Demographic surge, increasing demand, and development pace. Arick Morton, CEO of NIC MAP Vision, discusses these topics with Lucas plus results from the Senior Housing Market Outlook Report on this week's episode of Bridge the Gap.

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Arick Morton

By 2030, the 80 plus population will grow by about 37%. So that's taking an industry that, you know, if you hold penetration rates basically constant, you know, we would need to grow by about 37%. Construction starts over inventory right now I think are somewhere in that half a percent range.

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00:16

Intro

Welcome to season seven of Bridge The Gap, a podcast dedicated to informing, educating, and influencing the future of housing and services for seniors. Powered by sponsors Accushield, Aline, NIC MAP Vision, Procare HR, Sage, Hamilton CapTel, Service Master, The Bridge Group Construction and Solinity. Produced by Solinity Marketing.

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00:40

Lucas McCurdy

Welcome to Bridge the Gap podcast, the senior living podcast with Josh and Lucas. A very excellent data filled episode. You're going to want to lean into this. This may be one that you listen to a few times because we have Arick Morton of NIC MAP Vision on the program today. Welcome to the show.

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00:59

Arick Morton

Thank you, Lucas, it's a pleasure and an honor to be here as always. Thank you for having me on.

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01:03

Lucas McCurdy

Great to have you back. These are always very exciting conversations for me because we get to really nerd out on some data that is very important to the industry. And you guys are not just on the cutting edge, you're on the bleeding edge of all of this data. I would say the tip of the spear heads down in understanding and curating this content. And what a fun and awesome way to get this out, on a podcast freely to everyone. And we really appreciate your time, energy and support on this. And so as we dive in, look, I think one of the big topics is, demand of demographics. So today we're going to be going into the demographic surge. We're going to be talking about absorption rates. We're going to be talking about the increasing demand, also the development pace, we're going to go down a lot of trails. And I know that our listeners are going to want to be taking notes and leaning in. So, Arick, start us off, talk about this surge that really I've been hearing for my entire career. I've been at this for 15 years, and I've been hearing about this surge of demographics. But it really seems as real as it's ever been, at least for me in the past 15 years.

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02:17

Arick Morton

Yeah, absolutely. Well, Lucas, thank you again for the opportunity to be here. It's always a pleasure. And, you know, I think you have pointed out correctly, NIC MAP Vision just released a couple weeks ago, our senior housing market outlook, which is our first, you know, real kind of all of company effort to pull all of the data that we have together to offer, really a comprehensive picture of where the market's at. That is really something we've made freely available. So if you're interested, you can follow up. We can put a copy in the show notes, or whatnot. But, you know, I think stepping back in, in the senior housing industry, demographics are destiny, right? We are a need based product. And we have a kind of a consumer base that is going to be as big or as small as just the number of human beings who have a need for our service.

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And so, in 19, in the 1930s, obviously, there was a significant suppression of birth rates due to really primarily the depression. But then that kind of moved into World War II. And then as soon as really folks started coming back home from the war and even a little bit before, that birth rate started searching and that gave rise to the baby boomers, which are the largest generation, heretofore in, in American history.

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And so if you add 80 to 1945, you get 2025. And so that has been kind of like this, El Dorado for the industry, as you point in, for the last 15 years, you know, I've had the good fortune to be there in the industry, you know, a little bit longer than that. And it's always been wait till the baby boomers wait till the baby boomers. And so, you know, we just got through Covid. We just got through it, you know, kind of the dislocation that has come from that. And so what we wanted to do is sit down and say, all right, let's take a look at kind of all of the fundamentals that are driving the industry. Because what we're seeing inside of the absorption data is truly, you know, kind of incredible. Let's start to talk about that. So that's a little bit of a back story. 

