“Survive until 2025” embodied the essence of a challenging period and the hope for brighter days ahead. Now that 2025 has arrived, Arick Morton, CEO of NIC MAP, shares insights and the state of capital and growth outlook for the industry. 

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Hear the 2024 recap and Q1 report with Kyle Gardner HERE.

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Produced by Solinity Marketing.

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Intro

Welcome to season eight of Bridge the Gap, a podcast dedicated to informing, educating, and influencing the future of housing and services for seniors. The BTG network is powered by sponsors, Aline, NIC MAP, Procare HR, Sage, Hamilton CapTel, ServiceMaster, The Bridge Group Construction, and Solinty and produced by Solinity Marketing. Bridge the Gap in three, two.

00:37 - 00:49

Lucas McCurdy

Welcome to Bridge the Gap podcast, the senior Living podcast with Josh and Lucas in beautiful San Diego at the spring NIC conference with our great friend supporter Arick Morton. NIC MAP, welcome back to the show.

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00:49 - 00:51

Arick Morton

It's a pleasure to be here as always. I'm super excited to chop it up with you.

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00:51 - 01:44

Lucas McCurdy

Well, we love it when you come on the show. Either you or Kyle. You guys are bringing the best information around data points in the senior living industry. And, we're here. So many conversations are taking place. And you just came off of a panel here. You were at the. What a difference a year makes senior housing capital investment and growth outlook.

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And I actually was able to sit in on that very well attended, by the way. There were a couple, I would say at least a thousand people there. It was standing room only. There were people all across, all in, standing against the walls. And you had a great panel. Would you help our listeners that weren't able to attend? I mean, what a great opportunity for you to come on and talk about it, run us through some of the data points on your presentation?

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01:44 - 03:03

Arick Morton

It was a great panel, very, privileged to be on it. You know, we had three folks, we had Harrison Street, we had the Mortgage Bankers Association, myself. And so, you know, I looked at kind of the demographic story, which obviously I've been talking a lot about and, you know, basically just kind of pulled up and said, all right, well, you know, one of the supply and demand dynamics, what is the growth?

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What do the growth numbers look like on the demographic side? How are we doing from a construction perspective? You know, trying to take a second to look at kind of the question I'm always asking myself, it's like, all right, you know, if you project for the 80 plus growth and you look at supply, obviously that tells a story.

But is there anything we're not considering that could cause that equation to kind of move? In either direction. So we looked at, you know, the penetration rate and how that's holding up. As well as what are the financial resources of this generation versus the generation before. And, you know, I think the kind of the net of it is that I don't see a compelling reason to kind of believe anything but the demand that we are seeing each and every day, every quarter that we report that that demand is not set to continue to accelerate and that, you know, the supply side is is just not keeping up. In fact, it's kind of ebbing out, right now. And so, you know, I think that that story, you know, honestly kind of continues apace.

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03:03 - 03:20

Josh Crisp

That's a great story to unpack and talk about. For many aspects, but it also presents a lot of challenges, obviously opportunities with that. So are you seeing that at the same pace across all sectors of senior housing or is it it some sectors are way more than others.

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03:20 - 04:53

Arick Morton

Honestly, I spent the last two years in the data, you know, especially during the kind of the heart of the hard times of the last two years. It's crazy, you know, what a difference a year makes, right? It's crazy to think, you know, ‘23 and ‘24. I mean, Covid was probably the hardest time in the industry, at least operationally.

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I think financially, you know, ‘23 in 2024, kind of when the bills came in, when the government money ran out and and you know, that labor inflation really bad in the interest rates increased. So, you know, it is crazy what a difference a year makes. And so, you know, I spent the last two years when it was kind of the hard times really trying to identify like, hey, is there a part of the market that is either underperforming or overperforming.

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So cut it by, you know, segment type, by age, by size, by market type, I mean, we cut it every which way. And honestly, the graphs all pretty much moved together. So I there is, you know, obviously there are slight differences by market, right? I mean, you know, but the the kind of the, the raw supply demand dynamics that might be starting in a different rates, like, right, the occupancy in Atlanta and, you know, other metros might be a little bit different than where they're starting from.

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But you're still kind of seeing the basic overpowering absorption of the 80 plus population, really kind of that story continuing. It seems to pretty much be happening across the entire, you know, across the entire sector. So I have not been able to find a part of the market that is really significantly under or outperforming without, you know, very small market towns out of very small markets.

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04:53 - 05:33

Josh Crisp

So the deficit between housing services for that boom of population growth, there's a huge deficit which presents a challenge, but an opportunity. Yeah. But I'm sure a lot of the operators here that have had the struggles that we've had over the last four years are thinking, gosh, I'm seeing my occupancies continue to climb, my rents now I can get more rents.

