Skilled nursing is on the recovery path but still faces challenges

Skilled nursing is in the middle of industrial irony. Its recovery from the depths of the pandemic — when there were so many people dying in care — has been ongoing. In the third quarter of 2023, the occupancy rate had risen up to 82.2%, 850 basis points over the pandemic low point, according to a report by Marcus & Millichap.

“Improving occupancy is backed by consistently positive net absorption, with over 12,000 net enrollments so far this year,” Marcus & Millichap wrote. “In the decade preceding the health crisis, only one year recorded positive absorption, at slightly over 1,000 beds in 2014. Strong demand for care is further reflected in climbing rents. The nation’s average rate rose 3.4 percent year-over-year in September, its fastest gain since 2010.”

All fine, but the industry continues to face big hurdles. One is the reduction of inventory, with more than 25,000 beds gone since 2019.

“While this trend has been underway since 2017, it accelerated after the onset of the pandemic,” they wrote. “Rising operating costs have likely led to more closings among some lower-performing facilities. Some properties are also shifting to more private rooms, which is lowering the bed count.”

Another factor is a lack of labor, an issue for all areas of healthcare. There is still a shortage of 9% of trained personnel compared to even the end of 2019. Over the same period, though, the healthcare is larger by 5%.

A number of factors that stand out are “challenging working conditions, increasing overall health services labor needs, and the substantial training required for many positions.” People in the industry are trying to find ways of expanding the number of workers, as is the case in so many industrial sectors. There has been a chronic shortage of workers, which has kept the unemployment rate depressed.

According to Marcus & Millichap, there are various efforts to ease hiring, including “proposed legislation to allow college state-sponsored savings plans to also go toward various other training certifications.” But legislative cures can take years to effect.

Related: Why holistic benefits are essential for supporting and retaining health care workers 

Expansion of skilled nursing care availability also requires investment, another complication for the same reason there are practical restrictions on many areas of CRE: high lending rates. Year-to-date through the end of the third quarter was down about 45% year over year “and about on par with the first three quarters of 2015.”

Also, while sales prices are down from 2022’s record levels, they are still historically high. That means buyers need to obtain more future rent increases to justify the investment. If interest rates can remain contained, then investors might be able to move forward with purchases, improving transaction volumes.