Though both sectors cater to residents and are demographic-driven, senior housing cap rates generally trend higher than multifamily cap rates, and one real estate investor says that discount can be attributed to investor mistakes.
Despite recent trends of broader acceptance of the senior housing sector among institutional investors, cap rates compared to multifamily assets still diverge, similarities notwithstanding. Part of that has to do with the marked differences between the two assets, Michael Gordon, principal at Harrison Street Real Estate Capital, LLC, told NIC in a recent interview, including senior housing’s “operationally intensive nature” compared to multifamily.
“We would suggest that the market discounts senior housing because of the mistakes that investors can and have made in it,” Gordon told the National Investment Center for the Seniors Housing and Care Industry.
Drivers for cap rate spread include inherent risk in the potential for mismanaging a property and the multiple issues that could emerge when mistakes do occur, such as the cost or time of replacing poor management, says Gordon, as compared to a similar situation in a multifamily environment.
Other drivers Gordon named are the operational/leasing attributes of senior housing; the “limited universe” of institutional buyers interested in senior housing, versus the larger pool of buyers for multifamily; and the lower cost of capital—both debt and equity—available in the multifamily market.
“While we all have seen a compression in both senior housing and multifamily cap rates, a spread between these two sectors continues to exist,” he says in the interview. “I can tell you that it’s a fun time to be a seller of senior housing at the moment, and it will be interesting to see what types of capital trends we encounter going forward.”
Read the full interview with NIC.
Written by Alyssa Gerace