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To get to your question on the kind of magnitude of the upcoming demographic surge. I mean, it is, you know, in terms of kind of the typically slow rate of demographic change, it is an explosive change. And so, you know, the silent generation, which is the generation before, had about 47 million individuals at its peak. And, you know, the baby boomers will be 76 million and even a little bit bigger than that, especially when you account for life expectancy. And so what's especially impactful about that is kind of the pace at which it's coming. So if you look at, if you take 2023 and you say, what happens in the next, by 2030, the 80 plus population will grow by about 37%. So that's taking an industry that, you know, if you hold penetration rates basically constant, you know, we would need to grow by about 37%. Construction starts over inventory right now I think are somewhere in that half a percent range.

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So if you kind of look at the gap between how we're growing inventory and how rapidly that demand is coming, it is an absolute chasm between those two. And we're seeing it in the absorption numbers. So, first quarter, 2020, for absorption was 40% above, first quarter 2023 absorption 40%. And that 2023 first quarter absorption was already a historic record for NIC MAP data. So we're seeing basically kind of quarter over quarter, year over year. We are basically seeing historic absorption. And you kind of pull back and look at that. If you look at the data and we have some slides in there, you know, it's a pretty simple story. You know, the 80 plus population is that wave is starting to break. And so that is something that is only going to kind of accelerate from here on out. So it is going to truly be defining for our industry for the next 20 years.

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06:12

Lucas McCurdy

Well, I like how you put that with actual facts and data because, some people may say, well, you know, it's just, it's a demand after Covid. This is kind of just a momentary, seasonal effect you know, coming out of Covid, I think clearly what you just outlined, really, kind of shows that that's not the case.

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06:35

Arick Morton

I wanted to tease that out. We made a kind of a dedicated effort to tease that out. Sat down, got some really smart people, from around the industry to kind of weigh in on this. And, and so the way we, we sought to analyze that because obviously, you know, you had basically, Covid shutdowns. So you had demands plunge and then you had reopening and you saw demand surge. So, you know, the question is, are we still seeing the artifact of that? Now, I think if you sat down and kind of said, do you know anybody who's still sitting at home saying, well, I know Covid ended, you know, kind of almost four years ago, I don't know if it's safe to move into senior housing. I'm not sure, you know, anecdotally that we're really seeing that, but that's not good enough. We want to get to the data. 

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So what we did is we sat down and we looked at penetration rates. So the question is what percentage of the 80 plus population resides in senior housing. And so our thought was that if that penetration rate is still below where it was pre-COVID, then you could make an argument that we're still basically catching back up to kind of the demand that we lost.

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If not, then you would say it's probably the 80 plus population growth that's driving it. And so, you know, we sat down and we looked at that. And what you see from the penetration rate graph, I mean it's a great slide, and I think it tells an incredible story about our business, which I'm happy to get into, is that between 2010 and basically 20, you know, January 1st, 2020, we saw penetration rate grow by about 1% from about 10 to 11 if memory serves.

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And so, great. It's kind of a gradual increase in. So we overbuilt in the 2010s. There's  a graph in there that shows construction over inventory versus 80 plus growth, or inventory growth over 80 plus growth. And we outpaced it basically every single year. So you saw occupancy decline but not as bad as you would have expected because the penetration rate picked up.

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So we managed to attract more customers as a percentage of the overall population. Then Covid hits and you see the penetration rate plunge. We lost about six years worth of penetration in about two quarters. so I think it went from, you know, somewhere in the elevens down to like high elevens to low elevens. Then, basically as soon as the Covid vaccine came into production or came into distribution and kind of lockdown stopped, we basically went on a six month, six month run where we recovered all, we recovered about six months, six quarters, excuse me, we recovered about six years worth of penetration in about six quarters. And boom, we were right back to the same penetration rate we were at before Covid. And so to me that says, that basically, you know, that kind of that demand recapture thesis finished out in late 2022.

