Seniors housing is a vital and growing sector in the Canadian economy with a great deal of potential given the growing population of retiring and aging baby boomers. The population of people aged 85 and older is one of the fastest-growing age groups, and the demand for services to care for them are growing as well. With waitlists growing and government-funded construction and investment increasing, the opportunities in the sector are significant. Following are a few key trends and developments we’re tracking.
2023 was a tough year for the sector. Developers faced rising costs as inflation and labour shortages drove interest rates and wages higher. The rising interest rate environment also impacted valuations as cap rates have risen. An increase in the equity risk premium negatively impacted stock markets, including shares of publicly traded seniors housing operators. We also saw development costs rise in the first half of 2023, resulting in many developers staying on the sideline.
Uncertainty in the residential real estate market and declining sales volumes also slowed lease-ups in seniors housing. Meanwhile, some long-term care projects were sold for alternate use as their licenses matured. To counter this trend, provincial governments did their best to incent development by increasing funding and subsidies to developers and operators.
Among other trends, larger players are choosing to divest smaller properties in secondary markets. At the same time, they’re building for scale in larger urban centres. Operators are also leaving existing business lines to focus on either long-term care or retirement. While these moves led to significant merger and acquisition activity over the last five years, deals have been challenged given the rising rate environment. Buyers continue to resist paying a premium for the promise of future income, while sellers are taking a wait-and-see approach, focusing instead on improving operations and cash flow. However, we believe consolidation will continue given the capacity of larger firms to support the higher costs associated with construction and operations.
Other developments to watch include:
Increasing regulation and higher operating costs should persist in the short-to-medium term
Consumer demand for gated communities with on-site amenities should increase
Operators will remain focused on increasing occupancy levels and revenues while managing costs
Recently announced changes to fast-track the accreditation of internationally educated nurses should help manage current labour supply shortages
Our view is that it will take 12 to 18 months for the sector to normalise with continued support from lenders and the government, helped further by easing in both inflation and interest rate pressures.