Healthy Seniors Housing
Investor demand revitalizes this niche sector.
housing demand will continue to be fueled by several factors, including the
attractive spread between borrowing rates and capitalization rates, the
resurgence of the housing market, and the improvement in the stock market. The
continued demand growth is also fueled by seniors who are educated about
seniors housing and have the financial capacity to take advantage of the myriad
service options. With an increase in funds from institutional buyers and
non-traded real estate investment trusts, competitive bidding for
state-of-the-art stabilized seniors housing assets has increased.
sharp increase in home prices in 2013 fueled by historically low interest rates
boosted confidence among sellers and significantly reduced the number of
homeowners under water on their mortgages. According to housing tracker Zillow,
the percentage of homeowners that are upside down has plunged by 600 basis
points year over year to 25.4 percent. The percentage change represents more
than 2 million homeowners who have been freed from negative equity, providing
the impetus for many seniors to sell and relocate into independent living
fact, occupancy in both independent living and continuing care retirement
communities is anticipated to rise this year, spurring rent growth in both
product types. Assisted living facilities will also record an increase in
demand, though a wave of construction in some areas will cause the national
occupancy level to retreat modestly. The Southeast and Texas, in particular,
could see softening conditions due to the prevalence of newly constructed
assisted living facilities, including many with dementia care units.
housing investors will find a greater number of listings in the coming months,
which should help lift transaction velocity. Between the end of the second
quarter 2012 and the beginning of third quarter 2013, strong gains in rent and
occupancy generated healthier profit-and-loss statements. As a result, owners
interested in divesting can prove a stronger operating history and list their
properties at higher prices — and plenty of buyers await well-priced assets.
demand for assisted living properties, which makes up nearly half of the
seniors housing market, is currently greater than number of available listings.
For assisted living properties combined with a dementia care unit, cap rates
dip into the low 8.0 percent range, partially due to demographic trends.
Currently, 40 percent of the population over the age of 85 has Alzheimer’s or
related diseases, and that age cohort is anticipated to expand by 4 percent by
2017. At projected growth rates, 90,000 more seniors will be living with
dementia in 2017, necessitating the need for additional facilities.
in the assisted living sector is robust, particularly for facilities with a
dementia care unit. NIC MAP shows a 2.3 percent rise in inventory over the past
year as 6,800 units came online. Furthermore, 14,700 units are under
construction, which will put pressure on occupancy. By the second half of 2013,
occupancy at properties with mostly assisted living facilities units had inched
up 20 bps to 90 percent. Compared with the same time in 2012, however,
occupancy had trended lower by 30 bps as new construction outpaced rising
demand. In the first half of 2013, demand rose a healthy 0.7 percent.
completion of state-of-the-art facilities and strong demand for units enabled
operators to lift asking rents 2.3 percent year over year to $4,066 per month
in mid-2013. Rent growth accelerated in the first six months of 2013 by 1.6
percent. Aided by favorable lending rates, buyers increased their presence in
the assisted living investment market by 72 percent during the 12-month period
ending in the second quarter. The median sales price soared 20 percent to
$163,000 per unit while cap rates compressed into the low 8 percent range.
development affected occupancy modestly last year, resulting in an annual
decrease of 60 bps to 89.7 percent. Despite the decline in occupancy, operators
were expected to lift asking rents 2.8 percent in 2013 to $4,180 per month.
growth in the independent living sector reached 3,900 units during the 12-month
period ending in the second quarter, representing 0.8 percent rise in stock,
according to NIC MAP. An additional 78 properties containing 8,500 units were
under construction in the nation’s 100 largest metros. Anticipating
strengthening demand, developers increased the average size of each property
from 82 units to 108 units. New construction has closely matched rising demand
over the past year. In mid-2013, occupancy was 89.8 percent, up 20 bps from a
year ago, but down 10 bps over the first half of this year. Year over year,
demand for independent living units increased 1 percent.
stable occupancy and rising demand facilitated a 1.3 percent rise in asking
rents over the past year to $2,768 per month. In the second quarter of 2013,
average asking rents remained stable.
buyer demand pushed up transaction velocity by 33 percent during the same
period. The sharp increase in bidding resulted in a 15 percent rise in the
median sales price to $139,200 per unit. Average cap rates were in the low 8
percent range during that time.
improving national housing market will continue to enable seniors to sell their
homes and transition into independent living facilities this year, helping
drive up the occupancy rate to 90.2 percent, an annual improvement of 30 bps.
Asking rents will climb 2.5 percent to $2,810 per month.
in the skilled nursing sector dipped 0.3 percent between mid-2012 and mid-2013,
according to NIC MAP. At midyear, only 81 properties were under construction,
down 24 percent from one year ago. A total of 7,800 beds are included in those facilities,
which is 10 percent lower than the same period in 2012. Occupancy fell to a new
cyclical low in the second quarter as demand for beds was siphoned away by
assisted living facilities and hospice care. Year over year, occupancy dipped
50 bps to 87.8 percent, including a 40 bps decline in the first half of 2013.
$273 per occupied bed per day, average daily rates rose 2.6 percent year over
year. The rising cost of care and newer facilities that offer therapy and other
billable treatments to Medicare pushed up prices. Recent cuts to Medicaid,
however, will encourage operators to focus on private pay and Medicare to
realize future gains.
skilled nursing portfolios changed hands in 2012, which drove a 56 percent
increase in deal flow. Buyers paid a median sales price of $63,300 per bed
during the period, up 27 percent from the previous year. Average cap rates were
in the high 11 percent range.
more noncompetitive facilities closed their doors in 2013, demand is
anticipated to retreat further, resulting in a decline in occupancy. By
year-end 2013, occupancy will dip to 87.5 percent, an annual fall of 80 bps.
