Assisted Living Expected to Continue Its Senior Housing Reign in 2014

Assisted living is expected to continue its domination of the senior housing investment and acquisition scene in 2014 following a year where the sector grabbed industry headlines for new construction volume and low cap rates.

“For new development and newer, Class A product, assisted living and memory care are probably going to be the most attractive and easiest for us to sell. Everyone wants them,” says Jeremy Stroiman, CEO of brokerage firm Evans Senior Investments.

Next year will probably look a lot like 2013, says Kent Eikanas, president and chief operating officer of  Summit Healthcare REIT, Inc. (formerly Cornerstone Core Properties REIT), with investor interest expected to revolve more around senior living than skilled nursing. 

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“People are going to be a lot more comfortable with the lower acuity of independent living and assisted living,” Eikanas says. “As you go up the acuity scale, the amount of investors gets less and less.” 

Buyers are keeping an eye on the expected rise in interest rates, widespread capital availability, and overall positive direction of the economy, he says. 

“Our focus will continue to be on assisted living, memory care, and skilled nursing, but not so much on independent living,” says Brian Beckwith, CEO of private investment management firm Formation Capital. “There are still plenty of quality assets that are out there.”

Assisted living construction has sparked some fear of overbuilding, but most agree it’s a market-by-market situation that calls for increased scrutiny on where they locate new projects or acquisitions. 

“There is a little bit of an increase in new construction starts, primarily in assisted living. There’s less risk as it pertains to independent living when you’re considering construction starts,” says Justin Hutchens, president and CEO of National Health Investors. “Overall, I feel fairly bullish about both independent living and assisted living. The demand characteristics are as strong as they’ve ever been, and the new supply really hasn’t caught up with the absorption rate.” 

The two big variables to impact senior living are potential interest rate implications and how quickly rates rise, says Bradley Clousing, managing director at Senior Living Investment Brokerage.

“So far, we haven’t seen much of an effect on cap rates,” he says. “There’s still been an overabundance of capital and buyers in the market.”

With interest rates going up, it’s hard to get stabilized assets for the cap rates investors have been buying at and still expect cash flow, says Eikanas. Buying on performance numbers with the assumption that operators can improve performance may tail off as investors take a more realistic look at past performance.

“The reality of rising interest rates has a direct impact on our cost of equity capital, because investors that pursue income-oriented stocks will have other low- or no-risk options as rates go up, reducing demand for REITs,” says Hutchens.

The net result, he says, is that REITs will face narrower margins that will be partially offset from cap rates going up and by companies adding more volume to growth plans to continue to rase dividends for shareholders. 

That volume could come from smaller owners and operators looking to exit the industry because of new development or other drivers.

“In the last few months, we’ve seen probably a dozen assisted living opportunities where someone just came into the market [with a new project] and the owners are freaking out,” says Stroiman. 

A significant amount of clients Senior Living Investment Brokerage has represented in 2013 have 5-to-10-year-old properties, says Clousing, and are now considering the path ahead.

“Looking at the future from an independent operator standpoint,” he says, “we’ve had a lot of those sellers coming to market now because they feel like pricing is good; regulations are getting more stringent on state-by-state basis; and when you add in additional complexities from the Affordable Care Act and what that’s going to mean for employers, and seeing increased competition come in, that’s what spurred a lot of the recent sales we’ve had.” 

Written by Alyssa Gerace

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