The highly anticipated start to 2017 is almost here and with a new Presidential administration stepping in, all industries are bound to be impacted, including senior housing.
In the new year, many changes are expected to take hold in the industry, specifically around pricing, transaction volume and financing, according to experts who spoke on a Senior Housing News Finance and Investment Outlook webinar Tuesday.
Dealmaking will likely be impacted by economic policies pursued by the new president, and early signs indicate big infrastructure projects and other initiatives predicted to create economic growth. This could spell good news for senior living.
“If there is some inflation for the right reason, like an improving economic growth outlook, then asset classes that have a strong correlation to CPI [consumer price index] should perform well,” Justin Hutchens, chief investment officer for HCP, Inc. (NYSE: HCP), said during the webinar.
In part to control inflation, the Federal Reserve is expected to increase interest rates in the near-term, and this too could have an impact on senior housing—perhaps an unexpected one. Overall, market conditions suggest that investors are likely to be active in 2017, with M&A volume increasing and prices reaching potentially “knee-shaking” highs, some on the panel said.
Transaction volume, prices to go up
There has been some chatter throughout the industry about transaction volume making a comeback in the new year after dealmaking in 2016 slowed.
Interest rates are likely to rise in 2017, with the Federal Reserve expected to increase the benchmark rate as early as next week, Beth Mace, chief economist and director of capital markets outreach at the National Investment Center for Seniors Housing and Care, explained during the webinar.
There’s some notion that rising interest rates would constrain dealmaking, but the opposite might actually be true. With the potential of rising interest rates in 2017, transaction volume could very well follow, Chad Lavender, senior managing director at commercial real estate agency HFF, explained during the webinar.
“Transaction volumes actually increase with rising interest rates. Sellers are trying to get in front of it and buyers are trying to aggregate assets and lock in interest rates,” he said. “A lot of people were talking about how much rates increased this year, but [we are] still 11 basis points less than this point last year and rates are at historic low levels.”
It is predicted that public real estate investment trusts (REITs) may increase buying activity in 2017. There was a lot of talk this year about the REITs scaling back their activity, and there’s generally a belief that if interest rates go up, it’ll increase their cost of capital and diminish their purchasing power. But this may not be the case given the various factors in play.
“[The REITs hit] pause this year to digest what they had done and look at their portfolios as a whole to dispose of assets that didn’t fit into their larger strategic plan,” Mace said. “[It] will be interesting to see in 2017 because the cost of capital could be affected by economic environment, but that said, there could be good opportunities coming in the field next year, for the reasons [Lavender] explained.”
Coming off HCP’s big repositioning year, which saw it spin off its skilled nursing assets and start to rebalance its senior housing portfolio, the REIT revamped its acquisition approach. Going forward, HCP finds the RIDEA structure appealing, but it has stringent qualifications for the operators it works with, Hutchens said. However, it is becoming easier to evaluate potential partners, he added.
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“As this industry has evolved, it’s getting easier to underwrite the operator,” Hutchens said. “Many have 10, 15, 20 years [in business]. To evaluate their track record, [you] can even see how they played through a cycle in the last recession and see how they’re navigating new supply.”
In addition to transaction volume increasing, the average price per unit is likely to increase in the new year, Lavender added.
“The average price per unit will see a significant increase. I think 24 months ago there was a cap on unit price, but that’s not even something people are concerned about now,” he said.
A reason behind the anticipated increase in price per unit could be due to the fact that a lot of new product that hit in recent years now has reached stabilization, and the new buildings are commanding high prices in the M&A market, said Scott Stewart, managing partner and founder of Washington, D.C.-based Capitol Seniors Housing.
“My knees would start to shake when we were approaching a price per unit of anything north of $250,000 a unit,” he said. “We’re seeing trades now that have blown through $300,000, $400,000 per unit. We’re seeing record pricing of units that are trading in the $500,000s per unit. We like and are terrified by that dynamic, because we both acquire and sell.”
Assisted living, independent living to “kill it”
When it comes to specific senior housing properties to look out for in 2017, assisted living and independent living are predicted to take the cake.
In 2016, there has been a lot of new assisted living communities opening its doors, but for major REIT HCP, Inc., (NYSE: HCP), much of the company’s inventory growth is concentrated in independent living, Hutchens explained during the webinar.
“A lot of inventory growth coming online is assisted living, but in our case, we have more independent living—an asset class that deserves some attention and has some reliability,” he said. “We’ve also been favorable about combo products that offer assisted living as well as memory care in a portion of the community. They tend to perform well.”
Even though there’s some concern about the amount of assisted living supply currently, it may not hold back dealmaking for this asset class in 2017.
“I think both assisted living and independent living are going to ‘kill it’ in 2017,” Stewart said.
Written by Alana Stramowski