Cambridge Realty Capital announces key observations from the 2024 senior housing capital markets, marking a year of operational and financial strides tempered by ongoing challenges. Despite progress in occupancy and labor stability, much of the assisted living and memory care sector continues to grapple with compressed margins and elevated financing costs.
Operational Improvements Amid Persistent Challenges
“2024 has been a year of catching our breath and laying the groundwork for good things to come,” said Tony Marino, Managing Director at Cambridge. “We’ve seen some positives in rental rate increases, labor market stability, and occupancy growth, but we’re still waiting to turn the corner on interest rates and financing costs.”
- Occupancy Trends: Occupancy has shown steady, incremental growth throughout the year, reflecting a modest but consistent recovery.
- Labor Stability: Workforce dynamics have stabilized, making labor more predictable and manageable for operators.
- Rent Growth: Average rents are up over 5% year-over-year, though a discrepancy persists. “We’re seeing a clear divide between the ‘haves and have-nots’ in this sector,” Marino noted. “Market leaders can command significantly higher rents, while others struggle to meet financial benchmarks.”
Margins and Cost Pressures Redefine the Landscape
Operating margins remain compressed, with many communities achieving margins well below the nearly 30% benchmark common earlier in this century. This declining trend, which predates the pandemic, is a longer-term adjustment in the sector with major implications rebalancing rent for services versus real estate.
“Labor costs continue to consume a significant share of each rent dollar,” Marino explained. “And now, rising insurance costs are taking another bite. The good news is that inflation-driven rent increases are helping communities regain absolute dollar levels that can better support debt service.
Elevated Debt Costs Limit Financing Flexibility
The cost of debt capital has remained elevated, with limited signs of decline:
- Banks: Largely focused on existing customers, banks have shown little appetite for new relationships in 2024. Extending maturities on existing loans appears to be where their capital is going.
- Private Lenders: Active, but increasingly selective in their underwriting.
- HUD: Continually remains a reliable option, though its popular demand has extended closing timelines.
- Agencies: Agencies are returning to the market but at lower loan-to-value (LTV) ratios.
“We’re navigating a challenging debt landscape,” said Marino. “While private lenders and HUD provide options, the cost and complexity of securing capital remain a hurdle for many operators.”
Record-Breaking Distressed Sales Drive Market Dynamism
Distressed sales surged in 2024, with transaction volumes breaking records. However, prices per unit often fell below expectations.
“The influx of buyers acquiring properties at a lower basis is injecting some needed dynamism into the market,” Marino observed. “These buyers require less of each rent dollar to service real estate costs, potentially enabling innovative operating models that better balance rent allocation between services and real estate.”
Looking Ahead
“While we’ve made meaningful progress in some areas, the industry still faces significant headwinds,” Marino concluded. “As we move into 2025, we’re cautiously optimistic that the groundwork laid this year will yield more stable margins and improved access to capital.”
