Cautious Senior Housing Lenders Put Brakes on New Construction

Senior housing underwriters are taking notice as new construction ticks up as a percentage of existing inventory, but capital providers are playing a role in making sure the industry doesn’t get overbuilt.

“[New construction] has a dramatic impact on underwriters,” Justin Hutchens, president and CEO of National Health Investors (NYSE:NHI), said during the 2013 Annual Conference of the National Investment Center (NIC) for the Seniors Housing & Care Industry.

Underwriters check to see if there’s new supply on the market before doing an investment, and it has a major influence on whether transactions happen.


“It’s been relatively easy over the last five years because there’s been no new supply,” says Hutchens. “Now we’re encountering new supply.”

New construction as a percentage of existing supply ticked up slightly to 3% in the third quarter of 2013, according to NIC data released Thursday.

Looking at private-pay senior housing, the new development that’s happening is no surprise to the industry as absorption has been outpacing supply for the past couple years, NIC data indicates.


The good news, said Hutchens, is that the overbuilding that occurred in assisted living in the late 90s and early 2000’s isn’t likely to happen this time around.

“What’s different this time is that capital providers are much better educated,” Hutchens said. “We know how to actually measure market demand, and NIC has played a huge role in bringing market information to operators.”

Other factors include a more developed, matured assisted living industry with operators who have evolved, he said, and know how to create value and pick markets.

“[New construction] is very market by market,” said Kelly Sheehy, senior vice president at private equity firm Formation Capital, mentioning Texas as a prime example.

The type of product that’s being built plays a role as well.

“The target audience of a lot of new developments seems to be higher end,” Sheehy said.

Many times, new supply coming into the market will also be the most expensive. But existing operators with established reputations can still be competitive at a lower price point and “weather the storm of new supply,” Hutchens said.

But there are some exceptions in Florida and in the Midwest, he says, where a developer can enter the market with new supply and not be the price leader.

“If you can find that opportunity, you can just crush competitors, particularly those at a higher price point,” he said. “That’s not the trend though; there are just pockets out there where you’re able to enter at a price that’s not the top of the market.”

Ultimately, lenders agree that enough factors exist to limit oversupply. Many local municipalities, for example, are sensitive to allowing new product into their markets if it’s not needed.

Another factor: demographics actually support the new supply this time around, Hutchens said.

“We got way ahead of ourselves last time,” he said. “I’m not losing sleep over [development activity] by any means; I think the demographics will ultimately absorb the new supply.”

Written by Alyssa Gerace

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