Although there is chatter in the industry that construction is slowing down, many senior housing executives say they actually are planning to start building projects this year.
A full 75% of execs said they either are extremely likely or somewhat likely to pursue a construction project this year, when surveyed by investment banking and advisory services firm Lancaster Pollard in December. That was an uptick from 70% last year.
Columbus, Ohio-based Lancaster Pollard received survey responses from 273 people, mainly CEOs, CFOs, and owners of senior living companies. Of those respondents, 59% were associated with a for-profit provider.
The construction finding may come as a surprise; data from the National Investment Center for Seniors Housing & Care (NIC) shows new construction is cooling off, as does internal data that Brookdale Senior Living (NYSE: BKD), the nation’s largest senior housing provider, said it has collected. In addition, construction costs currently are surging and traditional banks have tightened construction lending a bit.
“This is one of the reasons we reach out to this group [of executives] every year,” Lancaster Pollard Senior Managing Director Steve Kennedy told Senior Housing News. “We see the headlines and can look at our pipeline, but this is another data set that makes you at least question what direction the market is heading.”
Lancaster Pollard’s pipeline also has more construction projects, either new builds or renovations, than this time last year, Kennedy noted. Construction may be appealing because demand still is relatively strong despite recent pressure on occupancy, he said. Another factor might be the state of the mergers and acquisitions market.
Only 22% of execs said they are extremely likely or somewhat likely to attempt to sell a facility in the next 12 months. That’s down from 65% of respondents a year earlier.
These leaders aren’t only holding back on selling, but buying, as well. In 2016, 53% of respondents said they were likely to pursue an acquisition; this year, that number was down to 43%.
Real estate investment trusts (REITs) have pulled back on their activity, particularly on the skilled nursing side, so providers might perceive less demand out there to acquire their assets, Kennedy speculated. In addition, cap rates have ticked up in recent months, with historically high per-unit/per-bed valuations now falling, and this too might have people holding off on divestitures, he noted.
“Is this the market saying, I’m not getting a price that I want, so do I renovate and/or expand?” Kennedy said. “Our data set still has a lot of mom-and-pop and smaller owner/operators, so that may be [a factor], but it is nationwide and includes lots of different makes and models, in terms of non-profit and for-profit.”
The Affordable Care Conundrum
As for what part of the care continuum will experience the most growth in 2017, the No. 1 response was “affordable seniors housing,” with 62% of respondents selecting this choice.
However, the respondents to the survey won’t be contributing to this growth themselves in a major way: Only 27% of them own, develop, or manage this asset class, and only 11% of respondents said that they have affordable housing projects planned for the next 12 months.
By contrast, 44% said they have assisted living construction projects planned, and 40% identified Alzheimer’s/memory care projects.
In terms of how construction and acquisition will be financed, 35% are considering a government agency such as the Federal Housing Administration (FHA), up from 30% last year. Loan syndications and placements followed, at 27%.
The growing popularity of agency financing might in part be due to HUD Handbook revisions making loosening some requirements for loans. In addition, a lot of the re-financing business that was “low-hanging fruit” for HUD now has been picked off, and the agency can review new construction and other projects on a shorter timeline than in the past, Kennedy said.
In addition,the fear and uncertainty about how much Fannie Mae and Freddie Mac might be wound down now has dissipated, and in fact the government-sponsored entities are becoming more creative in their financing structures for operators who are proven and qualified, according to Kennedy.
On the equity side, internal equity led with 44%, followed by private domestic investors at 29%, institutional investors at 23%, and real estate investment trusts (REITs) at 11%.
Trump Optimism
At the time of this survey, Donald Trump was a month away from being sworn in as President of the United States. Senior living executives appeared generally unconcerned about the new administration’s impact on business, with only 14% anticipating a negative or very negative influence, compared with 40% who expected a positive or very positive influence.
Still, a significant proportion—29%—said the Trump effect on their senior housing business was unknown.
Business leaders in senior housing and other industries have been bullish on a Trump presidency for several reasons, including the likelihood of more pro-business labor rules and a generally relaxed regulatory environment. Infrastructure is another area to focus on, Kennedy said.
“At its core, [Trump’s] infrastructure plan focuses on roads and public works, but he’s mentioned a few times that health care investment in infrastructure is an important part,” he said. “So if you take an economy that is at least growing, albeit not as fast as everyone would like, and you have a more favorable business environment from a decrease in regulatory burdens, and couple that with that the need to continue to invest and reinvest in public and private infrastructure, I don’t think this survey result surprised us all that much.”
Written by Tim Mullaney
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