Senior Housing Operators Face Shrinking Margins

Despite steadily rising occupancy rates, margins in 2022 have been shrinking for operators of senior housing.

Inflation and a shortage of skilled labor, especially nurses—a shortage which predated the pandemic but has grown much worse during it as nurses became part of the Great Resignation—have caused a surge in operating costs that is squeezing NOI margins at senior living facilities.

Managing costs has become priority number one for senior living operators. For those relying on agencies to fill staffing shortages, that’s a tough row to hoe.

“Operators’ bottom lines are being squeezed tremendously due to higher agency costs,” Edward Pan, a Colliers first vice president who specializies in senior housing, told GlobeSt.

“Operators are relying heavily on agencies to fill staffing shortages, adding as much as 20% to the cost of labor compared to [an in-house paid staff],” he said.

Some operators have seen their margins cut in half by rising labor costs, a few have seen them shrink to a near-breakeven point. Rent increases and rising care fees remain the remedies of choice for dealing with rising operating costs.

“Some operators use universal workers and technology to help manage costs. Most owners are having to raise rental and care rates to regain their 2019 margins,” Newmark Vice Chairman Chad Lavender, who heads the company’s Health & Alternatives Assets unit, told GlobeSt.

“Owners’ costs to operate have increased, so we can expect to see premier assets and operators continue to raise rates higher than historical levels to regain margins,” he told us.

Rents surged by 4.7% YOY in the senior living sector in Q2 2022, the quickest pace in more than a decade. But some are warning that affordability could impact on occupancy levels.

“Margins in this sector are such that increased costs must be passed along, which can impact affordability,” Pan said. “Rising rents negatively impact occupancy recovery, especially in independent living.”

“Operators are exploring several ways to manage increases, including the use of volunteers, partnering with non-profits and technology enhancements. But this sector is by nature a high-touch, very personal business and best practices will take time to react to and address the labor shortages,” Pan said.

Pan encourages senior living operators to “think outside the box” to reduce expenses.

“Operators need to spend the time and truly understand how each facility is running from the bottom up,” Pan said. “They need to ask themselves, are we scheduling for staff based on occupancy or evaluating each resident individually to see who truly needs the care service?”

Lavender thinks labor costs have plateaued. He predicts that “further stabilization” of NOIs and higher replacement costs will continue to drive up the value of well-positioned assets.

“Margins are starting to stabilize and expand in most parts of the country, though this varies greatly based on acuity type. We have likely hit a plateau on labor costs, which would help the margins moving forward,” he said.