Smoother Waters Ahead for Senior Housing Dealmakers

After 2016 got off to a slow start in terms of transaction volume, industry experts are seeing more stability in deal flow and expect sustained interest in the senior housing sector. And following the most recent Federal Reserve meeting on Wednesday, a steadier interest rate environment and less jumpiness from investors may lead to more confidence throughout the rest of the year.

At the present moment some macro trends appear to be taking shape for the year, but there are still many uncertainties about the senior housing market and the greater economy.

“Everyone is trying to get their arms around where we are in the market,” Bennett Johnson, vice president and national practice leader for CBRE’s Seniors Housing & Care specialty group, told Senior Housing News. “Everyone has seen slower or irregular deal flow. Some months have been very active, other months have been a little slower.”

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Following an interest rate hike from the Federal Reserve late last year, real estate investment trusts (REITs) have taken a back seat in the market and contributed to a slower overall year for transactions. The impact of these major players backing off dampened the overall deal flow for the beginning of 2016.  However, activity has started to creep back up and could signal that the high transaction volume—and pricing—of deals past has peaked. The irregular deal flow throughout the first six months of 2016 could signal a return to a more normalized level of transactions coming out of a boom

“The REITs pulling back and making the decision to slow down has had sort of a ripple effect,” Johnson said. “There might have been a wait-and-see approach at the beginning of the year [when] there was a lot of turbulence and unknowns happening. The market has been so active in the past couple years, we might just be returning to a normalized level.”

Johnson, who recently moderated a panel of industry experts at IMN’s Annual Private Equity Forum on Senior Housing, says the market has seen more deals coming from traditional financing sources in lieu of major acquisitions from REITs.

“We’re seeing a shift in terms of who is looking at the deals and who is underwriting them,” Johnson says. “The REITs took a pretty big step back last year. They are cleaning up their portfolios, which makes a lot of sense. The question is what will the REITs be doing for the rest of the year.” 
 
This question holds even more credence considering the Central Bank’s announcement on Wednesday to continue holding its federal funds rate and slow down the pace of future interest rate hikes. REIT activity is largely tied to interest rates, and hikes have an immediate effect on REITs’ cost of capital, essentially putting a freeze on high deal volumes. While REITs and other investors have long-prepared for interest rate hikes from the Fed, the impact on deal flow from a small hike last year was immediate. 
 
Slower job growth coupled with global economic challenges and low inflation rates influenced the Fed to maintain its current target range for the federal funds rate at 1/4 to 1/2 percent, Federal Reserve Chairman Janet Yellen announced following the bank’s June meeting. The Federal Reserve also downgraded its timeline for when it plans to implement its strategy of raising interest rates.
 
Despite a slightly gloomier outlook for long-term economic growth from the Fed, the decision to hold interest rates low could promote some short-term stability for the acquisition environment. 

“There still seem to be trades happening, interest in the market and capital sitting on the sidelines that needs to be deployed,” Johnson said. “There’s increasingly so much interest in the sector because of the long-term demographic story. …Deals are getting done and we’re seeing interest out there. Things are continuing to move along and it’s less of an unknown out there.” 

Written by Amy Baxter

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