As expected, the Federal Reserve raised the benchmark short-term interest rate by 0.25% on Wednesday. The move was widely anticipated within senior housing and other industries, and continues a trend toward higher rates that the Fed began in December 2015, following an extended period of ultra-low rates following the economic crisis in 2008.
Conventional wisdom has it that higher rates dampen investor appetite for real estate investment trusts (REITs), hurting their stock price, although there is some evidence to the contrary. In any case, with markets already pricing in the rate hike, REIT investors seemed to shrug off the Fed’s move on Wednesday. Shares of the “big three” senior housing REITs—Ventas (NYSE: VTR), Welltower (NYSE: HCN), and HCP (NYSE: HCP)—all were trading up in the late afternoon.
Big picture, the rate hike reflects a strengthening economy.
“Today’s announced 25-basis point interest rate increase … indicates that the Fed believes in the overall strength of the economy and that the economy is strong enough to withstand higher interest rates,” Beth Mace, chief economist and director of outreach at the National Investment Center for Seniors Housing and Care (NIC), told Senior Housing News. “It also indicates that the Fed thinks upward pressures on inflation are present.”
That upward pressure is coming, in part, from a low unemployment rate. The 4.3% unemployment rate recorded in May was a 16-year low, and is below what the Fed considers a “natural” jobless rate. As employers compete for workers, wages tend to rise, fueling inflation.
“We’re already seeing this in the seniors housing markets with many anecdotal stories by operators of rising wage pressures associated with shortages of labor and with higher minimum wages being pursued in many states,” Mace said. “The Bureau of Labor Statistics data also shows rising wage pressures, with average hourly earnings for assisted living up by 4.2% on a year-over-year basis in the first quarter.”
At least one major operator—Dallas-based Capital Senior Living (NYSE: CSU)—is not that concerned about the current interest rate environment. Higher rates are good for the purchasing power of senior living consumers living on a fixed income, allowing providers to raise rents, Capital Senior Living CEO Larry Cohen recently said. Slightly higher rates also should not compromise CSU’s ability to obtain financing for acquisitions, he added.
The Fed is holding to its previously announced intention to raise rates one more time in 2017, the central bank confirmed Wednesday.
Written by Tim Mullaney