Commercial real estate analysts report that institutional investors continue to flock to the seniors housing market as many expect the fundamentals to keep improving over the near and long term. There’s also an expectation that more developments will begin, which will open up even more opportunities for future investment. The survey, conducted by National Real Estate Investor and Senior Housing Global Advisors Inc., show that a majority of industry players believe activity will increase in investment sales, construction and financing. The only thing some say may stop growth is a spike in interest rates, but that is not expected and the U.S. senior population will continue to grow. For more on this continue reading the following article from National Real Estate Investor.
The seniors housing sector continues to carve out a bigger niche for itself within the commercial real estate investment world.
Exclusive results from a fourth-quarter survey conducted by NREI and Senior Housing Global Advisors Inc. show that industry players expect a continuation of the trend of improvements in fundamentals in the sector. They also expect developers to add more projects to the pipeline in 2014. (This marks the fifth time the survey has been conducted—once in 2011 and in the first and fourth quarters in 2012 and 2013.)
A majority of respondents anticipate an uptick in activity in the next six months in three areas—investment sales, construction and financing. Overall, 65 percent of respondents expect acquisitions to increase over the next six months, while an equal amount believe available financing for seniors housing will increase within the next six months.
There is a lot of demand and a lot of capital in the market interested in buying seniors housing facilities, including both high-quality assets and value-add opportunities, notes Mel Gamzon, president of Miami-based Senior Housing Global Advisors. One of the stumbling blocks on the investment sales side is meeting that buyer demand. “The supply of acquisitions remains tight, and the pricing for those high-quality assets is still aggressive and will continue to be aggressive into 2014,” says Gamzon.
Respondents are even more bullish on their outlook for new construction. Similar to results from the first quarter survey, 79 percent predict that new construction will increase in the next six months. That is notable considering the resurgence of construction that has already occurred in the past three years. Construction as a share of existing inventory for seniors housing was at 3.0 percent during the third quarter, which is 180 basis points greater than an annual growth rate that has been hovering at about 1.2 percent since the fourth quarter of 2011, according to data from the National Investment Center for the Seniors Housing & Care Industry (NIC) in Annapolis, Md.
Two-thirds of respondents (67 percent) said they have new construction ventures planned in the next six months with the largest share of respondents (44 percent) planning construction in independent/assisted living and 32 percent planning new memory care facilities.
“If interest rates spike up more than 200 basis points, I think you could see a slowdown in activity. But other than that, there are more tailwinds for growth and not a lot of headwinds,” says Jeffrey D. Kraus, managing director at Denver-based Spectrum Retirement Communities LLC. The owner/operator, manager and developer of seniors housing properties currently has about 3,200 units in its portfolio. The company has accelerated its development activity this year. Spectrum has $150 million in new properties under construction across seven properties that include 739 units, and the firm has another 1,000 units in earlier development stages.
As the cost to develop new seniors facilities increases, nearly two-thirds of respondents (67 percent) believe that the acquisition, renovation and repositioning of older projects will become an increasingly popular strategy for investors and operators over the next six months. “The value-add for acquiring assets at below replacement cost and making physical and functional changes to these facilities represents one of the best investments in this sector, and will continue to be so,” adds Gamzon.
Access to capital improves
Although lenders remain conservative, the financing available for development is on the rise. “Both large and mid-sized regional banks are starting to dip their toes back into development deals, but they are doing it with existing clients and with constrained structure and low leverage,” says Kathryn Burton Gray, a senior managing director at Dallas-based Red Capital Group LLC. Red Capital has provided more than $52 billion of integrated debt and equity capital since 1990 to the multifamily, student and seniors housing, and health care industries through three operating
companies. “Lenders are structuring these development transactions to ensure that they box their construction risks and to encourage an alignment of interest from the borrowers,” she adds. Red Capital is putting as much as 30 percent to 35 percent equity into a deal to obtain that financing.
An experienced management team and track record are most important in obtaining financing, according to survey respondents. Overall, 90 percent said that having an “experienced management team” was important or extremely important to obtaining construction financing. Other factors that scored high—either a four or five on a five-point scale—included having an “established track record as a developer,” (83.9 percent) providing “a comprehensive feasibility study,” (78.6 percent), contributing a “higher equity contribution” (64.9 percent) and having a “prior relationship with the lender” (64.1 percent).
It is always advantageous to have a relationship with a lender, particularly when borrowing conditions become more restrictive, notes Burton Gray. “Currently the lending capacity is frothy for acquisition and refinance dollars, but less available for development transactions,” she says. “Therefore, if you have a current lending relationship with a financial institution, it gives you access to at least get your development project reviewed if such lenders provide construction financing.”
