New builds are becoming increasingly rare in the skilled nursing space, and with material costs rising and inflation only going up it’s easy to see why.
Prices for mid-level skilled nursing projects rose to between $260 and $306 per square foot during the spring of 2022 – up from between $252 and $295 per square foot during the previous quarter, according to construction firm Weitz Company’s latest senior living construction costs report.
Common areas have become the most expensive to build, followed by skilled nursing and then assisted living and independent living Chris Harrison, a Weitz Company executive director, said during a webinar on senior living and care construction trends hosted by Ziegler last week.
It remains a difficult time to build, not just for SNFs, but across the health care sector.
Moving forward, Weitz analysts project an average inflation rate increase of 1% to 1.5% per month for the rest of the year.
While significant activity continues with independent living expansions as well as common area upgrades, skilled nursing builds have tapered off significantly to where they were a few years ago, according to Larry Graeve, senior vice president of The Weitz Company.
“Like everything else, [skilled nursing construction costs] have gone up and the price for labor has reached a 40-year high at a rate of 6% annually, compared to the normal 3% increase,” Graeve told Skilled Nursing News. “Materials have been all over the place, some things come up and they come down, but it’s still elevated to what it was prior to the pandemic.”
Graeve has also seen operators reduce new capital investment in skilled nursing over the past couple of years, especially given how the sector’s census has been affected by the pandemic.
Commodity and supply chain challenges continue as well, amplified further by the war in Ukraine, as continued interest rate hikes are expected to take some time to even the market out as pent up backlog works its way through the pipeline, according to Weitz’s cost report.
Even though the price of wood is half of what it was last June, it’s still 60% of where it was prior to the pandemic after going up several hundred percentage points over the course of the pandemic, Graeve added.
Graeve said that inflation rates have made it hard for “anybody” that’s trying to develop or build anything.
“We see a lot of assisted living and memory care, but not as much skilled nursing, although we have done some replacement skilled nursing, but it’s slowed from what it had been in the past,” Graeve said.
Most of the projects he’s seen in skilled nursing have been repositionings and operators “scaling back” the number of beds.
“It’s critically important that we come up with good strategies to be able to continue to grow and respond to the demographics that we have,” Graeve said.
Graeve suggested that any SNF operator looking to build new at the moment needs to prioritize their market study.
“Make sure you’re building what people want to move into,” he said. “Look at what your competition has and what services they provide. When we do see skilled nursing it’s generally that small house concept.”
Melton also suggested that for those that are building new, using multiple contractors is one way to keep labor costs down, using Enso Village, a Ziegler project in California, as an example why.
“We actually bought two subcontractors on that for the drywall, one of them does drywall on the wood frame, and the other does it on metal studs,” he added.
The advantage there is that breaking up the labor brings two different pools to the job, and at a time when finding construction workers is a challenge, it can help overcome a significant hurdle.
“If one starts to fail or slow down, or does not have the capacity, the other may be able to help supplement labor,” Harrison added during the webinar. “It’s a pretty good strategy for making sure you get labor on your project.”