NIC: Senior Housing M&A Activity Takes a Dive

Senior housing deals took a dramatic dip during the second quarter of 2016 compared to the past few years, according to recent data from the National Investment Center for Seniors Housing & care (NIC). 

During the second quarter of 2016, only 76 deals closed, totaling $1.6 billion, including $1 billion in seniors housing and $600,000 in nursing care. It was the first quarter to dip below 100 seniors housing deals since the second quarter of 2013, according to Beth Burnham Mace, NIC’s chief economist. The number of deals represented a 61% drop from the first quarter of 2016 when deals totaled $4.3 billion, and an 81% decline from the same time frame in 2015 when volume came in at $8.7 billion.

“We saw a pretty significant slowdown in transactions volume,” Mace told Senior Housing News. “That reflects a slowdown in activity by the [real estate investment trusts] (REITs) and private buyers as well as institutions. Just overall slow transaction volume.”

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The drop in M&A activity is in stark contrast to the record-setting number of deals in 2015. Predictions from earlier this year that the industry was already past “peak pricing” in terms of acquisitions rang true during the second quarter of 2016, as the pricing basis “retreated a little bit,” according to Mace. Seniors housing units sold for $163,000 during the quarter on a per unit basis, down from $173,000 per unit a year ago, according to Mace.

The REIT Ripple Effect

Throughout 2016, senior housing REITs have largely taken a backseat when it comes to M&A activity, in part due to a higher cost of capital following an interest rate hike at the end of 2015. Institutions and private equity seemed to follow suit throughout 2016. REITs may also be taking stock of their assets following a surge of transactions over the past few years, according to Mace.

“Some of [the slowdown] is that the big REITs are digesting the volume that they’ve done over the years,” Mace said.

The drop could also indicate a return to a more normalized market after a period of high transaction volume, as some industry experts have speculated.

In addition to interest rates impacting the actions of REITs, global economic issues have had some effect, as well. The United Kingdom’s referendum vote to exit the European Union in June sent an immediate shock to stock markets around the world, though investors have mostly shrugged off those concerns for the time being. The S&P 500 and The Dow Jones Industrial Average rallied in the weeks after the referendum vote and hit an all-time high in midday trading on July 12.

However, should the impact of the vote—“Brexit”—affect stock markets as the process of exiting the E.U. continues, senior housing in the United States could be impacted.

“The biggest issue is the Brexit,” Mace said. “When Brexit happened, that had the potential to have a significant impact on the global financial market confidence, much like what we saw happen with China. But the markets have brushed that off and hit an all-time high. The bigger effect is interest rates.”

Metrics Remain ‘Local, Local, Local’

The declining transactions volume follows a dip in other metrics during the quarter, including occupancy, which fell 30 basis points from the first three months of the year to 89.7% for overall seniors housing, NIC Map data revealed last week. Fortunately, construction rates, which have raised the alarm about oversupply throughout the industry over the last few quarters and impacted some major REITs, dipped slightly compared to inventory.

However, oversupply concerns are contained within localized real estate markets with high construction rates.

“The construction is pretty concentrated in certain markets,” Mace said.

Around 50% of construction in independent living and assisted living are contained within a number of U.S. cites. For assisted living, the most construction is happening in Phoenix, Atlanta, Detroit, Minneapolis, Dallas and Chicago. For assisted living, construction is largely concentrated in San Antonio, Washington D.C., Dallas, Kansas City, Atlanta and Houston, according to Mace.

Conversely, there are several cities with limited construction.

“The takeaway is a tale of two cities, two trends,” Mace said. “There are geographies that have limited construction activity underway. A lot of markets have seen improvement for construction, and a lot of markets have declined. It’s local, local, local.”

Construction rates play a big part in occupancy levels and rent growth in certain markets, and the variances between local markets is huge. For instance, one of the tightest markets in the country, San Jose, California, has relatively little ongoing development and also one of the highest occupancy rates at 94.9%. Year over year, San Jose saw rent growth of almost 7%, Mace said.

A market with lots of ongoing construction, San Antonio, Texas, saw rent growth of just 1.1% on a year-over-year basis.

“With a tight market, very little supply being developed there is supporting those high growth rates in that market,” said Mace. “The converse of that is San Antonio, where there is a lot more development.”

Overall, the seniors housing market reached a record high rent growth rate of 3.2% during the second quarter of the year, according to NIC Map data. Many senior living companies have stressed pushing “aggressive” rent hikes in recent earnings calls, including Brookdale, the nation’s largest senior living provider.

Written by Amy Baxter

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