There may be risks facing the senior housing market in the coming months and years, but that isn’t stopping top industry players from keeping an overwhelmingly positive outlook on the sector.
Bolstering that attitude is the perfect storm of rising occupancy levels, attractive returns, low cost of capital and assets that are “priced to perfection” — at least according to executives at the industry’s leading organizations.
“The private pay market is as healthy as ever,” said Chad Lavender, director of HFF, a Dallas-based provider of commercial real estate and capital markets services. “We’re going to see positive rent growth and occupancy growth in most markets.”
Lavender joined other industry participants during a webinar Wednesday on the market outlook for 2015, hosted by Senior Housing News. Echoing his positive sentiments was Scott Brinker, executive vice president and chief investment officer of Health Care REIT (NYSE: HCN).
Despite concerns over pricing and cap rates, Brinker said senior housing market fundamentals remain strong.
“It’s hard to imagine pricing going any higher, just given the historical levels,” he said. “Cap rates are as low as they’ve ever been; that said, the fundamentals of the business are still really strong.”
As of the fourth quarter of 2014, senior housing properties averaged about $140,000 per unit, while assets in some markets traded near $300,000 per unit, according to Beth Mace, chief economist of the National Investment Center for Seniors Housing and Care (NIC).
But this data begs the question: Have senior housing properties reached peak pricing?
“For best-of-the-best assets, we’re seeing prices we would expect,” Lavender said. “For secondary markets, I think they’re pretty fully priced to perfection.”
Looking ahead at opportunities for growth, Mace revealed an expected increase in occupancy rates in 2015, as the independent living side is headed toward a 90 basis-point bump to a 92.2% average by the end of the year, while assisted living is set to improve by 30 basis points.
“The bottom line for the fundamentals is, in fact, that things are improving and they have [already] improved, and my expectation is that occupancies will continue to grow as we get further into 2015,” Mace said.
There are concerns that hover over the industry as interest rates are projected to rise by Wall Street estimates based on recent Federal Open Market Committee remarks. Add to that an industry that is being flooded by both capital and competition. Still, top senior housing players seem unfazed by the potential headwinds they face.
In terms of rising interest rates, Brinker says the demand for the sector may help offset the risks involved.
“Interest rates may increase a bit over the coming years, but I’m not sure you’ll see a point-for-point increase in cap rates, just because of the significant demand for product in the space,” he said.
But as demand increases, so too does the number of competitors entering the senior living landscape. While NIC’s Mace expressed concerns over inexperienced developers or investors entering the space, Lavender contends that new entrants are healthy for any market as long as they’re launching into the industry with the right operator relationships.
“I don’t think people are going at it in an irrational, unrealistic way; they’re aligning themselves with the highest quality operators, … not just trying to buy up assets and get into the business,” he said.
Todd Jensen, chief investment officer of American Realty Capital Healthcare Trust, added, “I think there’s going to be continued competition for investing in the space. The good news is the vast majority of assets in the sector are in really highly fragmented ownership: Only 10% of properties in the sector are owned by publicly traded reits.”
And deal flow — and pace — is expected to continue, undeterred by shifting market factors.
“The pace is going to increase,” said Brian Beckwith, CEO of Formation Capital. “We’re seeing that in the pipeline we’ve got today of transactions that are announced or in process; over time, especially this year and maybe even next, it continues to be a very active market.”
Written by Emily Study