Execs Rank Interest Rates as Top Senior Housing Value Driver

A majority of senior housing executives believe interest rates will be the biggest driver for cap rates going forward, indicates a new survey conducted leading up to the 2013 National Investment Center (NIC) for the Seniors Housing & Care Industry conference, but investors are keeping an eye on new construction as well. 

For 2014, executives overwhelmingly agreed that interest rates would be the single biggest factor in senior housing valuation, at around 90% of the 65 respondents who evenly represented small, medium, and large companies. 

Decreased REIT activity and healthcare reform each garnered only about 20% of votes, according to results revealed at a NIC panel on senior housing acquisitions and valuations. 

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Interest rates were the top cap rate driver in the last 12 months, according to around 70% of respondents, who also pointed to REIT activity (around 55%) and the entrance of “new” investors into the senior housing space (less than 40%) as drivers.

“[Cap rates] obviously do impact our underwriting. Interest rates have gone up; it affects the pricing and what we can pay for products,” said Steve Blazejewski, the seniors housing principal at Prudential Real Estate Investors. 

“A move in rates doesn’t need to have a large impact on cap rates,” said Gray Hampton, managing director at Bank of America Merrill Lynch. “[Senior living] is still an industry where yields are relatively attractive to deploy capital… if the cost of funds moves up, you can still have attractive returns, especially if it’s the right operator.” 

The perception of decreased REIT activity has a lot to do with competition. 

“I don’t see any change in the level of appetite and enthusiasm,” said Hampton. “There aren’t that many big deals, but the appetite is similar to what it was. Maybe the REITs are losing some [deals] they wouldn’t have lost before, because of increased competition.” 

With cap rates low, Merrill Garden’s strategy the past couple of years has been to develop new properties, said Bill Pettit, president and COO of R.D. Merrill Co., rather than compete head-to-head on some of the quality assets that have been on the market. 

Merrill Gardens went to look at a site where data had indicated a lot of unmet demand, he recounted. But after going to the local planning department, it turned out a few other projects were already in the works in that general area, and the company ultimately didn’t build there.

“When you think about the lag activity on metrics, it’s very real, and it’s there,” said Pettit. “We still need to recognize that a lot of the construction activity is going to take about 12 months to operate in markets. Until you start to see material levels of new supply, it’s a very localized market impact. It’s not going to impact broad numbers.”
With less than 10% of survey respondents citing construction activity as a significant cap rate driver, Charles Bissell, the session moderator and principal at ARA National Seniors Housing Group, asked panelists if the industry is “kidding ourselves.” 

“There’s possibly more construction going on than perhaps data projects,” Blazejewski said, adding that new construction was the only potential factor beyond interest rates that could negatively impact the sector and cap rates.

Increased construction activity is probably going to discourage some buyers, said John Cobb, chief investment officer at Ventas (NYSE:VTR).

“If we’re looking at a building, and two are being built down the street, we probably won’t bid on that,” he said. “But others may look at that as opportunistic.” 

While the sector is “aggressive,” Blazejewski said it’s not a frothy market—and it’s “here to stay,” with generally increased investor acceptance of senior housing.

“It’s an attractive space,” said Cobb. “It’s going to attract a lot of different investors.” 

 Written by Alyssa Gerace

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