At the SHN Summit last month, capital markets panelists were asked if we are now at the top of the senior housing market and whether the market today appears “frothy.”
Google the definition and this is what appears:
- a mass of small bubbles in liquid caused by agitation, fermentation, etc.; foam.
“leave the yeast until there is a good head of froth”
- worthless or insubstantial talk, ideas, or activities.
“the froth of party politics”
Purchase prices are setting records, a competitive bidding environment for deals of all size, abundant capital, easing terms for bank financing and aggressive cap rates are helping to keep the senior housing market in a veritable buzz.
Combine these factors with a renewed sense of euphemism about utilizing technology to drive efficiencies and community satisfaction. By pure definition, the senior housing market has a good head of froth on it.
Will it Last?
After surviving the Great Recession in a better position than most other real estate asset classes and garnering the label “recession-resistant,” the sky appears to be the limit for senior housing. Yet new entrants don’t remember the previous downturn in this sector. The relative tame nature as a result of the most recent downturn leaves newer participants in the industry feeling particularly sanguine.
This renewed optimism is driving an agitation and ebullience over the bright future for senior housing. The optimism is also tempered with phrases such as, “The best deal I did this year was one where we just couldn’t compete on price,” and “I didn’t want to throw good money after bad.”
The fundamentals of senior housing are driving this new environment based upon beliefs of lack of supply in certain geographic areas and indisputable long-term, demographic trends. There is no question that demand for senior housing will be there, but what will be the true ebb and flow based upon the unpredictable needs of an aging population?
The senior housing market has another two to three years to run at its current pace of development, but to truly look beyond that time horizon and forecast with a strong degree of certainty is borderline delusional besides relying on the aging population.
Tech Boom, Take 2
Adding to some of the froth is the renewed buzz around technology in senior living; something akin to the dot-com days. Today it’s apps (not just websites) that can solve many problems for both personal and enterprise matters—from Big Data to Electronic Health Records. This excitement over technology investment must be tempered with realistic challenges such as payment mechanisms, privacy concerns, data exchange/interoperability and certainly most important, wide-spread adoption. Most will fail and few will succeed.
Community and industry adoption is almost as important as the capital being dangled in front of senior housing technology entrepreneurs. Funds such as the one launched in July by Ziegler and LinkAge have the ability to deliver venture capital, both debt and equity, but also immediate access to some of the most technologically savvy senior housing organizations in the world.
The froth factor is being fed further by the ‘me-too’ syndrome where outside professionals are coming into the industry in droves; single-family and multi-family housing developers and other professionals such as appraisers, brokers and surveyors who suddenly have budding senior living practices.
Changes in reimbursement policy, increased regulation and the fundamental economic questions of how will we pay for care of the aging population make the future certainly cloudy. After seeing some recent statistics showing skilled nursing occupancy starting to decline further as noted by the latest U.S. Census Bureau findings, the traditional silos of care are becoming less vertical and more horizontal across the continuum of care.
Froth vs. Bubbles
Ups and downs in senior housing have been driven by perceived market challenges, but fundamental misgivings about over-leveraged companies, acquiring businesses and real estate at overvalued prices and poor operations are typically the root cause for ups and downs in any business, senior housing included.
Bubbles and froth stemming from overvalued assets and assumptions about growth are unrealistic and overly optimistic. But there is a difference between froth and bubbles—froth typically fades slowly but bubbles pop suddenly and dramatically. We are in the midst of a frothy period of senior housing, both in terms of technology and real estate, and could be tipping into bubble territory.
Once interest rates begin to rise in earnest, this will help temper some of the asset bubble fears in senior housing, though it will lead to other challenges for operators and consumers as prices start to inch upward.
Industry leaders should steward common sense with reasonable minds; practical metrics and fundamentals will ensure that there won’t be a massive pop as long as the froth does not lead to large bubbles forming.
Achieving a perfect froth in cappuccino terms is an art, not a science. Let’s hope the veterans of the senior housing industry have perfected their barista skills.