Top Senior Housing Investment Opportunities

The seniors housing sector remains hot, and following robust transaction activity in 2015, investors are identifying and pursuing the asset classes they deem top opportunities in the current market.

CBRE, Inc., the world’s largest commercial real estate services firm, today released its Investor Survey & Market Outlook for Seniors Housing & Care, revealing that 2015 was a record year for institutional transactions and sales, despite a slower end to the year. The survey was sent to more than 250 seniors housing investors, developers and brokers throughout the country to identify trends in this real estate segment and capture their predictions for where the industry is heading.

The seniors housing sector closed 514 institutional transactions in 2015 and a total of $18.7 billion in sales. While the numbers were big, the increase in volume over the prior year was 4.5%, reflecting a slowdown compared to the 26% increase between 2013 and 2014. While most of 2015 saw high transaction volume and steady market fundamentals, an increase in interest rates at the end of the year weighed heavily.


“It’s almost directly correlated with the increase in interest rates and the rising cost of capital, and the impact those had on the public real estate investment trusts (REITs) and their purchasing power,” Zach Bowyer, managing director with CBRE, told Senior Housing News. “A lot of the data going into the fourth quarter, from a general commercial real estate standpoint, was indicating that we were going to have a record-setting year in terms of total transaction volume, which wasn’t the case. The market pulled back a little bit in the fourth quarter. Overall it was still a great year, but just with a slowdown at the end of it.”

Perhaps the biggest shift the survey found was the top opportunities identified by investors and developers. Looking forward, 33% survey respondents said that assisted living would be the biggest opportunity for investment, with independent living coming in second at 24%. Memory care assets were the least attractive to investors, with only 12% identifying this category as a top opportunity. Continuing care retirement communities came in third with 14%.

“Assisted living was a top opportunity, even with all the new construction, but what really slipped on that scale was the memory care specific properties,” Bowyer said. “What really moved up the scale were the independent living properties. That is good in a way for the market because now, with all the new development being assisted living, it will be a nice diversification. We see from the NIC data that independent living occupancy is at an all-time high.”


One of the most promising market fundamentals for investors were occupancy rates in 2015, which reached 90.1% during the fourth quarter of last year, according to data from the National Investment Center for Seniors Housing & Care (NIC). Both independent living and assisted living markets hovered near the 90 percentile for occupancy throughout the year, trending upward.

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A stronger housing market overall also contributed to investors’ interests in assisted living and independent living, and has had a “significant impact on seniors housing occupancy levels,” according to the survey.

Independent living was found to have the strongest correlation between an improving housing market and occupancy levels.

“The housing market is doing really well now in most areas of our country,” Bowyer said. “It’s bringing back consumer confidence and the potential resident’s ability to make that lifestyle option or choice a little bit earlier.”

Should the housing market continue to grow and strengthen, it is likely to have a continued positive impact on independent living, and investors are taking notice with more development. Bowyer also noted that the average age of residents moving into seniors housing appears to be declining, making independent living developments more feasible in the eyes of developers and investors.

However, overall development also recently reached an all-time high at 5.8% of existing supply, according to NIC data. Construction as an existing supply of inventory was highest in assisted living by the end of 2015, which could drive occupancy and rent growth pressures as more new supply comes on line in 2016.

Skilled nursing, which has recently been hailed as an increasingly coveted asset class, saw its average occupancy rates decline at the end of the year. However, daily rates rose 2.8% with increased net operating income between from 2014 to 2015 as a result of higher quality services and more efficient operators. The survey also noted that the number of nursing care acquisitions on the high-end of the industry ($100,000 per bed and above) increased in 2015.

Predictions for 2016 remain relatively stable, according to the survey, with a “strong long-term outlook” when it comes to senior housing valuations. Concerns about short-term oversupply remain, particularly as roughly 80% of new supply is set to come on line in 2016. CBRE called this fact “a major concern in the industry,” but noted there is a big opportunity for independent living development to offset increased supply in assisted living and memory care.

Cap Rates, Interest Rates

Cap rates last year were largely unchanged, with minimal shifts compared to previous survey years. CBRE stated this means the market is reaching a peak. Investors remain interested and CBRE professionals expect cap rates to remain stable.

Over the next 12-month period:

-48% of respondents said they expect no change in cap rates

-31% expect cap rates to rise

-21% expect to see some compression of cap rates

In December 2015, the Federal Reserve elected to aim to increase its benchmark interest rate. Senior housing cap rates have more room for compression and are likely to trend up gradually in 2016 within commercial real estate, though at a slower pace than U.S. Treasury yields, CBRE noted.

REIT activity had a big influence in the industry in 2015, pushing higher price points and remaining a “significant, yet unknown variable” for their impact on cap rates.

Stronger real estate fundamentals are expected to bring in more investors who will work to counter the rising interest rate environment. Strong interest with new capital flowing into seniors housing suggest that investors are less worried about the risks of the seniors housing industry in return for high-yielding assets.

“Recent transaction trends do suggest a slowdown, with underlying market fundamentals indicating a favorable long-term outlook, again assuming the economic climate remains stable,” the survey reads. “With the changing economic climate, an increase in public-to-private transactions is expected in 2016.”

Written by Amy Baxter

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