As of the third quarter of 2012, Baltimore’s occupancy was 91.0%, which is 110 basis points above its cyclical low. Baltimore’s occupancy has experienced a slightly slower recovery than the average MAP31 recovery to date, as Baltimore’s occupancy remains 380 basis points below its pre-recession peak, compared to 310 basis points for MAP31. While Baltimore’s recovery has been tempered to date, the lack of any significant scheduled near-term inventory growth, by itself, is favorable for continued gains in occupancy.
Somewhat unique to Baltimore is the large delta between independent living and assisted living occupancy rates. As of the third quarter of 2012, independent living occupancy was 93.2%, compared to 86.5% in assisted living, a difference of 670 basis points. The 670 basis point difference between independent and assisted living occupancy is second only to St. Louis within the top 31 metropolitan markets. While the delta has widened a bit recently, prior to the recession, this difference was still north of 500 basis points, suggesting this delta is structural rather than cyclical.
A potential explanation of this phenomenon is the unique mix of independent living properties in Baltimore. Approximately 90% of the units within majority independent living properties reside within CCRCs, which is the highest proportion within the top 31 metropolitan markets. Even though overall CCRC occupancy continues to oscillate near its cyclical low, Baltimore’s CCRCs have escaped the overall lackluster performance in CCRCs recently. One reason for the lack of recovery in CCRCs is due to the sizeable amount of new inventory that opened near the time of the financial crisis, as many of those projects have had difficulty filling units. Baltimore has experienced no CCRC inventory growth since 2006, shielding the market somewhat, from the supply pressures that were felt elsewhere. The majority independent living CCRCs in Baltimore have not been completely immune to the economic downturn, however, as their occupancy did decline 460 basis points from peak to trough but never fell below 92.5%.
During the next few quarters, the minimal inventory growth in Baltimore creates a favorable supply-side scenario for increases in occupancy. On the demand side, projected demographic growth in Baltimore and MAP31 are similar at 1.1% and 1.3%, respectively, although recent economic data has been somewhat soft. While Baltimore’s economy generally was more insulated than most due to its proximity to Washington D.C., its recent recovery has been tempered. As of September 2012, Baltimore’s employment has risen by only 0.5% in the past year, somewhat below the 1.5% pace for the United States. In addition, according to Zillow Real Estate Research, Baltimore’s housing market also has underperformed slightly in the past year and is projected to continue to do so in 2013. As of September 2012, the Zillow Home Price Index for Baltimore has fallen 1.1% during the past year, compared to a 1.5% increase for the United States. In 2013, Zillow projects Baltimore’s home values will continue to underperform, only increasing by 0.7%, compared to a 1.7% increase for the United States.
The softness in Baltimore’s economic data may begin to explain its relatively recent soft seniors housing absorption. Baltimore’s absorption has been comparatively soft, with annual absorption as of the third quarter of 2012 at 1.4%, compared to 2.2% for MAP31. Much of the underperformance is due to weak absorption in independent living properties, where CCRCs make up the bulk of the inventory. CCRCs have helped to sustain relatively high occupancy in independent living properties, but absorption in these properties continues to remain slow. Since Baltimore’s market is dominated by CCRCs, which continue to experience slow absorption, and that coupled with comparatively weak economic data, overall absorption is unlikely to accelerate materially in the near term. The combination of slow absorption and minimal inventory growth will likely lead to somewhat small increases in seniors housing occupancy during the next few quarters, although the respective property types may trend differently.
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