Expect the winds of change to blow harder than ever through the senior housing industry in 2020.
With each passing year, the wave of baby boomer demand draws nearer, attracting more capital and a greater diversity of talent to senior housing. In 2020, the pioneering companies that started the industry may still have a leg up due to their hard-won expertise, but they will find themselves tested by new and disruptive entrants focused on delivering a next-gen product. In addition, there are question marks hanging over the economy, and a race to seize major market share that is available in the active adult and middle-market sectors.
In compiling the following predictions and top trends for 2020, it was clear that the list of risks and challenges facing the industry is long, but is balanced by an equally robust set of opportunities. Struggling providers will need to take urgent steps or they will fall further behind those taking calculated risks to succeed in the dawning of a new decade for senior living.
A disruptor puts the industry on notice
Tech behemoths such as Amazon and Apple have been making moves into the senior health care space and could eventually disrupt senior living — as several industry leaders have warned. And last year, Reddit co-founder Alexis Ohanian — who now runs a venture capital firm — predicted a decade of “major change” is on the way for senior living, and he foresees the rise of a disruptive, tech-forward senior brand.
In 2020, the disruption threat level will rise. In fact, expect a startup to burst on the scene with major VC backing and an innovative model that gets entrenched operators quaking.
This scenario played out several years ago in the home care space when Honor raised $20 million. While Honor has not upended home care as some feared, its emergence forced legacy players to view their business through a new lens. For an idea of what a senior living disruptor might look like, consider what The Embassies of Good Living is trying to build.
Independent living starts to look obsolete
Independent living occupancy held up better than assisted living during the last few years, fueling strong investor interest. However, 2020 will give rise to some hard questions about this part of the continuum.
In spring 2018, industry experts pointed to growing interest in active adult as a potential threat to independent living. Because acuity has risen in independent living, today’s active adult resident resembles the IL resident of a decade ago, NIC’s Lana Peck observed.
Over the course of 2019, the active adult sector became red hot. A Summer 2019 CBRE survey showed declining investor interest in IL on a year-over-year basis compared with a sizable surge in active adult interest. Meanwhile, active adult rental property growth is being driven by big money from the likes of Carlyle Group and other private equity players and REITs.
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In 2020, active adult will continue to heat up, and on-demand, gig economy services and new technologies will continue to make this operational model even more viable in the years ahead.
Some active adult players argue that they are not competing directly with independent living, but expect developers, investors and operators to question the value proposition of IL communities that have higher labor and dining costs and shorter length of stay than active adult, yet lack the needs-based demand and recession resilience of assisted living.
That said, independent living is not going to falter overnight. It’s a robust sector, with about 11,000 new units opening between 2017 and 2018, according to NIC data. Still, there are already challenges on the horizon. As of Sept. 2019, initial rent discounts in IL were at their highest level, on average, since NIC began reporting this data in 2015.
The DoorDash era of dining begins
Boomers, millennials and Gen Z might not agree on much, but they all love DoorDash. The food delivery service was the fastest-growing brand among all three generations in 2019, according to a new analysis from Morning Consult. Two other food delivery services — Postmates and Uber Eats — also made the top 10 fastest-growing brands among boomers.
As more people of all ages embrace the ability to have food delivered with a few quick taps on a phone, senior living communities are struggling to hire and retain their culinary workers. Not to mention, dining is typically a cost center and operating margins remain under intense pressure as labor costs rise.
So, expect more senior living providers to get more strategic about trimming in-house dining and supplementing with delivery services. They might begin to forge partnerships with DoorDash and its competitors in a similar vein to existing partnerships with ride-hailing companies for resident transportation. And more communities will work with delivery services like Shef that use “ghost kitchens.” These are commercial kitchens that do not have any attached restaurant and are used only to prepare food for delivery.
Tensions rise between owners and operators
Clean separation between senior living owners and operators is becoming rarer. This might be a long-term positive for the industry, but in 2020 it will lead to rising tensions.
Real estate investment trusts (REITs) have steadily moved away from triple-net leases in favor of RIDEA. Despite REITs’ assurances that triple-net is still a viable financing structure, expect leases to become rarer — operators and owners alike have seen what happens when market pressures increase operating expenses and suppress rates, even as annual rent escalators hit.
Besides REITs, private ownership groups like Bridge and public firms like Invesque have made moves to acquire operating companies. By owning an operator, these ownership groups gain insight into best practices that can then be disseminated across their portfolios, including in communities under third-party operators.
Expect more owners to forge JVs with operators or acquire them outright in 2020, and manage their portfolios much more actively than in the past. Some owners and operators will play well together and others will struggle, when teams on the frontlines resent — or are hampered by — more stringent and hands-on owners.
Economic downturn catches operators flat-footed
Heading into 2016, a survey showed that relatively few industry professionals believed that a serious oversupply problem was imminent. Even when it became clear that oversupply was a problem, many continued to underestimate its impact. As recently as May 2019, one seasoned leader in the field — Senior Living Communities’ Donald Thompson — warned, “I don’t think this overbuilding is going to go away as fast as people think.” He appears to have been prescient, with Ventas already having revised its 2020 expectations in light of unexpected pricing pressures related to new supply.
A similar storyline could be taking shape around a recession. In 2018, SHN Executive Vice President George Yedinak warned of a potential 2020 downturn, while also calling out senior living owners, operators and capital providers for painting an overly rosy picture about their portfolios. These rosy refrains continued in 2019; when asked about their fears over a recession, most industry pros brushed off the question, often saying that any downturn is likely to pale in comparison to the last economic crisis, and emphasizing senior living’s recession-resilience.
