The market for development and acquisitions among senior housing properties shows no signs of slowing, and even with construction far outpacing post-recession levels, those in the market say there is still ample opportunity, according to a survey by the National Real Estate Investor (NREI).
Industry players are anticipating improved fundamentals, according to a fourth quarter survey conducted by NREI of seniors housing brokers, developers, owners and operators. They are also seeing more development ahead, with 67% of survey respondents reporting they have new construction planned in the next six months. Acquisitions, too, are expected to continue, with 65% of those surveyed expecting a greater number of transactions in 2014 versus the current year.
Among planned construction, 44% of respondents said they are building independent and assisted living communities with 32% having memory care communities planned.
Nearly 80% said they expect new construction to rise in the coming year.
“If interest rates spike up more than 200 basis points, I think you could see a slowdown in activity. But other than that, there are more tailwinds for growth and not a lot of headwinds,” Jeffrey D. Kraus, managing director at Denver-based Spectrum Retirement Communities told NREI.
For market participants who are looking to develop new properties, the financing landscape continues to improve with management remaining paramount, the survey finds.
“Both large and mid-sized regional banks are starting to dip their toes back into development deals, but they are doing it with existing clients and with constrained structure and low leverage,” Kathryn Burton Gray, senior managing director at Dallas-based Red Capital Group told NREI. “Lenders are structuring these development transactions to ensure that they box their construction risks and to encourage an alignment of interest from the borrowers.”
Ninety percent of survey respondents said an experienced management team is important or extremely important to securing financing for new construction. An established track record, providing a feasibility study, contributing higher equity and having a prior relationship with the lender all ranked highly as well.
The expectation of where cap rates will fall was divided, according to NREI’s findings, with 44% saying they expect cap rates to go up in the next six months, 37% expecting cap rates to remain flat, and 18% anticipating and downturn.
“I think what that is suggesting is that we are still uncertain about the interest rate environment and the availability of assets and portfolios to acquire in 2014,” Mel Gamzon, president of Miami-based Senior Housing Global Advisors, told NREI. “The choicest of the acquisition opportunities are still going to see nose bleed cap rates.”
Written by Elizabeth Ecker
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