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Seniors housing remains a darling among real estate investors and capital providers for its continued stability and favorable long-term outlook. Despite some market tightening due to rising operating costs and interest rates, demographic trends continue to impress. Demand continues to grow as millions of Baby Boomers are poised to need housing and care options, and investors are ready to reap the returns.
The promising future for the sector, which includes independent living, assisted living, skilled nursing and memory care facilities, was the topic of the 2018 Senior Housing & Care Conference hosted by the Colorado Real Estate Journal. I joined colleagues who specialize in healthcare investment and operations to discuss what we’re seeing in the sector.
Niche, No More: What’s Drawing New Investors
Seniors housing and care has matured from a niche sector populated by small specialty owners to a sophisticated real estate class of its own, attracting private equity and other capital sources. During the last economic downturn, while the sector did experience some softening, seniors housing outperformed other classes of real estate. The sector’s strong investment performance and low volatility has garnered interest from an increasing number of foreign investors as well.
In the first quarter of 2018, according to data from the National Investment Center (NIC) for Seniors Housing & Care, seniors housing and care transactions figures show a total of $2.6 billion closed deals in the first quarter of 2018, and private buyers accounted for $1.3 billion, or half, of those transactions. This was the 19th consecutive quarter of more than $1 billion in closed transaction volume by private buyers.
At the same time, capital is widely available; robust competition among debt providers gives borrowers many options. Lenders are providing a range of financing from short-term bridge loans to permanent financing to get deals done. Debt sources include Fannie Mae, Freddie Mac, the Federal Housing Authority (FHA), U.S. Department of Housing and Urban Development (HUD), Corporate Mortgage Backed Securities (CMBS) and life and pension funds. For the federal agencies, seniors housing and healthcare is a highly favored asset class, with a strong loan performance history.
In addition to the growing number of players, seniors housing deals are also becoming more sophisticated and multifaceted. KeyBank recently worked with a client that was acquiring a portfolio of 10 assets, helping them navigate the assumption of some of the in place debt, bridging pre-stabilized properties that were not ready for permanent debt financing, and securing permanent financing on stabilized assets. The deal was financed using a combination of balance sheet, agency, and life company capital.
Keeping an Eye on Headwinds
While the news for seniors housing investors is generally strong, some industry trends are tempering the pace a bit and impacting some deal valuations.
On the finance side, rising interest rates and the flattening yield curve are impacting investment decisions. Additionally, new construction is facing increased constructions costs and overbuilding concerns in certain markets, causing construction lending terms to tighten.
Operationally, there are concerns about rising operating costs, in particular labor cost and ability to find and retain the appropriate staff.
Making a Long-term Commitment
As long as lenders remain disciplined, we don’t foresee a large retraction or contraction in the seniors housing market. In fact, favorable demographics and the increased sophistication of the sector mean plenty of opportunity exists for investors and capital providers.
Investors who are looking for a lender to work with should consider working with one that has been committed to the sector over the long-term. A future downturn may cause newer entrants to pull out, while those with and long history and experience in the sector can weather a softening as the market readjusts.
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