But occupancy is still close to historical low levels, and there are already rumblings that boomers are struggling to sell their single-family homes and move to senior housing. With this as the backdrop, even a relatively mild downturn could result in serious setbacks for companies that are unprepared. Just as the oversupply problem was minor until it wasn’t, the threat of a recession might seem mild until it actually comes to pass.
The good news is that despite a yield-curve inversion in 2019, the Federal Reserve’s interest rate policy may keep the economy chugging along next year. NIC Chief Economist Beth Mace sees less likelihood of a 2020 recession now than she did in late summer, she recently told SHN. Back in September, she said that businesses need to create a plan for how they will respond if a recession occurs — that advice is still good, and enterprises might now have a bit more time to follow it and get a leg up on more complacent competitors.
Anything goes in adaptive reuse
Adaptive reuse projects have converted a wide array of buildings into senior living over the years, from hotels to schools to factories. In 2019, more types of real estate joined this list, with defunct malls, closed universities, former farms and historic psychiatric hospitals all becoming senior housing.
In 2020, senior living will be chosen as the next use for an even more surprising variety of buildings. This trend will support the growth of urban senior living (see the Watermark redevelopment of a former Jehovah’s Witnesses building in Brooklyn, pictured above). It will also fuel the active adult rental boom, as converting to lower-acuity settings comes with fewer design limitations and demands than assisted living.
Look for design creativity to flourish as development teams seek to preserve community landmarks even as they transform them to senior housing. While this can come with significant costs, the payoff is senior housing that is more integrated into the community, in buildings that have emotional resonance for those who move in.
Famous brand puts its stamp on senior living
Brand crossovers are gaining momentum in the hospitality world, with Equinox Hotels building on the fitness and wellness brand, and West Elm Hotels channeling the “unique and highly identifiable” furniture retail brand. As with other hospitality industry trends and practices, this one will eventually take hold in senior living. Expect 2020 to be a watershed year, with the first big announcement of a superstar brand putting its stamp on senior living.
The brand crossover might take the form of a well-known hotel company putting its name on senior living buildings. While companies such as Hyatt have had their names on senior living in the past, the time is now ripe for another iteration of this play, because more than previous generations, baby boomers have a tenacious loyalty to their favorite brands. While senior living is known as a local business, the wave of aging boomers may begin to challenge this notion by favoring housing that holds the promise of quality that they associate with respected hotel brands. With the world’s first standalone Four Seasons Residence underway, it does not seem ridiculous to envision a Four Seasons Senior Living — although perhaps “senior” would be dropped for a more subtle reference to the age of residents.
At the same time, the hotel industry itself has evolved over the past decades, with the rise of boutique offerings that focus more on unique, local experiences rather than generic, one-size-fits-all decor and dining. So, consumers may be more apt than in the past to embrace hotel-branded residential living, knowing that they are not necessarily sacrificing a personalized experience by doing so.
And it may not be a high-wattage hotel brand, but a hospitality-oriented celebrity (Martha Stewart, we’re looking at you) or a lifestyle and wellness brand in the vein of Equinox or West Elm that puts its stamp on a senior living building in 2020. Businesses of all stripes see the demographic writing on the wall, and if senior housing is at all in their wheelhouse, they’re sure to explore avenues into this marketplace.
Failing experiments cause dismay
One major theme to emerge in 2019 was that senior living is undergoing a “sea change” or “evolution,” and standard operating procedures — which have led to success in the past — are not sufficient to meet new needs, challenges and opportunities. Alert, forward-thinking providers are therefore experimenting with new ways of doing business and, inevitably, not all these experiments will be successful. In 2020, early innovators will encounter challenges, leading to industry hand-wringing.
To take one example, NIC’s Beth Mace said last spring that it’s time to “throw spaghetti against the wall” to solve the middle-market puzzle. A number of providers are doing just that, putting together middle-market prototypes. But spaghetti is also being thrown at the wall in other areas, such as in new active adult models and memory care approaches, and in launching Medicare Advantage plans.
In 2020, some of these experiments and innovations will — if not fail outright — create messy situations. Alarmist voices will inevitably issue fretful warnings about the need for the industry to stick to its knitting. But bold, well-capitalized providers will ultimately come out ahead as they learn some lessons the hard way and then iterate more successful approaches. As Discovery Senior Living CEO Richard Hutchinson put it, he expects to pay some “dumb tax” for being an early mover, but believes that in the end the company will have an edge on overly cautious competitors.
Big hires from other industries make waves
For years, senior living companies have brought in talent from other industries such as hospitality and retail. But this trend is about to reach a new level, with some of the biggest names and boldest thinkers from top companies in other industries making their way into senior living C-suites.
Last year provided a foretaste of what’s to come, with former Equinox CEO and Kimpton Hotels President Niki Leondakis taking the helm of The Wolff Company’s senior living operations, and former White House Press Secretary and Starbucks President of U.S. Retail Kris Engskov joining Aegis Living as president.
Hires like these hold transformative potential for the industry. Senior living communities have been copying the look and feel of boutique hotels for years — with some notable successes — but in Leondakis, a boutique hotel pioneer herself is training her sights on the senior housing sector as the field for her next innovations. Engskov, meanwhile, is bringing his tremendous operational expertise to bear as Aegis scales up regionally. And follow-on hires from Starbucks illustrate that bringing on a high-caliber leader from a world-beating enterprise can have a trickle-down effect, beefing up the whole org chart with leadership talent.
While it’s tough to predict exactly where the next high-profile hire will come from — be it retail, airlines, technology or some other field — senior living should be an appealing option for any top executive who is seeking to make a meaningful impact in their next chapter.