Investors are starting to increase activity in the senior housing space and are eyeing independent living in particular, but they appear to be less inclined to take on risk than in the past.
“We have these outside challenges, such as the election, Brexit, the Chinese economy, and I think people are just being a little more cautious,” said Bennett Johnson, vice president and Seniors Housing & Care Practice Leader at CBRE Inc. The valuation and advisory services firm just released its 2016 mid-year update on senior housing, including findings from a survey of investors in the space.
One result of increasing investor caution is that while Class A properties continue to command premium prices, there is a different storyline for Class B and C properties, which are considered riskier bets.
There has been a “clear shift in expectations” as senior housing cap rates have climbed since mid-2015, with the largest increases coming for those less desirable properties. The largest cap rate increases within that timeframe has been for Class C independent living, which has gone up 21 basis points, and Class C assisted living, which has gone up 35 basis points. That’s compared with an increase of about 10 bps for class A independent living and 18 bps for class A assisted living.
The market also was inundated with more of this Class C-type product in the first half of 2016, as the large real estate investment trusts (REITs) hit pause on their recent buying sprees and looked to strategically divest. In addition, the REITs backed off further dealmaking as they digested their large acquisitions from the past few years, “similar to a snake that just consumed a large animal,” the CBRE report states. So, especially compared with the recent record-setting pace for transaction volume and value, the year began slowly for dealmaking.
There are indications that the slow period will continue, given that 44% of investors who were surveyed in the first half of 2016 said they expect to make no changes in the size of their senior housing portfolio in the next 12 months. That was up from 26% as of the second half of 2015.
Still, improving cost of capital could be incentivizing REITs to get back in the game, the report notes, and CBRE does expect deal volume to tick up.
Reinvent Independent Living
Future transactions may largely involve independent living, if investor interest is a guide. Independent living was ranked as the biggest opportunity for investment by 31% of survey respondents, making it the overall winner. Assisted living came in at No. 2, with 27%. It had previously been ranked the top opportunity.
That may be because investors see the chance for innovation in the space, said Johnson.
“I believe there’s a chance for IL to reinvent itself,” he told SHN.
A lot of independent living has become de facto assisted living; whether licensed for AL or not, residents in these buildings are bringing in services as needed to help them with daily activities, he explained. The average age in these locations has risen to the upper-80s, and so developers believe that there may be a gap in the market for a more amenity-forward independent living model that can appeal to a younger demographic.
“I’m starting to see a few developers creating just that,” Johnson said.
These communities offer upgraded amenities—replacing the ice cream parlor with a deli or wine bar, say. Location also is key, Johnson noted.
“One of the projects I know of is more in a multi-use area that includes offices, hotels, some other multifamily-type residential,” he said. “I think part of [the reinvention] is location, being slightly more urban.”
The improved housing market is another factor playing in independent living’s favor, given that seniors currently feel more confident in their ability to finance senior living through a home sale, Johnson said. A slump in housing is one factor that could put a damper on the current independent living enthusiasm.
On the other side of the coin, investor interest in standalone memory care continues to erode. That asset class ranked No. 5, behind continuing care retirement communities (CCRCs) and nursing facilities, for what is the biggest current opportunity.
Standalone memory care was hot coming out of the Great Recession, when a building could go up for around $10 million, said Johnson. Now, there’s some fear of oversupply, and investors also are aware that memory care caters to an older demographic, while the age wave set to hit will bring younger seniors to the market first.
Other findings from the CBRE investor survey included:
– 58% expect cap rates to remain unchanged over the next 12 months
– Construction activity ranked as the top current concern, followed by increased property-level operating and development costs
– 45% said that there has been an increase in marketing time for properties, from offering to contract
The survey was sent to 250 participants and 80 responded. They were primarily institutional investors, brokers, and REITs.
Written by Tim Mullaney