Why Senior Housing Assets Are Taking Longer To Sell

Investor interest in senior housing remains strong and will continue for the foreseeable future, but the marketing period for assets has grown longer. This may signal a growing disconnect between buyers and sellers, but also reflects the expanding investor pool and current headwinds hitting the sector.

Increased marketing time was among the findings of the Seniors Housing & Care Investor Survey and Trends Report, released earlier this month by global commercial real estate and investment firm CBRE. Thirty-nine percent of the survey’s respondents indicated the marketing period for senior housing assets has increased. The main culprit is a lack of available product on the market, CBRE Senior Managing Director for Valuation & Advisory Services and National Practice Leader for its Seniors Housing & Care specialty practice Zach Bowyer told Senior Housing News.

But there are other factors at play.

Advertisement
Knapp Group Seniors Housing Advisors
Knapp Group Seniors Housing Advisors Founder and Principal Jim Knapp (left) and Managing Partner Justin Knapp

When marketing a senior living asset for sale, each state and property type has a unique set of challenges, Knapp Group Senior Housing Advisors Founder and Principal Jim Knapp told SHN. Michigan-based Knapp Group focuses specifically on senior housing transactions, and works under the umbrella of Marcus & Millichap.

But while each property has its unique characteristics, there are some common themes at the moment that are forcing even the most seasoned buyers to be more cautious in their underwriting.

“There are interest rate increases that are going on and occupancy challenges because of new development over the past 36 months,” Knapp said. “One of the biggest challenges we hear a lot about is staffing matters that buyers and sellers are having to address.”

As a result, brokers are finding themselves educating prospective buyers more about the specific markets they wish to enter.

Other brokers say there is not a growing disconnect.

“There is always disequilibrium in the market,” Healthcare Transactions Group Founder/Principal Mark Davis told SHN. Founded in 1996, Davis’ Maryland-based firm focuses specifically on the senior housing and post-acute sectors, and has closed $2 billion in transactions across 34 states.

“There are some concerns about headwinds in the industry, like a lower census in staffing and an expectation of what product should be, but for well-performing assets, there is not much disconnect,” he said.

More Educated Buyers

CBRE
CBRE Senior Managing Director and Seniors Housing and Care National Practice Leader Zach Bowyer

The investor pool entering senior housing is expanding and diversifying as the industry’s performance has caught the attention of the at-large commercial real estate industry. As a result, senior housing investment is undergoing an institutionalization similar to the one multifamily underwent in the late 1980s and early 1990s.

“As recently as three to five years ago, there were investor-developers who were very active in the senior housing space,” Bowyer said. “Now, increased transparency and the work of groups like NIC and ASHA have made it easier for investors to get educated. There are pension funds and major institutions committing resources to teams with sector experience, to better understand and get involved in the space.”

That educated pool of buyers is also exercising caution when it comes to picking opportunities. They are asking questions about the markets they want to enter, in order to better understand how the opportunities they are bidding for operate. With occupancies trending downward in the sector, they are also being more tactful in their approaches to opportunities.

“Three years ago, it was easier to broker a sale,” Knapp Group Seniors Housing Advisors Managing Partner Justin Knapp told SHN.

The investor pool is chasing flexible core product and eschewing value-add assets requiring added capital to renovate and meet the needs of the modern senior, Davis observes. There is a lot of conservatism from investors for projects that are more speculative, involving a lot of future pro forma projections.

“There are clearer expectations in assisted living to have buildings with a wider range of options,” Davis said. “The industry has a model of what is considered optimal and desirable.”

Despite the access to more data on the sector, there is still a lack of sobriety among some of the newer investors rushing into the space, regarding the operational obligations and challenges in senior living.

“The more successful investors have grown through M&A activity very organically and carefully,” Davis said.

Arbitrary regulatory hurdles

As educated as the investor pool has become, there are still some investors rushing in to the space with a lack of understanding of the operational side of senior living, and that is a factor in the disconnect. One of the challenges is in regulations, which vary from state to state.

Knapp Group recently sold Traverse Manor, an assisted and independent living facility in Traverse City, Michigan. Michigan has licensed assisted living, while independent living facilities can operate without a license. Traverse Manor was operating legally as an unlicensed facility that offered a high care model. Although the asset received brisk activity from prospective buyers and several LOIs during the marketing process, some backed out because recent changes to Michigan law created uncertainty as to whether a new operator could continue operating in a similar manner or would have to get licensed, which would have created new challenges and expenses.

“The buyer who ultimately bought the asset understood this,” Jim Knapp said.

There is a lack of sobriety among newer investors rushing into the space about the operational obligations and challenges to senior living, Davis said.

“The more successful investors have grown through M&A activity very organically and carefully,” Davis said.

Written by Chuck Sudo

Companies featured in this article:

, ,