Small Operators May Find 2013 Optimal Time for Senior Housing Exit

Consolidation in the senior housing sector remains the name of the game going forward in 2013 as the overall industry moves toward efficiency, according to a recent Seniors Housing Research Report, but construction levels are picking up as well.

Small operators with only a couple assets that need significant technology upgrades may find the current environment an “optimal time to exit,” says the Marcus & Millichap report on the first half of 2013.

“Cap rates are sell-side favorable and buyers with plenty of capital are scouring the country for the right deals, especially value-add opportunities centered on improving the cost side of business,” the report says. “Cash-heavy owners will have a considerable advantage when upgrading to the new standards, encouraging some smaller operators to consider exiting the market.”


With federal reimbursements becoming linked more strongly to patient outcomes, operators will need to keep track of residents and maintain medical records that can be accessed across the care continuum.

“Outcome-based reimbursements, high entry costs, and available capital creates a strong divest environment for small operators,” says the report.

Despite a 26% jump in transaction volume for independent living in 2012, deal flow has been modest so far this year with the major REITs sitting on the sidelines, according to Marcus & Millichap.

However, independent living demand is expected to remain healthy in upcoming months as more seniors can afford to retire. The report predicts a 70 basis point rise in occupancy, to 90.2%, in 2013, supporting an annual average rent increase of 2.4% to $2,879 a month.


On the assisted living side, the number of properties that changed hands in 2012 shrank 40% as the dust settled following seismic REIT activity the previous year. Assisted living occupancy is only expected to gain 30 basis points in 2013 to an average 90.4%, with average rents climbing 2.6% to $3,728 a month.

The consolidation trend is expected to continue this year, but another trend is starting to gain steam: construction.

Texas has the most units of senior housing under construction, at more than 2,000, according to a Marcus & Millichap chart. Ten states, including California, Minnesota, Florida, New York, and Michigan, have between 1,000 and 1,999 senior housing units under construction.

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Independent living development is accelerating with builders breaking ground on almost 50 projects totaling 5,600 units in the past year—1,700 of them new—by the end of the first quarter of 2013, according to data from the National Investment Center (NIC) for the Seniors Housing & Care Industry cited in the report. By comparison, there were only 4,700 units under construction one year ago.

Construction for assisted living units will accelerate this year, according to Marcus & Millichap, which will limit the pace of occupancy gains. Inventory expanded 2.4% with an additional 4,500 assisted living units across the country, according to NIC data. Another 7,200 units are under construction in the country—the highest level in more than a decade, according to the seniors housing report.

Development activity for Continuing Care Retirement Communities (CCRCs) is at a new low, according to Marcus & Millichap, as builders are holding out until market conditions improve more. Occupancy gains in CCRCs have lagged somewhat but are expected to get some traction this year. Average entrance fees rose more than 8% in 2012 to $280,000, while occupancy increased 40 basis points to 89.3%.

The skilled nursing industry is getting some increased clarity on several reimbursement-related issues surrounding the fiscal cliff, the Affordable Care Act, and sequestration, the report says. Per-day rents will rise to $281 per bed, the report projects, 2.2% higher than at the end of 2012. Occupancy is expected to make gains of 30 basis points to 88.5%.

“Skilled nursing operators will feel the brunt of the [sequester and healthcare reform-related] cuts because a higher percentage of revenue comes from Medicaid,” says the report. “Operators with a healthy mix of assisted living and skilled nursing assets will be less susceptible to fluctuations in government spending.”

Written by Alyssa Gerace

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