Niche properties

Healthy Seniors Housing

Investor demand revitalizes this niche sector.

Seniors 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.

A 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 facilities.

In 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.

Seniors 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.

Assisted Living

Investor 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.

Development 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.

The 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.

New 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.

Independent Living

Inventory 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.

Relatively 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.

Strong 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.

The 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.

Skilled Nursing

Inventory 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.

At $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.

Several 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.

Although 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

Between 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.

Deal 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 Michael Pardoll is a senior vice president-investments in Marcus & Millichap’s Charlotte, N.C., office. Contact him at

The Capital Markets Discover Seniors Housing

by Jeffrey A. Davis

After years 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.

Curiously, 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.

It’s 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.

In contrast, 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.

Historically, 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.

For borrowers 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.

Here’s a 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 MidCap Financial.

Insurance Companies. Either insurance companies have yet to discover seniors housing or they do not understand how to fit these properties within their lending criteria.

Commercial 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.

Fannie Mae/Freddie 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


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