accelerate, and in turn, pressure growth in 2017 and 2018. According to the NIC Map Data, inventory growth increased to 4.2% in 2Q17 compared to 2.6% in 2Q16, and we expect deliveries will remain high, but trend closer to 3.7% over the next 12 months.