Why Overbuilding Won’t Dampen Senior Housing Dealmaking

Senior housing stakeholders have understandably been on high alert this year, as concerns around overbuilding seem to grow by the day.

These concerns, however, may be overblown.

In fact, capital is plentiful and can potentially offset any negative effects of overbuilding, according to the Spring 2017 Seniors Housing Market Report from Chicago-based global commercial real estate services firm Jones Lang LaSalle (JLL).


Overbuilding realities

Overbuilding will likely lead to an increased number of “distressed” assisted living and memory care deals in certain markets this year, though pricing will probably stay “relatively high” due to the number of buyers chasing those deals, the report says.

Overbuilding will also likely negatively impact assisted living and memory care occupancy in several markets in 2017, including Chicago, Denver, Salt Lake City, Detroit, numerous markets in Florida and all of the major markets in Texas, the report notes.


Currently, the average occupancy for senior housing nationwide is below 90%—but the occupancy rate for assisted living and memory care in several markets is even lower, in the mid-80% range.

Despite all of this, hope is not lost for lucrative assisted living and memory care deals.

Even in saturated markets, investors continue to aggressively pursue [assisted living and memory care] acquisitions,” the JLL report reads. A great deal of the capital that’s currently seeking deployment is targeted to be put toward “opportunistic” acquisitions, and there is more of this type of capital than there are deals, JLL adds.

“As a result, even un-stabilized projects well behind pace on lease-up are likely to receive multiple offers, and sell for aggressive prices,” the report says.

New capital sources ‘daily’

Plenty of capital—new and old, domestic and foreign—is being thrown at U.S. senior housing, and that will likely continue throughout 2017.

“Equity for new developments and acquisitions remains readily available, with new entrants seeking to enter the market almost daily,” the report reads.

The financing rates for Fannie Mae, Freddie Mac and HUD loans, meanwhile, “remain quite attractive,” and all three institutions are expected to have “very busy years.”

It’s possible, however, that construction financing will become more difficult to secure, due to banks tightening their underwriting.

All the while, the U.S. senior housing industry is getting more attention from foreign capital sources.

About $3.4 billion worth of foreign capital has been invested in U.S. seniors housing over the past decade, 40% of which has come from Canada and 35% of which has come from the Asia-Pacific region, according to a separate note published by JLL.

Chinese investors have been particularly interested in U.S. seniors housing as of late.

Brookdale Senior Living (NYSE: BKD), for instance, is reportedly in talks to be purchased by a Chinese firm for $3 billion, and China-based Cindat Capital Management partnered with China-based Union Life Insurance Co. Ltd. to acquire a 75% interest in a U.S. portfolio of long-term and post-acute assets for $930 million last November.

Written by Mary Kate Nelson

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