Direct Impact of COVID-19 on the Senior Housing & Care Sector
Speaker: Beth Burnham Mace
Blog post: May 14, 2020
It is no secret that COVID-19 and the consequential closing of businesses will impact the economy, and our sector won’t be excluded. Beth Burnham Mace, Chief Economist and Director of Capital Markets Outreach at National Investment Center for Seniors Housing and Care, guided an audience through five key influencing factors of the post-COVID-19 effects on the economy and areas of direct impact we should be expecting.
#1: The Severity, Breadth, and Duration of the Pandemic
This is dependent on the number of confirmed cases, number of deaths, and how long stay-at-home orders persist. Mace states that if testing for COVID were more widely available, we would have a better read on how long this will continue. On average, the U.S. sees about thirty-thousand new cases per day (Johns Hopkins Coronavirus Resource Center, 19 April 2020).
#2: The Economy
Before the COVID-19 pandemic, the U.S. was in the longest streak of economic expansion in history, and this will no doubt play a role in how we emerge. Mace predicts a recession, citing research from the Bureau of Economic Analysis that suggests we are in for a deep shock to the economy.
Categories of Direct Impact
#1: Residents and Frontline Healthcare Workers
While the biggest concern for most communities is the welfare of their residents, that cannot happen without a safe and healthy staff. Many communities are struggling to find ways to provide additional support to their staff on the frontlines who are working overtime while putting the residents first during this uncertain period. Staff in our industry are compassionate people. Showing care for them will resonate, no matter the gesture. While we are in a pandemic, this recognition can move away from “typical” incentives such as gift cards, and closer to gestures that ease general life burdens that come with crises. Although it is difficult to secure widespread testing for staff, communities are doing what they can by sending their employees home with extra PPE for themselves and their families. Some communities are providing staff and their families three meals a day to ease financial burdens.
COVID-19 has caused an increase in labor costs for senior living, more intensively affecting communities with confirmed cases. Rising labor costs are a result of overtime, appreciation pay, temporary staff, new technology, PPE, additional training on evolving standards/policies, and even childcare reimbursement. The first quarter of 2020 showed that over 50% of communities were more than 90% occupied but beginning in March insights have revealed lower occupancy rates and the pace of move-ins slowing down. It is likely to be a challenge to balance these, as wage growth exceeds annual same-store rent growth.
#3: Capital Availability and its Cost
Although the Federal government responded quickly in sharp reversal of interest rates, there are other causes for concern. It can be expected that there will be much more conservative lending and borrowing approaches. Banks will change lending terms to accommodate lower loan to value ratios, higher debt service coverage, wider spreads, and higher interest reserves on escrow accounts. The amount of distressed asset servicing and re-cap opportunities in our industry will grow.
#4: Transactional Deal Activity
Today’s pandemic reality is that we are seeing limited transaction volumes, extended timelines, and focus on existing portfolios. With very few government offices open for inspections and finalizing legal documentation, it is extremely difficult to execute a deal. Regarding underwriting assumptions, Mace expects more conservative lease-up times and net operating/margins compressed by pressured occupancy rates, moderating growth, and lower revenues—while expense rates and growth will become higher. In addition, capitalization rates will expand, and the cost of borrowing will increase.
#5: Construction and Development
Construction in seniors housing continues to slow. The number of units under construction is steadily declining.
With these factors in mind, what is ahead? While acknowledging economic storms for our sector, Mace says to remember that everyone is still aging, meaning our industry is not going to disappear. We need to advance the role of technology in our industry and use it to better prepare ourselves for the future. For example, if our entire sector had been using telemedicine pre-COVID-19, there would have been less of a scramble to adjust when the pandemic hit. Utilization of big data analysis, wearables, and rapid flow of telemedicine is critical in adapting to the current crisis.
Overall, Mace encourages us to consider what determines health, if we want to financially survive during and post COVID-19, we must pay attention to all facets of health in clinical healthcare, including social and environmental factors, individual behaviors, and genetics.