Senior housing players have some reasons to be optimistic about financing looking toward the year ahead.
The positive outlook stems from the Trump administration’s talk of deregulation, along with interest rate action and real estate investment trust (REIT) activity.
Another outcome that may have an impact on senior housing finance, which will remain to be seen, is what the new administration will actually do with the health care system—with the intention of the administration to repeal and replace the Affordable Care Act, Chris Blanda, vice president of financial advice and investment banking firm Lancaster Pollard, explained to Senior Housing News.
“We are going to see how the new administration starts to behave, which could change our outlook,” he said. “It’s tough to predict how they will behave opposed to other elections because they haven’t shared how they are going to get things done in detail. Everybody’s just waiting to see.”
So, some measure of caution is needed, but so far the tea leaves suggest financing could become easier to obtain, fueling transactions in the sector.
Deregulation may be good
Deregulation in business is something President Donald Trump continues to focus on, and if certain regulations are scaled back it could be good news for borrowers in the senior housing space, Chris Honn, managing director of the Seniors Housing & Healthcare Group at commercial real estate services firm Berkadia, told SHN.
“Any borrower in our space will want to have less regulations because it will be easier to get capital,” he added.
Certain regulations up to this point have made it tough for some borrowers, and if the new administration deregulates banking specifically, it would open up some more options, Blanda added.
“Regulation within the commercial banking universe in 2016 has hampered borrowers’ desires and abilities to fund new construction projects,” he said. “If the Trump administration deregulates banking I would envision banking may become more attractive. Banks could also get more aggressive if the government allows for it.”
Rising interest rates
The Federal Reserve raised short-term interest rates in December, and that won’t be the end, as there could be as many as three more rate increases this year.
The jury is still out on whether interest rate hikes would constrain dealmaking, as some believe it will and others still think rates are historically low, even with the upcoming increases.
There may be signs of a slowdown in transactions immediately following a rate hike for the first month, but generally things even out, Honn said.
Sellers want to get ahead of the upswing while buyers are trying to lock in rates before a hike, which may in fact increase transaction volume.
“Transaction volumes actually increase with rising interest rates. Sellers are trying to get in front of it and buyers are trying to aggregate assets and lock in interest rates,” Chad Lavender, senior managing director at commercial real estate agency HHF, said during an SHN Finance and Investment Outlook webinar in December. “A lot of people were talking about how much rates increased this year, but [we are] still 11 basis points less than this point last year, and rates are at historic low levels.”
Effects on REITs
REITs saw a slow down in acquisitions 2016, but did see acceleration in dispositions. This year, however, could bring a change.
“[The REITs hit] pause [in 2016] to digest what they had done and look at their portfolios as a whole to dispose of assets that didn’t fit into their larger strategic plan,” Beth Mace, chief economist and director of capital markets outreach at the National Investment Center for Seniors Housing and Care (NIC), said during the webinar. “[It] will be interesting to see in 2017 because the cost of capital could be affected by the economic environment, but that said, there could be good opportunities coming in the field next year.”
Other opportunities that could be seen this year include partnerships overseas, Blanda shared.
“More recently we have been starting to see overseas investments, specifically with China partnering with domestic institutional investors,” he said. “These foreign institutions can be hungry and willing to take a little lower yield.”
The trend of operating companies buying back properties they lease from REITs is something to keep an eye out for this year as well, Honn added.
“We don’t foresee a major change [this year], Blanda said. “The end of 2016 will be spilling into 2017. We will see what the new administration will do to the health care system and payment systems in individual states.”
Written by Alana Stramowski