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And so then you look at 2023 and you say, wow, the absorption in 2023 was about double the historical, the pre-COVID, average, double, double absorption. So that's a 100% growth in demand in the year of 2023. And then 1Q 2024 is 40% above 1Q 2023 looking you know, we have the data release for 2Q and you'll see, a similar story come there. That comes out in a couple of days. 

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So, you could still make the argument. And again, I mean, the data tells a story, but it doesn't, it’s not, I think, definitive, but I think the strong, the preponderance of the evidence certainly suggests that it is population growth, that is driving this historic absorption at this point, not recovering from Covid.

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10:11

Lucas McCurdy

There's another metric that was really striking to me that you mentioned. And it was kind of the contrast between the demand and development. And you mentioned, I think you use the phrase, chasm, in which I thought, you know, wow, this is more than bridging a gap. This is a chasm, that those numbers are so drastically different. So talk to us about this barrier to increasing the development pace to meet the demand. And how are developers and senior housing gonna overcome this obstacle?

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10:47

Arick Morton

Assuming we were still in the, you know, the best development times in the mid ten years, right? You know, 2016, 2017, you know, 75% non-recourse financing, all that kind of good stuff. Even if we were there today, to meet the bogey by 2030, we would need to do about twice, two times the amount of development we did in any one year in all of senior housing history.

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So you start there, right? You start there. That's where you start. So that's already even if we are sitting around and, you know, times were as good as they possibly could be, we would still need to put on our running shoes and start sprinting to keep up. But then you kind of look at, well, where are we today? And we need to roughly quadruple our current pace because, you know, obviously we're touching all time, construction over inventory lows. You know, when you see some of the numbers that will come out this quarter are, you know, those are always subject to revision, but they're dragging bottom, you know, an all time low near, all time low doesn't really make a big difference.

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And so, obviously kind of what's happening is that the credit markets are incredibly tight. you know, there is an interest. Everybody kind of sees an interest rate cutting cycle that's coming, but it still hasn't materialized yet. And so I think, you know, the banks as well as a lot of the industry participants are still kind of saying, well, you know, let's see a couple more cards before we push big chip stacks into the middle. And so, you know, I think that is still obviously kind of suppressing new development activity. And so what's going to happen? I mean, in 2027, the 80 plus population is going to grow by 7.5%. so, you know, I think our all time, you know, kind of construction or development inventory growth numbers, probably somewhere in the 3 to 4 range, maybe even less. And so, you know, there's just, there is going to be so much new demand coming into the market that, you know, we will just be chasing that. At least probably through the end of the decade, because obviously, as you know, even if everybody said, all right, I'm ready to push my chips in the middle today.

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You know what, 18 months, 2 years to get the site entitled. Another 18 or 2 to get it built. I mean, you're talking, you know, 4 years probably, and that's in probably the Sun Belt, certainly not any of, you know, more, administratively, burdensome jurisdictions. You know, you're looking at four years, that's 20, that's mid 28 before you're delivering product.  Even if you decided to really go today and if you're in California or New York or somewhere else, I mean, you know, could be in that 2030 handle, right? 

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So, you know, I think as an industry, we are going to be chasing that demand, which I think creates incredible, investing opportunities both on new development. But then obviously, if you, you're kind of back into that and say, well, what does that mean for assets I own or assets I buy, you know, if you're picking the right markets, obviously this is national data. So you know you still got to pick your thoughts. And there are areas with declining populations. I mean every senior housing property is kind of its own business. There is opportunity, there's an incredible investment environment that's setting up right now.

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13:58

Lucas McCurdy

I'm seeing it too. I'm in and out of communities, really almost every week. And these are typically legacy age communities somewhere between 20 and 30 years old. And, I've been visiting those aged communities, really for my entire career and hoping and wishing, like many others, that they would get updated. And I'm seeing a real increase in focus on value-add, acquisitions, or just taking these legacy communities and bringing them up to date, reimagining some of these antiquated spaces that are not really being utilized or maybe weren't, the floor plan doesn't fit to today's needs. And also an increased focus on upgrading the units, which in my opinion has been a drastic lag, really in my entire career, has been kind of limping through upgrading units, and they may even be focusing on the common spaces. And you walk these beautifully renovated common spaces, you walk into the units and it's like this unit does not match the rest of the building. And it's kind of been like, well, we'll get to it. 

