Senior Housing Valuations Drop About 5%, Deal Timelines Stretch 9 to 12 Months

The senior living industry has so far avoided some of the most dire early predictions regarding the possible disruptions of Covid-19, giving some investors hope that the sector is already on its way to recovery.

But the industry is by no means out of the woods yet, and what happens in the coming months will likely determine whether that more hopeful sentiment bears out.

That’s according to a new report from commercial real estate services firm Jones Lang LaSalle (NYSE: JLL). The report, released Thursday, is meant to serve as an update to JLL’s Spring 2020 Investor Survey, and includes a survey of 109 investment sales professionals, debt providers, developers, private equity investors and other stakeholders.

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Although it’s clear Covid-19 has driven up many operators’ expenses while putting a damper on occupancy and revenue over the past three months, the industry has also shown resilience to the pandemic’s pressures. And even while 83% of the JLL survey’s respondents expect cap rates to increase as a result of Covid-19, those trends are also expected to be short-term in nature, the report noted.

There is early evidence that the industry’s ongoing decline in occupancy is stabilizing, according to the latest Covid-19 survey conducted by the National Investment Center of the Seniors Housing & Care (NIC). As of June 7, the pace of move-ins and move-outs had improved across all senior housing segments, and a smaller share of organizations reported month-over-month and week-over-week declines in occupancy than at any time during the organization’s seven prior Covid-19 impact surveys.

The stabilized occupancy rate for majority assisted living properties fell 260 basis points to 85.2% between March and May, while independent living occupancy dipped 190 basis points to 89.5% during the same period, according to figures NIC released on June 16.

National Investment Center for Seniors Housing & Care (NIC)

In its completed market valuations, JLL identified a 1% to 7% decline in gross revenue as a result of the pandemic, with an average decline near 2%, according to the report.

Senior housing and care operating expenses increased by a range of 3% to 10% in 2020 as operators boosted workers’ pay and scrambled to procure PPE, according to market valuations completed by JLL. But some of these expenses are likely temporary, or can be offset by reductions in spending elsewhere, according to Zach Bowyer, managing director at JLL.

“Some of those early numbers were very bleak, but for a good reason,” Bowyer told Senior Housing News. “Now that they’ve gotten a handle on that, we are starting to see expenses normalized.”

The new report also lends credence to the idea that this recession is not like the last one in 2008. For one, the U.S. housing market is in better shape than during the Great Recession, and that should help maintain demand for lower-acuity senior housing types, such as active adult and independent living, Bowyer said.

While the number of survey respondents expecting to increase their exposure to senior housing and care fell from 60% in January to 47% in May, the industry is still a good bet when compared against other, harder-hit property types such as retail or hospitality. And senior housing rent collections have remained stable during the pandemic, with little to no change in loss-to-lease, according to the JLL report.

“Senior housing, from a performance standpoint, relatively speaking, is still doing well,” Bowyer said. “It is somewhat adhering to its reputation for being recessionary resilient, even in this environment.”

As for where investors see the greatest opportunities, many are embracing more need-driven property types, such as assisted living. Among the survey’s respondents, 42% identified assisted living as the biggest opportunity for investment, while just 13% said the same about independent living. That’s a stark difference from what investors told JLL in January, when 27% said assisted living presented the biggest opportunity for investment, and 21% said the same about independent living.

Recent market valuations have been reported at a discounted rate approximately 5% lower than pre-pandemic pricing, according to the report. Among buyers and sellers, the expected marketing time for a deal increased from six months in January to nine to 12 months in May.

Although Bowyer initially expected the Covid-19 pandemic to scare newer investors away from the industry, that has so far not happened.

“Almost the opposite has occurred, where even more new capital has started to gain interest in this space,” Bowyer said.

There are some early signs that capital markets are beginning to thaw, and that new deals are in the works. JLL has also noted a small uptick in market study requests for new developments. On the other hand, a decent number of potential deals just aren’t getting off the ground right now.

“We are seeing a lot of activity in terms of potential deals, like LOIs,” Bowyer said. “Still, I would estimate half of them, if not more, come back to our desk, and then something will happen where it will either go on pause or the deal will be off.”

In the long-term, investors are still “cautiously bullish” about senior housing. But the coming weeks and months will test the industry’s resilience, especially if there is another spike in infections similar to what occurred during the early days of the pandemic.

“We’re really in uncharted territory,” Bowyer said. “It’s unfortunately kind of a wait-and-see type situation.”

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