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And so that's sort of a sigh of relief. That's actually what our industry needed, not necessarily all those unhealthy reasons that we experienced. So that's the good side. The challenge is what do we do about that. And you know, we're like, so what would you say to that?

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05:33 - 08:29

Arick Morton

I mean, I think certainly, we needed the recovery. You know, I think this is we're kind of picking back up what we lost in COVID. I think actually, this quarter, we surpassed pre-COVID occupancy. So, you know, we are back and even a little bit ahead of where we were pre-COVID.

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So obviously, you know, that's been welcome news, I think. What do we do about this? You know, I think obviously it's something that is an issue. Right. Because it sounds great to see how the buildings are all going to fill up and everybody's going to be full. And, you know, that sounds great. But I think that will invite a policy response.

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Because legislators are going to hear about it from their constituencies that are getting constituents. They're going to be hearing and seeing it personally. And so, you know, depending on what state you're in and you know who's in charge, obviously, you know, that could invite, policy, responses that we as an industry might not, you know, like so I, I do think not to mention I think we have kind of a, you know, a social obligation that we, we operate this space and we deliver this service.

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And so, you know, we need to meet the needs of, of the population. So it's something that we need to do, you know, we need to work on it. How does it play out? I mean, obviously, I think construction is very different from pencil. You're seeing there are places where it does, and we are still seeing some starts, but stocks are at their all time low.

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And then, you know, obviously within the administration, I mean, you're putting 25% tariffs on lumber from Canada, you know, 20, 25% tariffs on drywall from Mexico. You know, a reduction in the migrant workforce that powers a lot of construction sites. So you kind of look at that and you're like, well, I don't, you know, and the Treasury rates come down a little bit, so who knows where that's going to go.

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So the interest rate environment. So I think you know I think that will continue to be difficult going forward. For me, I think the way that we solved the problem, or at least put a dent in the problem in the short term is with expansion. And if you think about an expansion, you have a lower kind of cost per unit because you have a lot of fixed cost coverage and you already have the land and you already have the electrical panels and all those sorts of things.

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So your cost per unit is lower. And then your, you know, incremental revenue or your incremental margin on those new expansions is higher because, you know, you already have an executive director and you already have a director of clinical services in a van. And, you know, all those sorts of operating costs are a lot of fixed cost coverage. And so, you know, I think you can get to that unlevered yield on cost in, in an expansion, a lot easier than you can get to that unlevered yield on cost on a brand new ground up. And so I think you know, I think there's kind of a call to arms to the industry to look at, you know, okay, what is a five year projection look like in this market area.

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Is there anything coming in the pipe. And if not, you know, do I have flag land that I can start to think about another wing, you know, an expansion. And I think that's what the industry's going to have to do in the short term to kind of put a dent in the problem.

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08:29 - 08:48

Lucas McCurdy

And I want to jump in here one step back before that, to give our listeners the magnitude. If we don't have your graphs, your slides here. Yeah. But we'll probably be sharing some of those with our listeners either edited through the video or but posts on social media give some magnitude that that kind of begs the question on.

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08:48 - 10:03

Arick Morton

We need to roughly quadruple our current development pace to keep pace by 2030 and between. So over the next five years, we need to quadruple our current pace and basically double the pace a little bit. Basically double the maximum all time pace. So right now we're at about half our all time high pace.

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So we would need to roughly for our current pace, double our all time pace. And actually we basically need to double our all time pace for the next roughly 20 years or 25 years just to keep pace, right. You know, assuming penetration rates stay the same. I mean, there's some assumptions baked in. Of course. So, you know, that's the order of magnitude that we need to meet.

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And so obviously, I mean, the other thing and, you know, how does it solve I mean, I think you can imagine a world where you can, you know, if you can put 300 units down right like that, that can make it, that can get your, your margins up. And, you know, you can get the coverage there. So, I mean, I think people are starting to think about bigger buildings with higher rents.

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I mean, people are trying and kind of that part of the market. So I do think we're seeing some new construction and people will continue to be creative. But obviously, I think the current policy environment's very unpredictable. And so, you know, it's a little hard to make those, those kind of long term maps.

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10:03 - 11:10

Josh Crisp

Oh, yeah. Well, to catch that, I mean, we're not going to be quadrupling, as you mentioned, any time soon. And I think that presents a huge opportunity. I've heard a lot of talk while I've been here, just in different circles, developers, operators looking at their existing assets, like you just said. And candidly, there's a lot of opportunity with creativity, it doesn't even have to be a lot of land, but, a lot of assets out there all over the country have opportunity for growth and expansion.