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So for me, I actually, that's one of the pieces that I'm excited about is that, these legacy communities, these older buildings, which is a big portion of the inventory in the United States.

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15:25

Arick Morton

50 or 60% of the inventory, I believe, is over 25 years old, 45% is over 25, and like 60% is over, is 17 or 18 years.

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15:35

Lucas McCurdy

Okay. Wow. I mean, what an amazing opportunity to take these communities. A lot of them have great reputations. They have great care, great staff, and they're trying to compete against that shiny new penny down the street that was built, maybe in 2020 or 2019. And, you know, people walk through and they think, yeah, it’s got a great reputation, but it just doesn't look as good as these newer communities.

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What a great opportunity to increase that. So, that's something that I'm seeing personally, and I think that that's a big opportunity. Certainly the data that you just laid out matches that kind of turn and focus, like you just said it'd take, you know, 4 or 5 years to get something out of the ground there.

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Okay. Big topic of conversation around that. And it seems like, look, I'm no finance expert. No one is going to come to me for investment advice and financing and capital stack. But I am afforded this kind of front seat to these types of conversations. And it seems like, yes, these new developments, they're not penciling out because largely it seems to be the interest rate, right. This interest rate that, you know, it's been kicked around for a number of years is when is it going to go down? Is there going to be a cut in the rates? How are investors going to overcome this? What in the capital markets, what's going to need to shift? Is it solely the interest rates that are going to need to shift so that people actually start these new developments? What are some of the key metrics around this that you're seeing?

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17:07

Arick Morton

Yeah, I think it's probably I mean, if you kind of sat down and looked at a proforma for a new development, I mean, your key drivers are going to be obviously occupancy rate, construction cost and, you know, kind of labor cost, right? I mean, those are probably the kind of, and then interest rate, of course. And so, you know, occupancy, I think we're entering a cycle where those, those fills and those occupancy rates are likely to kind of go very high. We have a graph in there where if you kind of just project current performance forward, I mean, the industry is looking at 95, 97, 99% interest or excuse me, occupancy rates probably won't play out exactly like that.

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But I mean, if you just kind of do the simple math of population growth minus supply growth and what does that mean? So I think occupancies in new developments are entering a world where you can start to push that up. And on the right side, obviously if we enter a world of kind of constrained supply and basically a demand overhang, you would expect to see, you know, rates outpace kind of cost. That would be, you know, that's typical kind of the econ 101. So I think there's probably some rate appreciation that can help bring more new supply into the market. 

You know, and it's really that ratio of kind of rent over, over labor. And so I think there's a decent case that in the short and medium term, you know, rents maybe should outpace, outpaced wages. As you know, you kind of have this supply and demand imbalance. And then obviously, you know, there's construction costs and, and interest rates.

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You know, I think construction cost, kind of growth, has certainly another piece of the puzzle. I think that there's obviously creativity in the development community on how do you try to economize and still develop a quality product that could be done. Value engineering obviously is one piece of it. You know, as you're seeing some of the air kind of being let out of the economy and inflation, some downward pressure on inflation, goods input inflation, all that kind of good stuff, you know, hopefully that will help moderate construction costs. I do believe we're seeing some of that is what the data says.

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And then obviously lastly it's kind of both capital availability and the cost of capital. are kind of the two pieces, right? I mean, you know, your cost of capital is not only a function of the interest rate on your debt, but if you only get 50% leverage and you're having to use 20% equity for 50% of it, then you're blended. It's really about blended average cost of capital there. And so, you know, I think as we see a more accommodative rate policy and hopefully, you know, kind of banks starting to lend a bit more I think hopefully we'll see better terms. So basically higher leverage effectively which, you know, higher which will bring down the weighted average cost of capital. And then obviously, you know, a lower rate will also, you know, kind of bring down the average cost of capital. 

