Senior housing has proven to be a hot ticket for many types of investors, as they are looking to jump into the market while housing activity rebounds to pre-recession levels.
To date, most say there is huge upside for investment given a recession-resilient property type and a consumer demographic that is expanding in droves each day. So far, investors are seeing big opportunities in a booming market. But there could be major uncertainty ahead, experts say.
“You have a perfect storm that leads you to believe that senior housing is definitely in an uptick,” said Scott Stewart, managing partner at Capitol Seniors Housing, a private equity investor in the space. “The real wild card is going to be linked to interest rates.”
Interest rates will ultimately determine future investments in the industry, according to experts who spoke at this year’s Senior Housing News Summit in Chicago. For most investor types, higher interest rates will slow their business.
When asked whether these rising rates might provide opportunities, Stewart said, “No. With higher interest rates you’re going to have productivity in the economy — maybe increased demand and occupancy within the communities — but I’d rather see interest rates stay where they are.”
Alternatively, some investor types may find benefits in the increased rates.
“When interest rates rise, NHI will have a huge advantage,” said panelist Justin Hutchens, CEO of National Health Investors, a publicly traded real estate investment trust. “Investors who don’t have the cost of capital advantage that we have will leave the marketplace. Quite frankly, I’m looking forward to it.”
Hutchens said he expects capitalization rates to “drift up” as well.
Previously, industry professionals have stated that interest rates would be the top cap rate driver in senior housing. In an industry survey conducted by CBRE, 26% of respondents said they expected an increase in cap rates over the next year, while 53% said they didn’t expect the increases.
Cap rates for senior housing property types vary, with independent and assisted living properties showing cap rates in the low 8% range, according to data compiled by the CCIM Institute, a resource for commercial real estate practitioners. Skilled nursing facilities and continuing care retirement communities show the most profit for investors with cap rates of 11% and 10%, respectively.
Despite the low cap rates for some property types, Stewart said investors are still in the market to shop.
“Not only are people buying, but the market’s starved for good product,” he said. “It blows my mind when you look at the broker community listing and how much it’s going for — and people are still buying it.”
And with an imminent increase in interest rates, many say now is the time to invest.
“It’s going to happen, it’s just a matter of time,” said panelist Joel Sherman, senior vice president of acquisitions at CNL Financial Group. “There’s a window, and hopefully you can still take those opportunities while that window is open.”
This is proving true as senior housing property development saturates some locations, and investors look for ways to dip into the industry’s profits. For the most part, senior housing is viewed as a stable long-term investment that’s been recession-resilient and profitable even at times when other property types flopped, Summit panelists said.
“Everyone is getting their share of the action. What’s most important is why the industry is a good investment target,” Hutchens said. “It’s about as healthy as it’s ever been. The occupancies in assisted living have come back pretty close to pre-recession levels [and] independent living is all the way back. You have a much more experienced operator today than you did pre-recession.”
Written by Emily Study