Why is it so difficult to attract capital in the senior housing industry? Clearly it’s not the demographics, the demand or the oversupply of new product. It’s the competition that the capital faces. Many investors are waiting for the bigger, better deal with greater returns with other opportunities on the horizon. When speaking with private equity and well-heeled investors lately, they are moderately interested not because they don’t feel there is opportunity; it is that the returns are not high enough compared to the potential opportunities in the distressed commercial markets.
Where ever you look or read, the majority of people are under the impression that there are more price declines ahead for the commercial real estate market. Just look at the February Congressional Oversight Report entitled, “Commercial Real Estate Losses and the Risk to Financial Stability”. The report, while lengthy and somewhat academic, provides extensive detail on the risks associated with the current state of commercial real estate and is somewhat alarmist. The report states:
“There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public. An extended severe recession and continuing high levels of unemployment can drive up the LTVs, and add to the difficulties of refinancing for even solidly underwritten properties. But delaying write-downs in advance of a hoped-for recovery in mid- and longer-term property valuations also runs the risk of postponing recognition of the costs that must ultimately be absorbed by the financial system to eliminate the commercial real estate overhang.”
It’s not that investors aren’t interested in senior housing and senior living, the return on investment (ROI) just doesn’t look as attractive against the opportunities and possibilities from the distressed commercial real estate sector.