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So I think those are the moving pieces. I think they're all kind of starting to trend in the right direction. I think regardless of whatever they look like. The reality is that if we, you know, if we kind of muddle along for the next 2 or 3 years and people still aren't starting projects, what's going to happen is there is going to be, you know, so many 97 or 98% built, you know, so much product that's at 96, 95, 90, whatever percentage occupancy that that's going to make projects pencil. I mean, that's just how the economy works, right? If there's not enough, if demand outstrip supply, price goes up and then eventually that will make a lot more projects pencil. So that's what we're looking at here. You know, I think regardless of what the Fed does, but obviously if we start to see some rate cuts and we start to see the banks lend a little bit more, I think that probably kind of starts to pop the top a little bit.

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20:45

Lucas McCurdy

That makes a lot of sense. Both having high rates and also high labor costs, obviously, these are the challenges and these barriers and, frankly I'm personally surprised that labor is still so expensive. There's, I think that the dam is going to break on that at a certain point. But I look at construction costs on a daily, weekly basis, and I'm still surprised, of the numbers that we're seeing out in the construction force and in the labor force. So, these are definitely some challenges. and kind of how you ended there was kind of looking at some opportunities. So let's talk about opportunities now.

What opportunities, you know, in current supply and demand, those imbalances they present to developers, investors. I think you started to kind of outline that. I'd love to get some more of your thoughts.

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21:37

Arick Morton

You know, one thing that we talk about in the outlook that I think is very interesting, we took kind of we looked at  the net worth, an income of 75 plus households, from, you know, it's all normalized for 2022. And you basically look at that as a ratio. You kind of look at that historically, both income and net worth against the cost of senior housing. And kind of say like where is the median, senior housing, you know, kind of prospective consumer. And so, you know, what that data tells you is that the relationship between the median, not the average, the median. So this is the 50th percentile household, 75 plus household in the United States of AmAricka. The ratio of their income in net worth to senior housing has never been more favorable. They have never. The boomers are the richest generation in history by a long shot. Obviously that is somewhat top weighted, but even the median, you know, and so basically median income in net worth has grown over the last ten years by about 35% in real terms, in real terms, not in nominal dollars, in real terms. Meanwhile, the cost of senior housing has increased by about 7% in real terms.

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So, you know, you have a median, kind of prospective consumer who is significantly more able to afford the product than they were a decade ago. And so I think I kind of start there. I think that's important. And so I think really, if I, you know, five is kind of putting dollars to work, obviously on the development front, there are markets where deals pencil you just gotta you just gotta go find them. Right. And so, you know, it's what it's getting into the right, right tier in the right space. Because there are markets in the, you know, in this country that have, you know, 35%, 80 plus growth and, you know, income qualified, 80 plus growth and no active projects in the pipeline. Right? There's is opportunity there, both from a new product perspective.

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But then, you know, I think obviously from an acquisition perspective, you know, there's class A stuff trades, because, you know, the agencies are still lending. And, you know, if you pick stuff in the right markets where there's not a lot of new supply coming in, and there is still that, you know, very strong population growth, then, you know, you're probably going to be able to see, you know, maybe not as much on the occupancy side, but you probably are going to see rate appreciation, that you know, can be very accretive to the bottom line.

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Obviously, outside of that, I think what you identified is spot on, which is there's a lot of product that's old. There's a lot of senior housing properties that are old, that are incredibly well positioned with respect to the market that they can serve or do serve. And, you know, I think finding, hey, this building has, you know, with a $2 million investment, or, you know, some UTO's and common space refresh and repositioning or conversion memory, you know, whatever the right playbook is, you know, this old building that might, you know, look like an eight and a half cap or nine cap building right now can be repositioned into, kind of, you know, from an old longboard into a very, you know, fast, kind of big wave board that, you know, right, as a wave starts to break.

