Senior housing is beginning to face the threat of overbuilding among certain property types including assisted living and memory care, write Stifel analysts in a note this week following the The National Investment Center for the Seniors Housing & Care Industry annual conference last week.
“Potential for overbuild next 2-5 years has increased, in particular for memory care and assisted living communities but to lesser extent independent living and continuing care retirement communities, especially entrance-fee properties,” write Stifel Dan Bernstein and Rob Mains, noting an “open lender spigot for construction.”
Overbuilding in seniors housing is not likely to mirror the “industry crushing overbuild” seen in the 1990s, but could have several implications for the sector including downward pressure on net operating income and an accelerated aging of older properties on the market.
“Senior housing fundamentals remain strong next couple of years,” Bernstein and Mains write. “We do not expect a 1990’s style industry crushing overbuild, but NOI growth could slow or flatten nationally 2-5 years from today, and in some geographies turn negative, as new supply begins to increase.”
While assisted living and independent living show rebalancing, according to the most recent data from NIC MAP, released at the NIC annual conference in Chicago last week, the analysts see development increasing due to liquidity from multiple sources and near 100% loan-to-cost options available.
“Coupled with slowing demographic growth the latter of half of this decade, REITs, investors, and operators should view the intermediate term with caution, while near-term NOI growth should remain strong for the remainder of 2013 and into 2014,” the analysts write.
A secondary outcome of potential overbuild is the relative age of communities constructed in the 1990s, that will age rapidly with respect to new construction.
“The other potential negative of significant new construction is the obsolescence of older 1990s vintage communities and capital needs required to keep those assets competitive,” according to the report. “Granted, a number of operators and REITs have put significant capex into the assets but we think more capex will be needed to compete against attractive and efficient newer designs.”
REIT partnerships with good operators can temper the impact of new construction, the analysts say, with operations remaining an intensive part of the senior living business.
Written by Elizabeth Ecker