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And like you said, that's scalable. And it's a lot quicker to the market. So I think that's going to be a huge opportunity. And for those there's also a lot of really tired operators. Yeah. You know, they've, they have weathered, a lot of years. Then, in their senior years of their lives as operators, they were expecting to go out on a high.

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And then Covid hit. Right. And that cancelled the retirement plan. Right. They're trying or maybe expedited it in some cases. But I think the value of the properties potentially also that have the expansion opportunities, those are going to be higher value assets when you imagine.

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11:10 - 11:30

Arick Morton

100%, 100%, and I think, you know, every deal screen, that's probably happening right now. You know, when something comes up on the market everybody should be looking at that and saying, all right, well, is there a way for me to add, you know, 10, 30 units onto this property? And if so, you know, does the market support it? And then, let's go.

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11:30 - 11:48

Josh Crisp

Well, and I'm here hearing a lot of talk about distressed assets that that's like the next opportunity for investors to look at. But is that counter productive? If we're talking about the push for demand being so high, is that even going to make these distressed assets an inflated value?

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11:49 - 12:04

Arick Morton

I think what I'm seeing kind of anecdotally, we track a lot of transaction data. Stuff's trading. And even though, you know, there is distress stuff out there, you know, but if it has a good future on it, it's, it's kind of trading as well.

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12:04 - 12:39

Arick Morton

So, you know, I think it's an interesting time because, you know, the current performance, the current environment today might be one thing, but the expectation of what it would be in a couple of years is different. So I think that's where you're seeing some kind of still some bid ask spread there. Yeah. Where people are distressed is like yeah, I mean it might be distressed today, but in three or four years, you know, the senior population has grown 15 or 20%. Is this thing distressed? And so I think that's kind of an interesting psychological moment in the market for that reason.

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12:40 - 13:07

Josh Crisp

Well, with all this data, I mean, you have so much wealth of information at your disposal. You guys worked really hard at that. So when you're looking to partner with the developers, the investors, the owners, the operators in the, in the business, like, what does that look like for you all? Now, what is your most valuable conversation you're bringing and what kind of information are you kind of providing to these partners of yours that's vast here at NIC

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13:07 - 13:19

Arick Morton

I think it's a little bit of a kind of the supply demand equation. Right? What does the growth look like in this market? What is the current market performance? Where's the rate and what does the pipe look like? And what does that mean?

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13:19 - 13:59

Arick Morton

What project that forward five years and kind of what does this market look like. And I mean I think we're in an environment where, you know, you need to make sure there's enough labor and, you know, there's other kinds of basics to loans. But, I mean, I think in a way underwriting is getting a little bit simpler right now because you just, you know, if you're turning off, then the supply growth kind of portion of the analysis, you know, it's just a question of like, alright, well how much is this market going to grow? This piece of real estate can either gather, continue to gain its current share or can I, you know, do something to help it increase that share. So, you know, in a way, I think, the underwriting environment's like getting a little bit simpler, you know?

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13:59 - 14:25

Josh Crisp

So what about the whole supply and demand issue? How does that impact or does it even impact secondary tertiary markets? Because, you know, predominantly in the industry, we've really had this focus around major, you know, the MSA is the major primary market. But I'm hearing a lot of talk about opportunities in secondary in these growth markets outside of the secondary into the tertiary markets. What's your opinion on that?

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14:25 - 15:54

Arick Morton

I think there are certainly a lot more secondary and tertiary markets where the growth is, you know, uneven or, you know, that national story isn't necessarily Sara Lee, the story of every market. Right. And, you know, I try to first tell everybody like, look at this as a local business.

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You compete in a little 15 minute drive time, you know, whatever it might be, whatever your trade area is. And it doesn't really matter what's happening nationally. You know, it doesn't matter what's happening on the other side of the MSA. You know, you're going to get what you're going to get in your you're going to you're going to live and die by kind of your market area.

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And so, you know, I think you have to do that due diligence in the southeast of those secondary and tertiary markets. You know, they might be doing well in the Midwest. They might be declining. Right. Like it, you know, and that's a very global statement. So I think it really just comes down to the building and what its specific conditions are. I do think that especially in the tertiary and secondary markets, you have to kind of run the same analysis on the labor pool and really ask yourself, like, is there enough labor?

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Because a lot of the secondary and tertiary markets, too, are kind of running into I mean, this will be a bit of a social crisis, not just for senior housing, but for hospitals. And skilled nursing in these markets is like the seniors are still there, you know, but  the children have migrated to, you know, whatever the nearest MSA is. And it's like, sure, their demands are there, but is the staff?