So I think there's some really creative kind of market analysis that can be done, where you can pick some great spots, put some, you know, a little bit of money into the buildings and kind of reposition that and really capture this 5 or 10 year period where supply just won't be able to keep up with demand. I mean, those are the kind of striking opportunities to me.

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25:22

Lucas McCurdy

And a lot of these buildings are in great locations, locations that you just can't even get today. And, so those are, you know, kind of double opportunity there.

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25:31

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26:00

Lucas McCurdy

This kind of makes my mind wonder about the tertiary markets and how this may affect it. There seems to be over the past number of years, this kind of push out of major cities for young families. And as we know, these kind of adult daughters, adult sons, the grandparents, these aging, you know, adults are wanting to live near their family members. And I'm wondering how that would affect the tertiary markets. And when you compound all of these challenges, in this kind of push out to the the homesteaders, you know, they're kind of moving out of these major, you know, the Chicago's the Dallas’s, you know, these kind of big, big cities kind of going out into some, some of the suburbs and some tertiary markets.

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How do you think that that's going to affect, do you think that there's maybe a new or an opportunity there for a focus on some of these maybe kind of forgotten senior living communities that are out in these kind of tertiary marketplaces. Do you think there's an opportunity there?

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26:59

Arick Morton

Absolutely, I think what you define as tertiary markets, you know, it varies. So, you know, I'm based in Raleigh, North Carolina. So, you know, I kind of use a local example, right? I mean, you know, if you went out to like Clayton or Fuquay Varina, which are kind of second ring or third ring cities around, you know, the metropolitan area, you know, what people call that, a tertiary market or not?

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 So, I think there's a little bit of that which is, what do you call in a tertiary market if it's something that's closely attached to a large and booming metropolitan area where families who might have previously tried to live close in, in a smaller house, close in because they had to commute now can have a little more freedom to go out into a more bedroom community that's further out. I think that I'd kind of put that in one bucket. Obviously if you're looking at something that's like kind of truly, a rural tertiary community and rural Kansas or something like that, you know, I kind of put that maybe in a little bit of a different bucket. But I think, I think at the end of the day, you know, the kind of considerations are the same. So one thing that I think is, it's an underappreciated challenge for the United States of America, and it's not just our challenge. It's really the whole health care economy's challenge is that you have a lot of seniors who are still in that second bucket right in, you know, they call it a rural Kansas, type of town.

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But you might not have a lot of younger people who would be the staff.. And so I think one of the first things you got to do is when you do your demographic analysis, you want to look at not only your seniors, you also your adult children, but you also want to look at that workforce and what does that look like and how is that going to change over time.

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So I think that's one of the first things you got to look at is just like, is the staff available to staff many of these buildings because a lot of these buildings in those types of markets at the end of the day, they can't get the staff and they certainly the rate power or ability to pay and isn't there, and the staff is not there so they're going to have to pay a premium and they're competing with the hospital and skilled. I mean, they're competing with a lot of people for that very dwindling or finite pool of labor. So I think a lot of those folks are, you know, are facing kind of an existential, you know, erosion of kind of margin that will challenge their ability to kind of remain a going concern.

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So I think you got to really look at that as kind of an all right, well, is labor going to be here? But then I think to your larger point, I think there are a lot of these kind of, you know, second tier bedroom communities where you're seeing a lot of that. And so I think what you really do want to look at is that kind of adult child side and say, all right, like, where are we seeing, where are there buildings that where, you know, 5 or 10 years ago this was kind of, you know, not, not somewhere you might have wanted to be. 

