Summary: First quartile independent living (IL) properties (those with the lowest average monthly rent) maintained higher levels of occupancy than fourth quartile properties (those with the highest rent) through the global financial crisis. First quartile IL properties were less aggressive in raising rents, evidently using price as a tool to stay full.
Data: Occupancy rates in first quartile (lowest cost) IL properties showed greater stability than IL properties in the other quartiles during the downturn, as indicated in the graph below. First quartile properties reached peak occupancy of 93% in first quarter 2007 before dropping 450 basis points to a cyclical low of 88.5% in second quarter 2011. Occupancy has since recovered to nearly 90%.
By contrast, fourth quartile (highest cost) IL properties hit a peak of 93.6% in first quarter 2007 and then dropped 890 basis points to 84.7% in third quarter 2010. The highest rent properties reached a higher high, but also fell to the lowest level of any of the quartiles. Occupancy has recovered to just over 88%, showing a bigger recovery from a lower low.
What explains the difference in occupancy rates between the first and fourth quartiles? We look to rent growth for clues.
Both first and fourth quartile IL properties reported solid rent increases in the early days of the NIC MAP data series, with year-over-year rent growth in the 3.2 to 3.7% range. After fourth quarter 2007, first quartile properties began a steady moderation of their asking rent increases. By fourth quarter 2010, asking rent increases had eased to 0.5% in the first quartile and, subsequently, a gradual upward trend ensued. Rent growth has since recovered to about 1.5%.
By contrast, fourth quartile properties held on to rent growth for a longer period. Asking rent growth dipped below 2% in one quarter (Q4 2010) and has subsequently recovered to 2.8%.
Analysis/Implications: The data suggest that independent living communities exhibit behavior similar to that of apartments and other real estate property types: landlords use price as a lever to manage the occupancy level and/or to signal the property’s market position. Communities at the high end of the rent spectrum appear to have held firm on prices, preferring to incur lower occupancy levels rather than risk being considered a discount provider. Communities at the low end of the rent spectrum appear to have had no such qualms; they moderated their price increases in order to maintain census.
We need to be careful with our conclusions and how hard to push the data, as NIC MAP does not report incentives or other discounts, making it impossible to compare effective rents in the quartiles.
Discussion/Topics for Further Work: Does this square with your sense of what happened during the downturn? Is this likely to persist or will high-end communities adopt a willingness to ease off on rent growth?
The next posting will examine the same data for assisted living communities.
Please share your thoughts and ideas in the comments section.
National Investment Center for the Seniors Housing and Care Industry www.nic.org