Senior Housing Pulls Back on New Construction

Construction and renovation projects remain popular plays for senior living providers in the year ahead, but their interest in such forays has slightly decreased, according to recently released findings from investment banking and financial advisory firm Lancaster Pollard.

The survey, distributed in December, includes responses from 295 senior living providers. About 70% of respondents said they would likely pursue a new construction project in 2016, with over half indicating an extreme likelihood of doing so. However, this figure represents a decrease from the 2014 survey, in which 80% of participants expressed interest in new construction.

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“If you can acquire assets and turn them around and improve them, while you’re not likely to create the value that you would in new construction, the reality is that there’s arguably less risk,” Lancaster Pollard Senior Managing Director Steve Kennedy tells Senior Housing News.

Taking on renovation projects is also less attractive for providers than in the past, with 69% saying they’re likely to begin a renovation project as compared to 80% in 2014. In the survey, renovation was defined as making the existing services and facilities more modern.

The memory care market proved popular among respondents, as 61% believe it will experience the most growth in the coming year. Similarly, respondents cited assisted living and memory care as the type of construction projects they have planned.

“Memory care has been topping growth metrics for a while now,” Kennedy says. “When you get into the skilled nursing side, you get restrictions on supply growth, and there was a purging of [continuing care retirement communities] that struggled a few years back.”

To fund projects, internal equity and private domestic sources remained the most popular forms of equity among respondents. Interest in different types of debt financings were fairly even for participants, but 27% of those surveyed indicated they aren’t considering debt financing in 2016, a marked 58% decrease from responses in 2014.

“When you’ve had rates as low as they have been, a lot of the low-hanging fruit has already been recapitalized,” Kennedy says.

Construction costs saw a slight increase in January, and some projects aren’t coming to fruition as the result of higher labor costs, according to a different report recently released by construction firm The Weitz Company and the American Seniors Housing Association (ASHA). The pullback in construction is happening amid oversupply fears, especially with regard to assisted living.

In terms of acquisitions, 53% will likely pursue an acquisition this year, a figure that stands largely unchanged from 2014. And 65% said they’ll probably attempt to sell a facility in the next 12 months, an action more likely among for-profit providers. With about half looking to buy and half looking to sell, market fundamentals are solid, Kennedy says.

“We know that the M&A market is really robust,” Kennedy says. “We’re seeing a lot of capital pour into the sector, and it’s driven up prices. …Those are some good fundamentals that support values we’re seeing.”

Also noteworthy is that the majority of respondents aren’t participating in an accountable care organization (ACO), at 75%. For the companies that have participated in an ACO for less than a year, there is a higher percentage of nonprofits partaking versus for-profit providers.

“The reason for the low participation rates in ACOs is because 31% of respondents report that there is no ACO in their service area,” the report states. “Twenty-five percent have not been asked to participate in an ACO. Only 13% of respondents’ organizations were asked to participate but declined.”

Written by Kourtney Liepelt

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