Senior housing is no longer an under-the-radar investment opportunity and is now considered an institutional-grade asset class for real estate investors. But the pool of investors grows, however, as some noticeable headwinds are starting to form.
Those future headwinds and other obstacles were on the minds of the panelists on Senior Housing News’ Finance & Investment Outlook for 2019 webinar. Following are a few standout items discussed during the hour-long event.
A reduced appetite for peak pricing
Through Q3 2018, senior housing sales accounted for $9.1 billion in transaction volume. That is a significant dropoff from 2017’s $16 billion in sales volume and $14.5 billion posted two years ago. Unless a flurry of deals are completed before year end, there will be no chance of matching those totals, National Investment Center for Senior Housing & Investment (NIC) Chief Economist Beth Burnham Mace said.
One factor in the reduced volume is a lack of big portfolio sales. The number of properties changing hands this year is on par with 2017, Mace said. But there are more single asset and one-off deals happening.
The flurry of portfolio deals over the past couple years has resulted in a fragmented market, LTC Properties (NYSE: LTC) Executive Vice President and Chief Investment Officer Clint Malin said. Westlake Village, California-based LTC is a real estate investment trust (REIT) with 205 communities across the continental U.S.
Markets with high barriers to entry will continue to see strong pricing and interest, Malin added.
As the market matures and investors are more educated about various product types, there are a growing number of pricing mismatches, Thrive Senior Living Chief Investment Officer Alan Moise said. Atlanta-based Thrive operates a portfolio of 20 properties in nine states.
Sellers with high pricing expectations are unable to finalize deals, while new buyers are not willing to pay stabilized pricing for non-stabilized assets, according to Moise. The few opportunities that are being completed are being quietly marketed, and sellers looking to salvage broken deals are going to have to rely on existing relationships to sell a property.
“If a buyer is smart, there is still tremendous opportunity to be positioned for value-add opportunities,” he said. “They are relationship-based transactions.”
Interest rate pressures
After nearly a decade, interest rates are on the rise and that is flattening yield curves for investors seeking high returns on their senior housing investments, Mace said. The risk premium for investors, compared to the 10-year Treasury note, is now around 250 basis points.
The Federal Reserve has raised interest rates by 170 basis points in 2018, Hunt Real Estate Capital Senior Managing Director Kathryn Burton Gray said, and she expect the another interest rate hike next month. Fed Chairman Jerome Powell suggested he may have been too aggressive with rate hikes and may slow the pace of future increases.
Even if the Fed slows the pace of interest rate increases, Burton Gray sees a slowdown from traditional lenders.
“I think you’re going to see a drop out of local banks, because they come in when (the market) gets frothy,” she said.
Foreign investment will slow
The Trump administration’s trade wars are already forcing some countries to scale back the amount of capital they are deploying to U.S. real estate, which they considered a stable investment for years. There used to be a large influx of Chinese money in senior housing, Burton Gray said. That has slowed as trade talks continue, and Burton Gray is taking a dim view on foreign investment heading into next year.
But it will not dry up completely. Foreign investors from China, Russia and other nations are buying senior housing in order to learn best practices from operators, then take those lessons and build senior housing in their home countries, Mace said.
This is only a taste of what was discussed during the webinar. Click here to access the full recording.
Written by Chuck Sudo