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But post-Covid, now we're seeing that migration come in and it's the right type of migration. I mean, that's all we actually have a lot of that type of data and look at the psychographics and the income levels and, and all those sorts of things. And so I do think there, you know, you kind of got to really go in and then pick apart each market. But there are certainly are a number of opportunities like that you know, kind of really across the country.

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30:21

Lucas McCurdy

You know, you mentioned margin. Let's make this our final kind of topic to go over. You know, and I've heard this throughout my career, these kinds of phrases, mission and margin. And then coming, kind of through Covid and after Covid, like clearly there was a huge cost associated with that that is very difficult to pass on. And I'd love to get your thoughts, on the data surrounding, margin as it stands now. And what is the opportunity in the future?

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30:52

Arick Morton

When you talk to people in the industry, right, I think there's obviously kind of where you, where you sit is where you stand. And so,folks who bought a bunch of buildings in 2018 or 2019, with cap rates, interest rate, environment, you know, cost structure, etc., etc., they're going to have one perspective on kind of what the world looks like.

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Folks who, if you came in today, right, with a blank, just a blank slate and looked at it and said, well, margins are what margins are. What are they doing going forward? Because that's my investment time horizon. You’re gonna probably have a very different perspective. And so we looked at, you know, margins at agency finance buildings. And we also looked at margins in the publicly traded portfolios. And you know, what you find is that the margins are increasing. They are growing and, you know, they're growing healthily. When you kind of project that forward in some of the folks who make projections on those sorts of things are expecting senior housing to be, frankly, one of the best performing asset classes, in the, in the, in the near term. And so, I think that's to me, that's kind of the backdrop of margin. I think if you said, well, where are we at? So something to think about is, you know, senior housing is really at call it at 70, 80% occupancy. You know where the industry we're past that. I mean, it's pretty much a fixed cost business right. You're getting food costs. You got some little cost here and there for those if you have 100 unit building, if you have 80 residents in the building, adding ten more residents, yeah, you'll have a slightly increasing cost, but it's going to be pretty small, certainly relative to the amount of revenue you're getting, you know, 70, 80% plus kind of gross margins on those, those incremental residents.

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And so, you know, when you think about what's happened to margins, you've had kind of margin erosion with respect to labor and goods inflation kind of outpaced rent growth for a period of time in a relatively significant way. Now, historically, we had done pretty well at kind of keeping that constant or that imbalance. And we've done pretty well since the inflation crisis has kind of come down and the labor crisis has come down. So we did have this period of kind of cost structure inversion that, our cost structure growth inversion that we're going to have to work our way back out of. But on top of that, you know, we saw occupancy declined significantly.

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And so obviously, if you take those marginal residents off that, you're getting them that pure margin that's going to have a very significant impact on margins. And so, when people talk about margins, there is that relationship of rate to cost, that's important, and we may have taken a step back there. But the other side of that coin is that, well, if the industry was over supplying itself, overbuilding for a decade, and we had kind of driven our steady state occupancy down to 87 or 87.5, which is about where we were in the late, late teens or late tens,but now because of this demographic surge, we're going to see that go to 92 or 93. Well, that extra 5% occupancy, I haven't done all the exact math, but is probably likely to drive a steady state margin that is higher than it would have been if we were back at 87%, 87.5%. But we didn't have that inverted supply to, kind of cost and rank growth kind of, growth rates.

So, I think on margins personally, I think that occupancy growth is obviously a very good way to grow margin. And so I think that the kind of coming projected occupancy boom is likely to do a lot to repair those margins. And then when you have really high occupancy and not enough, a lot of demand and not enough supply, obviously, that's the natural thing of the way the market works is that it will push prices above cost. And so, I think you're likely to probably see some of that margin capture to a point where if you sat down and said, hey, the industry's at 95% occupancy, steady state, and it's been able to drive some rate because it is, you you might end up in an average, a better average margin environment than you were before Covid.

