Transactions are booming and investment dollars have been pouring into the senior living industry, but the Federal Reserve may be moving closer to raising its federal funds rate target by the end of the year—and a decision could come as soon as this week, at its Federal Open Market Committee meeting. Such a move could send a ripple through the senior housing sector, particularly when it comes to acquisitions and development, says Beth Mace, chief economic economist and director of capital markets outreach at the National Investment Center for Seniors Housing & Care (NIC).
Higher interest rates could alter the economics of a transaction, cause providers to pause developments and shakeup cap rates and property valuations, Mace wrote in a blog post Wednesday. She tells SHN that it’s not so much a question of whether the Fed is going to increase its target rates as it is a question of ‘when?’ and ‘how much?’
“If rates go up sharply, or if they go up suddenly and unexpectedly, that could have an impact,” she says. “It could affect your bottom line.”
(Update: On Thursday, the Fed decided it is in fact is not going to pursue a policy that would cause interest rates to increase in the short-term.)
Mace says most real estate investment trusts (REITs) have been advised about potentially rising interest rates and likely have incorporated the possibility into their business models. There has been discussion of an interest rate spike for years, she says, and economists have been predicting that it will take place by the end of the year or in early 2016.
Still, an increase doesn’t come without implications. The cost of doing a business deal is going to escalate, which could prompt investors and lenders to reconsider deals and pipelines, Mace says. She also says expansion and renovation projects might slow, and developing new senior housing properties could involve greater costs.
Mace is not alone in forecasting what a hike would mean for senior housing.
“[Interest rates] directly affect the purchasing power of buyers,” said Jeremy Stroiman, CEO of Evans Senior Investments, during a webinar Wednesday. “We are in the hottest, most attractive senior housing and skilled nursing environment I’ve ever seen. …But higher interest rates will directly affect M&A activity.”
Stroiman attributes this to capital becoming more expensive as the result of an uptick in interest rates. Buyers won’t be able to pay the same price they could prior to the increase, he said, and the value of property then goes down.
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“As [interest rates] begin to creep, [buyers] may not be as aggressive on growth,” Stroiman said. “Every day an interest rate changes, that affects the value.”
Despite the plausibility of slowing M&A activity and development, demand for senior housing should remain strong, Mace wrote. The Fed typically adjusts its policies to influence interest rates upward when the economy indicates strength, she says, which in turn bolsters demand.
When all’s said and done, though, Mace says it depends on what the interest rates will look down the line.
“It’s hard to have a perfectly clear crystal ball on this,” Mace says.
Written by Kourtney Liepelt