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15:54 - 16:52

Josh Crisp

Well, and I'm glad you brought that up because we've been coming across opportunities and hearing people come across opportunities where, you know, they had done all of their underwriting, work and their research around, hey, wow, this is a perfect demographic to redevelop or expand or even build a new product for housing. And then they did no diligence on the workforce, and then they can't find any employees in the market because the, the, the labor force can't afford to live in the market where there's no influence of the private pay market.

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So I think that potentially it is also a real challenge. And an opportunity. Right, as well. And so, we're starting to also see some mixed use developments where there's some private public partnerships, with states and housing authorities, where the workforce, labor force, housing is coming in and bringing the labor to the market. And so I'm curious to see if you're kind of seeing that happen across the country 100%.

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16:52 - 18:10

Arick Morton

I mean, I think we're probably entering a world over the next few years where the bigger question is not is the demand there? It's going to be the, you know, the supply, the quote unquote labor supply there. And so either, you know, you're 100% right or what we look at is what I encourage everybody to look at, everybody works, you know, think math.

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Look at the counts. You know, we have your age by income data. So you can kind of see right in this, you know, in what is the growth of the caregiver kind of income, income segment in this market. You can look at psychographics by income. So like who, who is it? Who is the labor force in this market?

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And look at, you know, there's a couple other data sets that are interesting there. And so, you know, yeah, you I think you, I think there's a lot of markets where some people are going to, you know, make some bad investments because the demand side, you know, absolutely crushed it. But, you know, you didn't account for it and that you raised a great point. It's not just in the secondary tertiary market. It's also in some of the, you know, some of the places where developments can pencil right now are going to be super high end markets. And, you know, you really have to ask yourself who's going to work here. Have a very good idea of what, you know, what the wage rate is going to be, what wage rates are going to be needed to get them to come there. And make sure you get that right.

18:10 - 18:29

Josh Crisp

You know, Lucas, I don't know what we did before Arick, and team came into our industry to help us with these big challenges and understand the data, but how much better I feel having partners in our industry like NIC MAP and, what what an opportunity and challenges we have ahead, ahead of us. Right?

18:29 - 18:49

Lucas McCurdy

We do. We do. Okay, so final thought, final comments. One part of your presentation I thought was so interesting. It was a small piece of the presentation, but it was just like one of those things, like I never thought of that as you mentioned, kind of like, okay, we got this demand. Does it plateau, does it drop off? What happens? And then you started, you had a very long tail look and you were talking about these different generations. I'm like, oh my gosh, only Arick could think of this thing and look that far down the runway. Fill us in.

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19:06 - 20:44

Arick Morton

Well, I won't take credit for that. You know, obviously the Census Bureau produced those projections. But more importantly, you know, I've gotten, I've gotten questions from people that are like, well, aren't we going to have a bunch of empty buildings after this? So, you know, I'm like, all right, well, well, let's go answer that question.

And, you know, no, for, you know, probably a horrifying for us to, to talk about, but the, you know, the millennials are coming right behind the Gen X and the Millennials are coming right behind the boomers. And so the tail end of the boomers, now, you see a little bit, you know, if you kind of say 27 to 30 is the average age of, you know, having a kid, right?

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So 19, you know, 35 plus that plus is 1965. So you kind of okay, the people who would have turned we had we had a flatlining of the population growth because of the depression, inside the 80 plus growth because of the depression. So if you kind of add 30 years to that, you know, that kind of happened in 2020.

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So we hit that low. So, you know, 2050, it starts to kind of level off and levels off for just a little bit. And then it picks right back up. And the raw growth number sorry the raw growth numbers will be the same. The percentage growth numbers will be a little bit lower because they're on a higher base.

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But I mean I think the point is, you know, we're not going to build a bunch of buildings and then have a bunch of empty buildings in, you know, 20, 50 or so. And I think that's an important point to make because, you know, you want that terminal value, right? We're building these. And the idea is they have a, you know, 30, 40, 50, 70 year functional life. And so it's, you know, you want to build them you to have somebody to sell them to. So, you know, we want people in 2040 to think, yeah. Well they're still. I still have a long runway here.

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20:44 - 20:59

Lucas McCurdy

Very compelling optimistic data. And I can't wait to see what attention this industry brings from a lot of people from the outside. And that's going to be very interesting to watch that play out. Arick, thank you so much for your time today.

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20:59 - 21:00

Arick Morton

Thank you. It's a pleasure as always.

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21:00 - 21:16

Lucas McCurdy

And for our listeners, I know you're going to want to comment and connect with Nick map. You can scroll down and hit that link in your show notes there. Go to btgvoice.com. Download this content. So much more. Connect with us on LinkedIn and thanks for listening to another great episode. Bridge the Gap.

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Outro

Thanks for listening to Bridge the Gap podcast with Josh and Lucas. Connect with the BTG network team and use your voice to influence the industry by connecting with us at btgvoice.com.