With healthcare real estate investment trusts (REITs) having such a low cost of capital, it’s often difficult for private equity firms to compete when it comes to stabilized, “Class A” senior housing and care assets, but there’s room for investment when it comes to turnaround deals and development.
REITs are grabbing the “lion’s share” of the stabilized market because they can afford “Class A” assets that are already performing well, says Scott Stewart, managing partner at Capitol Seniors Housing.
For the most part, private equity has been “priced out” of stabilized assets, and is moving toward “other sectors where the waters are more welcoming,” Stewart continues.
“REITs can’t get into opportunistic or construction [deals] because they’re not cash flow,” he says. “That’s what I see private equity gravitating toward.”
Jeff Davis, president of Cambridge Realty Capital Companies, agrees that it’s difficult for private equity to buy “super stabilized” buildings.
“Private equity needs a certain return and can’t get it competing and buying stabilized buildings,” he says.
There’s still “absolutely” a role for private equity in the senior housing market, though, says Jim Seymour, the senior managing director and head of healthcare real estate lending at GE Capital, Healthcare Financial Services.
“A very significant percentage of our volume is financing private investors’ purchase of seniors housing and care assets,” he says. “Our cost of funds aren’t going to be as cheap of a rate, but some of our better customers feel like they absolutely can make acceptable returns in the space.”
There are obvious reasons why institutional capital—both private equity and REITs—are attracted to the seniors housing space, with demographics trending favorably to a significantly growing senior population. Add to that the fact that there’s been minimal new construction in the past few years, Stewart says, and it’s a “classic perfect storm confluence of demand outstripping supply.”
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“Even though there really has been no new development for some time because of the recession, I see it’s starting to sprout up a little bit this year,” he says. “I don’t think what’s in the pipeline now, and what’s going to be coming in the pipeline is going to be able to meet the growing demand for this space, so I see a favorable demand-outstripping-supply in seniors housing, well into the next several years.”
As for his company, Stewart says they’ll be trying to get more into new construction, and already have a few deals in the works.
“We like to stick to the fundamentals, and go into good, safe markets where we can hit our demographics. We want to stick to those and not get ‘cute’ and be pioneers,” he says, adding that good development financing is still hard to come by.
Written by Alyssa Gerace