Fiercer Competition ‘Rears Its Head’ in Senior Housing

A surge in seniors housing construction isn’t staving off investor demand for the product, according to exclusive research findings from a survey conducted by the National Real Estate Investor (NREI) and the National Investment Center for Seniors Housing & Care (NIC). Even so, concern around competition is high, as 62% of participants indicated new and competing facilities significantly impacting occupancy rates.

The majority of survey respondents expect stable or improving fundamentals across the senior housing industry in the next 12 months—73% believe rents will rise, and 56% anticipate a slight uptick in occupancy rates, according to the report. But competition’s impact on seniors housing occupancy is up from years past—47% of respondents viewed new supply as a threat to occupancy in 2014, and 50% in 2015.

The survey consists of more than 200 responses collected between June 2 and June 13 from NREI and NIC’s respective databases of commercial real estate professionals, with 138 considered qualified respondents due to their involvement in the seniors housing industry.

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“Given the new supply that has come into the market, it makes sense that competition would be rearing its head more now than a few years ago,” NIC Chief Economist Beth Burnham Mace told Senior Housing News, echoing her comments in the report.

Other factors impacting occupancy rates as noted by survey-takers include the United States economy and the state of the U.S. housing market. Discounted rents were viewed as having the least impact on occupancies.

After occupancy remained flat in the first quarter of 2016, it worsened in the second quarter of the year, declining to 89.7%, according to NIC data. Annual asking rent growth posted its quickest growth since mid-2008, increasing at a rate of 3.2% in the second quarter of 2016. Survey participants’ thoughts on these fundamentals echo the trends noted by NIC, with most expecting a slight improvement in occupancy of less than 1% in the year ahead and 39% anticipating a rate increase of less than 1%.

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Additionally, the volume of new supply being added to the market presents concerns about competition as it relates to occupancy, but overbuilding fears remained in check among respondents, according to the report. Construction starts as a percentage of existing stock dipped to 5.6% in the second quarter of 2016, according to NIC data, as compared to 5.7% in the first quarter of the year. And 45% of respondents to the survey believe an uptick in development is ahead.

Still, 79% of survey-takers don’t believe new construction will lead to overbuilding. That might reflect the fact that development is largely concentrated in certain markets, the report stated.

Construction starts in Atlanta during the first quarter accounted for almost 17% of existing inventory, for example, while development in Baltimore and San Diego had construction at less than 2%, according to NIC. This new supply will be coming on the line between now and 2018, Mace said.

Other significant findings from the survey include:

  • Investments: Survey respondents were split on the strength of market fundamentals in the East, South and West, while 22% found the Midwest as far less favorable. In terms of transactions, almost half of participants expect property sales to remain the same over the next year, while 25% believe sales will decrease and 26% expect an increase. Also, 47% of respondents expect cap rates to increase over the next 12 months, and 34% think cap rates will remain the same. Even those believing there will be an increase predict it to be small, going up by an average of 11.4 basis points.
  • Capital: Survey-takers don’t anticipate significant changes when it comes to access to capital in the next 12 months. Access to debt will likely be the same, according to 45% of respondents, and 52% expect access to equity to be the same, as well. In addition, real estate investment trusts (REITs) are less of a source of capital today than they have been in the past, falling from 46% in 2014 and 2015 to 28% in the current survey. As such, local and regional banks have stepped up to take on larger roles, increasing from 17% in 2015 to 31% in 2016.
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The report was released before the Federal Reserve on Wednesday issued a mostly upbeat assessment of economic conditions, fueling speculation that it will raise the benchmark interest rate this fall despite economic dislocations such as the United Kingdom’s exit from the European Union. If interest rates increase substantially, this would put a damper on financing available for senior housing development and acquisitions, Mace noted to SHN.
Written by Kourtney Liepelt

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