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So I think it's an interesting and complex picture. We're going to do some more analysis on that. I mean, you got to make a lot of big kind of assumptions, but I do think it's interesting to kind of look at those side by side and say, well, how much of our margin loss is, everybody kind of says, oh, we lost all this margin. That's because, you know, labor costs just spiraled on us. Well, maybe it's also because you lost a bunch of occupancy. So you let's kind of put those side by side and see how much is attributable to, to kind of each part of that. And then look at the question going forward and see, all right, well, what does the future hold in those regards?

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35:43

Lucas McCurdy

You know, I'm in general, I'm wired to be an optimistic guy, but I think even the biggest pessimist sitting listening to this episode, you've got to see the opportunity that is really at the doorstep. I mean, it's here, in senior living, I hear a very optimistic, present and future for the industry. And I love how you have laid this out very thoughtful. And also, I think, a very measured and very fair approach to this conversation on, kind of some complicated topics, surrounding the data and the industry really appreciate, a very fun conversation and for your time today, any final thoughts?

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36:28

Arick Morton

No. You know, I would encourage everybody to get a hold of it, to get a hold of that market outlook. Read through it, if you got questions, comments, you disagree with something, shoot us a note. If there's additional areas of research that you think are interesting, we're happy to kind of take those under consideration and try to pursue them a little bit. But, you know, I think it is we are at the start, you could quibble with whether or not these historic absorption numbers we're seeing are the first laps of this wave or whatever. But regardless, in two years or three years, you know, it's not really a debate anymore.

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So we are sitting on the cusp of a generational kind of opportunity. But I also the thing I leave you with is I think it's not only a generational opportunity. Great. We can, as an industry, do well, but it's also a kind of a generational responsibility. So, at the end of the day, what we do is we build care services for people and vulnerable folks and people's loved ones at the end of their life. And that's really a sacred responsibility for obviously, anybody who's been involved with it or had a loved one, in senior housing, you know, what the difference between kind of how stressful that process is, how hard that process is, how fraught that process is. And what the difference between a bad experience and a great experience and an okay experience are? 

And that is a sacred trust that we get and we get the opportunity to kind of do well while doing good, which is one of my favorite things about this industry. And so, when you step back and look at this, not just from as an investor or as an industry stakeholder and say, wow, look at all that demand. But when you kind of step back and look at it from a societal perspective, you say, wow, imagine a world where there's all kinds of markets where people can't get their loved one in for memory care when they need it, or assisted living when they need it. And imagine the stress and the challenges and frankly, the regulatory scrutiny that's going to bring, and so, I think as an industry, I kind of see this as a bit of a clarion call that, we do need to kind of really start to kind of wrestle with the fact that we're going to need to put in more product in the hands of consumers, and we're going to need to do it quickly. And if we don't, it's going to be not only a problem for us kind of, probably the regulatory scrutiny that will build, or bring, but it's also going to, you know, kind of be I think, a letting down, of society, because they're going to look to us to provide the health care services and the care services and the social environment and kind of all of that that their loved ones need as we see this time of kind of unprecedented growth.

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39:20

Lucas McCurdy

A remarkable rally cry from one of the smartest people in the industry on this topic. Arick, I really enjoyed this conversation, and I know that our listeners out there, they're going to want to know more, and they're going to want to dive into the tools that NIC MAP Vision offers. And so go to those show notes. NIC MAP Vision is an incredible supporter and putting out this content freely to our industry so that you can benefit from it. Thank you so much for your time today, Arick. Really appreciate it.

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39:49

Arick Morton

Thank you Lucas. It's a pleasure as always and anytime. Thank you so much.

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39:53

Lucas McCurdy

And go to BTGvoice.com, access this content and so much more. Hit us up on LinkedIn, we'd love for you to be a part of this conversation, especially those executive directors and the people on the front lines that are actually, in the field, in these communities. And seeing this happen in real time. We'd love to get your perspective on this. And thanks for listening to another great episode of Bridge the Gap.

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40:15

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 BTG voice.com.

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