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In 2024, many senior living operators have shifted from raising rates to keeping them where they are, and even offering discounts. As they do so, they must walk a fine line.
On one side of the coin, concessions and discounts provide a short-term financial boost to a portfolio’s bottom line. On the other side, relying too heavily on concessions could erode the long-term value proposition of the senior living industry.
Amid a high inflationary environment, I believe senior housing operators must carefully consider all options to regain occupancy, rather than simply offering discounts on resident rates.
Recent conversations with leaders of senior living operators including Pegasus Senior Living, 12 Oaks Senior Living, Anthem Memory Care and Priority Life Care have convinced me that operators should revamp sales practices and emphasize improved marketing efforts to attract previously unreachable older adults and use discounts sparingly.
In today’s exclusive SHN+ Update, I reflect on my recent conversations with senior living operators and examine current state of senior living discounting to provide the following analysis:
– Recent data showing the pace of new concessions and how operators are offering discounts
– Operators’ strategies for offering discounts in 2024
– The impact of discounting on the long-term value proposition of the industry.
‘New highs’ of discounts in 2024
As I reported last month, senior living operators are offering rate discounts at a record pace across primary markets monitored by NIC MAP Vision.
In recent months, NIC MAP data shows that discounts have ticked up. The delta between asking rates and initial rates “reached new highs” in the second quarter of 2024. Independent living showed the widest difference with an average of 16%, equating to just over two months of free rent. That is up from 1.4 months in June 2023, according to NIC data.
“While this discount strategy can be effective in driving move-ins and balancing the market dynamics, it also underscores some of the challenges operators face in sustaining revenue growth amidst the relatively higher operational costs,” NIC Principal Omar Zahraoui told me.
For comparison, the delta between asking rates and initial rates averaged 9.4% for assisted living operators in the second quarter, equivalent to 1.3 months of rent concessions – also a new high, according to NIC MAP Vision. For memory care operators, discounts averaged 10.3%, equating to 1.2 months of free rent.
According to recent data from senior living sales consultancy Bild & Co., operators are offering a few different move-in incentives, including reducing rent, waiving or reducing community fees, or coupling discounts with reduced community fees and rent reductions.
At the end of the day, I think operators are wise to test a variety of approaches – and my conversations in the last week tell me that they are indeed doing so.
‘Optimal strategies’ for concessions
In March, I opined that providers must use pricing power wisely and maintain a precarious balance between executing rate increases and discounting. In recent conversations, operators have told me that they are wary of deep discounts or concessions.
Chris Hollister, CEO of Dallas, Texas-based Pegasus Senior Living, told me it is important to limit the time a discounted rate is available to “drive a sense of urgency” within a local market.
“We try to be strategic and limit discounting to spotlight units based on value-pricing or excess inventory,” Hollister told me.
Hollister also believes that the industry is in “the first part of a major change” regarding supply-demand dynamics, noting that operators could have more pricing power “now through 2027 and beyond.”
This comes as operators have implemented steep, and in some cases, double-digit rate increases in the last two years — but I see this trend slowing as customers demand affordability and value, given the cost of moving a loved one into a community.
“[It’s] good news on rate, but we need to stay honest with our customers and focus on delivering great care and service,” Hollister said.
Some of the dynamics around whether or not operators offer concessions and discounts depend on local market conditions. It’s no secret that primary metropolitan markets have greater competition compared to rural settings. Sometimes, that creates challenges from a competition standpoint.
For example, competitors are enacting discounts in many of the markets that the West Lake, Oregon-based Anthem Memory Care operates in, according to VP of Sales and Marketing Nicole Bartecki. However, the pace at which concessions are being offered is slowing, she added.
Keeping some concessions as a short-term strategy is key to preserving margins, Bartecki noted, underscoring the balancing act all operators face in recouping occupancy.
While short-term dynamics around rate pricing, discounting, and concessions remain fluid, I believe that with lowered base rates and slowing annual rate increases, operators will be able to maintain rates and move away from discounting, even in the near term.
“The focus will likely shift toward delivering consistent value and service quality, rather than relying heavily on discounting as a primary tool for occupancy,” Bartecki told me.
12 Oaks Senior Living Senior Vice President Aaron Catoe told me that the “optimal strategy” for the Dallas, Texas-based operator involved a two-phase approach for concessions made during the early stages of a new community’s stabilization. This comes before recapturing “unrealized revenue” through rate increases and aligning with local market rates, he added.
“While the use of concessions will continue in the industry, the way concessions are used has already begun to change,” Catoe said. “The result is the continued tension between two opposing schools of thought: concern over loss of income versus the concern over the cost of vacancy.”
While these concepts compete with each other, concessions can lead to increased occupancy, but they can also negatively impact revenue “if left unchecked,” Catoe noted.
“It is this integration of two seemingly opposing thoughts, both of which hold truth, that must be carefully navigated,” Catoe added.
Priority Life Care CEO Sevy Petras told me that while discounting is a short-term strategy, it could have long-term impacts on an operator’s bottom line, likely leading to “increased pricing pressure and a shift towards more value-based selling strategies.”
“We hope to see an increase in public trust and awareness of senior living communities,” Petras said. “This, in turn, should lead to a reduction in the need for concessions.”
But gaining that public trust, I believe, will be a tough task for the industry, as evidenced by the slow growth of the overall penetration rate among targeted demographics and mainstream media coverage of affordability and safety concerns.
Opportunity remains for improving value and perception
Reflecting on my conversations with operators this week, I believe that maintaining value – while still strategically offering discounts – is crucial to the long-term success of operators, regardless of portfolio composition.
While some older adults are choosing to move into communities sooner, many within the target demographic are choosing to remain at home and age in place.
Rising home care costs could present senior living operators with an opportunity to offer the kinds of incentives that would attract people aging in place who are in need of more care.
A recent Wall Street Journal article revealed the “crushing financial burden” of aging at home. The article noted that the national median cost of a home health aide was $33 per hour, up $13 per hour compared to 2015, according to long-term care insurance provider Genworth.
However, with the high cost of care, especially as older adults enter communities with higher care needs, it could be challenging for operators to differentiate themselves as the clear choice for families concerned about their relative’s well-being if rates and care costs continue to rise.
“The key for senior housing operators may be to couple a discount-driven model with also one that emphasizes innovative care models, high-quality amenities and sustainable workforce models redefining the value proposition for future residents,” Zahraoui told me.
As operators told me in our recent conversations, I think the way forward will continue to be a careful balance between keeping rates where they are and selectively offering discounts.
I think the tension referenced by 12 Oaks’ Catoe is a clear depiction of the tough challenges operators face in offering concessions, and makes explicitly clear the need for executing on effective sales strategies.