One of the notable findings in the fourth-quarter survey is that respondents are split on their expectations for the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac to be major financing sources over the next two to five years. Nearly one-third (32 percent) said that GSEs would be major financing sources to the industry, while 36 percent said no and 32 percent were unsure or had no answer. The GSEs have traditionally played a key role in seniors finance and the broader multifamily housing market. “The collective concern of the future viability of the GSEs centers primarily around the dysfunction of the Washington political landscape and the issues surrounding the debt ceiling that will be revisited next year,” says Burton Gray. “With budget cuts on the horizon and the balancing of the government budget, every government sponsored program is on review for future viability.”
Investors are accessing multiple sources of capital. When asked what types of debt financing respondents are considering for acquisitions and new construction, more than half (53 percent) said they are considering local/regional banks. Respondents also are exploring a variety of other options with top picks including U.S. Department of Housing and Urban Development loans (34 percent), institutional lenders (34 percent), national banks (33 percent), life insurance companies (26 percent) and Fannie Mae and Freddie Mac (23 percent).
Investors vie for properties
Investment capital from domestic and international buyers continues to flow to seniors housing properties. At the end of the second quarter, $9.2 billion in seniors housing properties had traded hands during the prior 12 months—up 27 percent compared to the same period a year ago, according to data from Real Capital Analytics in New York. (That data does not include sales of nursing care facilities.)
“We’ve seen an influx of new capital in large part by private REITs, private equity, pension funds, and sovereign wealth funds,” says Scott Brinker, executive vice president of investments at Health Care REIT Inc. The Toledo-based REIT has completed $5.3 billion in new investments year-to-date through October, which is an increase over the $4.9 billion in investments the REIT made in 2012. The REIT invests in both seniors housing and health care real estate properties with a current portfolio that spans 1,197 properties in 46 states, as well as Canada and the United Kingdom.
“We have seen significant opportunities to acquire premier portfolios at attractive prices with returns well above our cost of capital,” says Brinker. In July 2013, Health Care REIT completed the final phase of the $4.3 billion acquisition of 125 premier quality seniors housing communities with approximately 10,000 apartment units that are managed by Sunrise Senior Living, the sector’s premier brand name. The portfolio is concentrated in London, New York, Los Angeles, Washington D.C., Boston, Chicago and Montreal.
Respondents are split on their expectations for changing cap rates. Overall, 44 percent expect cap rates to increase over the next six months, while 37 predict they will stay the same and 18 percent expect a decrease. “I think what that is suggesting is that we are still uncertain about the interest rate environment and the availability of assets and portfolios to acquire in 2014,” says Gamzon. The insatiable appetite investors have exhibited for quality assets does not seem likely to diminish. “The choicest of the acquisition opportunities are still going to see nose bleed cap rates,” he adds.
Independent living/assisted living and memory care continue to have the greatest growth in investor demand. Within the survey, 46 percent of respondents believe independent living/assisted living will experience the greatest growth in investor demand, while 37 percent indicate that memory care is experiencing the greatest growth.
Steady demand bolsters activity
Looking ahead to 2014, a further rise in interest rates might prompt investors and developers to reevaluate opportunities. “We anticipate this $275 billion industry today to continue a moderate growth going forward, tempered by more patient capital and improved underwriting guidelines,” says Gamzon.
The prime driver behind both investment sales and development is a steady demand from the existing seniors population and the aging baby boomers waiting in the wings. Seniors housing fundamentals in the United States showed steady improvement during the third quarter of 2013. The average occupancy rate for seniors housing properties in the third quarter of 2013 was 89.3 percent, an increase of 30 basis points from the prior quarter and a 50-basis-point increase from the third quarter of 2012, according to NIC data.
Respondents are optimistic that occupancies will continue to rise. More than half of respondents in the fourth-quarter survey (54 percent) expect the level of occupancy at their seniors housing facilities to increase. An additional 43 percent expect it to remain the same. Respondents expect occupancy to increase an average of 78 basis points over the next six months. “We think that demand right now is strong,” says Kraus. Spectrum currently has approximately 3,200 properties in its portfolio of both owned and managed properties with average occupancy levels above 95 percent among its existing properties.
As the industry continues to evolve, a focus is also developing on incorporating sustainable building practices. Half of respondents (51 percent) said that they either have a current sustainability plan in place or plans to introduce a sustainability program for existing and/or future construction projects. “Improving the sustainability performance of facilities is important because it helps to lower operating costs and ensures that our buildings are optimized in the care delivery system and make the best impact on patients and care givers,” says Brinker. At Health Care REIT, the cornerstone of the company’s sustainability program focuses on benchmarking energy and water use and waste generation. Facility operators also rely on the Energy Star program to make decisions that both reduce environmental impact and provide a return on investment.
Between September 25 and October 31, 2013, NREI subscribers were emailed requests to participate in an online survey. The effort resulted in a total of 187 completed surveys, including 131 respondents involved in seniors housing as brokers, developers, owners or operators.
This article was republished with permission from National Real Estate Investor.