Continuing Care Retirement Communities
June 2012 and June 2013, continuing care retirement community inventory
expanded by 0.9 percent, according to NIC MAP. In the second quarter of this
year, more than 2,000 units were underway in the larger 31 markets, including
more than 400 units in Minneapolis. Chicago, Detroit, and San Jose, Calif.,
each had more than 200 units under construction. Also in the second quarter,
occupancy at CCRCs was 89.2 percent, down 30 bps from one year ago and 10 bps
from 2013’s opening period. Average rents at midyear were $2,908 per month,
while the average entrance fee was $279,000, down modestly from year-end 2012.
flow inched up in 2012, though transactions in the sector remained limited due
to a dearth of listings. Investors paid a median sales price of $73,900 per
unit while average cap rates were north of 10 percent. The average deal size
ticked up modestly to 450 units. The housing market’s recovery will continue to
support demand for CCRCs. By year-end 2013, occupancy will be 89.8 percent, an
annual climb of 30 bps. Average rents will also climb modestly as demand
supports higher rates.
Mark L. Myers is a
senior vice president-investments in Marcus & Millichap’s Chicago O’Hare
office. Contact him at Mark.Myers@marcus millichap.com. Michael Pardoll is a
senior vice president-investments in Marcus & Millichap’s Charlotte, N.C.,
office. Contact him at Michael.Pardoll@marcusmillichap.com.
The Capital Markets
Discover Seniors Housing
by Jeffrey A.
of cash-starved inactivity, new development is sparking once again in the
seniors housing/healthcare segment of the commercial real estate market.
Commercial banks, the traditional source for new construction financing in this
segment, remain somewhat leery. However, developers, seniors housing investors,
and providers are finding ways to embark on new development ventures. Investors
supporting the foray into seniors housing are basing their decisions on the
lack of new product and the aging of existing seniors housing stock.
real estate developers have also discovered seniors housing. In part, their
enthusiasm is explained by the lack of opportunities in other commercial real
estate areas, especially the office and retail segments. But these developers
also appear to have fallen in love with the demand demographics for the seniors
housing segment — whether wisely or not remains to be seen.
important to note that the seniors housing market is strongly bifurcated
between skilled nursing facilities on one hand and assisted living, independent
living, and memory care properties on the other. Many investors are not comfortable
with the continuing threats of Medicaid and Medicare funding cuts and have
distanced themselves from skilled nursing homes for this reason.
assisted living, independent living, and memory care facilities are being
viewed more like other commercial real estate types, a viewpoint that has
significantly changed the outlook for seniors housing investment over the past
24 months. The current landscape is much more competitive, with large and small
investment groups and private equity firms getting in on the action.
private real estate investment trusts funded by individual investors looking
for a 5 percent to 7 percent yield have shunned skilled nursing facilities.
That’s still true, but REITs today are actively bidding on cash-flowing
assisted living and memory care projects. Public REITs
have modified their ability to own the real estate and operations side using a
new RIDEA structure to facilitate joint venture participation in a project. But
here again, the emphasis has primarily been on assisted living, independent
living, and memory care properties.
seeking a mortgage loan, there are two primary funding options: conventional
and government agency financing. Conventional financing for seniors housing typically revolves around commercial banks of all
sizes and different types of credit companies and/or private lenders. HUD,
Fannie Mae, and Freddie Mac are under the agency format.
brief overview for the various funding sources.
Commercial Banks: This group rages from small neighborhood banks with
$50 million to $100 million capitalizations to major money center banks, like
Wells Fargo, J.P. Morgan Chase, and Citibank. They typically provide five-year
term loans, either fixed or variable, and 25-year amortizations. The majority
of commercial banks focus on personal recourse loans but the larger banks can
discuss nonrecourse loans. Historically, these institutions have been a primary
source for construction financing.
Credit Companies. Also active in seniors housing, credit companies
provide loans from $5 million and up with floating interest rates. These
lenders have been excellent advocates of seniors housing financing for some
time. Examples of credit companies active in this space include GE Capital and
Companies. Either insurance
companies have yet to discover seniors housing or they do not understand how to
fit these properties within their lending criteria.
Mortgage-Backed Securities. CMBSwere
once a major source of funding for nursing homes and assisted living facilities
but have not been actively involved in the seniors housing market since their
exit from the scene at the turn of the current century.
HUD.The Department of Housing and Urban Developmentfunds all types of
licensed facilities, including skilled nursing, assisted living, and memory
care properties. The agency has remained on a roll since efforts to modify and
centralize origination and underwriting activities were initiated in 2008. The
agency’s lending volume has increased from approximately $800 million a year in
2007 to about $5.8 billion in the most recently completed 2013 fiscal year.
Mac. Both conservatorships of
the federal government, Fannie Mae and Freddie Mac have a similar approach to
seniors housing. Neither fund skilled nursing as a dedicated product but are
able to relate their seniors housing lending to independent living, assisted
living, and memory care products. Both have significantly reduced their activities,
from combined volume highs of around $12 billion in 2006 and 2007 to about $1.5
billion for each agency today.
Jeffrey A. Davis is president and CEO
of Cambridge Realty Capital Companies. Contact him at www.cambridgecap.com.