Senior housing investors expect to acquire even more health care real estate in the coming year as they look to growth primarily through acquisition. And despite an anticipated rise in interest rates as well as more regulatory oversight, they are expecting business performance to improve further.
Such are the findings of a survey conducted in September by GE Capital among 150 senior housing executives. The executives were surveyed via email on their concerns and plans for the coming year in senior housing.
Largely they are bullish on the opportunity that the sector continues to present, with several shifts in their attention versus years past.
“Acquisition activity has continued to be strong,” says James Seymour, senior managing director of GE Capital, Healthcare Financial Services’ real estate financing team. “This is driven by a couple of factors: one, the strength of the industry and overriding demographics. Combine that with an environment where interest rates are pretty low and that makes for a good economy for acquirers.”
Among those surveyed by GE Capital, 67% said their primary growth strategy in the next year is to buy or merge with existing properties or operators, and 26% said they will upgrade and revitalize existing properties.
Due to their demand for acquisitions, more than half said the most important financing they seek will be acquisition financing, with 31% reporting they are likely to seek construction financing.
But those in the market also see valuations approaching unsustainable territory, with nearly a quarter reporting valuations are not sustainable currently.
“As a lender we are a spectator to that,” Seymour says. “We are at valuation levels typically only seen at peaks of an economic cycle.”
Some who have the flexibility might decide to lessen the pace of acquisitions in the meantime, he says, noting that cap rates are historically wider versus where core real estate assets have traded historically.
“Some of this spike in valuations may be attributed to the cycle, but also the maturing of this asset type,” he says.
Executives reported a shift in the importance of reimbursement pressures in the coming year, as they are less concerned than in years past. Interest rates and regulatory oversight rose to the top two concerns, respectively, about business operations in the coming year.
But an opportunity—or challenge—is also rising in the shift of providers toward working with larger health care systems to improve health care delivery overall.
“To some it’s an opportunity and to others its a threat,” Seymour says. “All the changes are about reducing the cost of the health care system. The operators and operating systems trying to get ahead of the curve by investing in data, outcomes, relationships with other players will be positioned very well. Other operators who either don’t have the capital or bandwidth or acumen are probably those that will end up being sellers in the next few years.”
In spite of relative uncertainties the outlook remains strong with a drive for more capital to be invested in the space.
“Spurred by changes in the post-acute environment and improving industry fundamentals, U.S. senior housing and care investors and providers are aggressively pursuing a variety of expansion strategies,” Seymour says.
Written by Elizabeth Ecker