Opportunity zone funds held promise for senior housing investment prior to Covid-19, and the sector may gain greater luster for these funds as a result of the pandemic. However, the outlook remains mixed at the moment, with some funds bullish on senior living and others avoiding the space, and the opportunity zone program facing ongoing uncertainties.
One bullish investor group is Pinnacle Partners, which is consulting with senior living industry veteran David Eskenazy. Coming out of Covid-19, opportunity zones can serve as the economic stimuli that they were intended to be, Pinnacle Partners Managing Partner Jeff Feinstein told Senior Housing News.
“When it was envisioned in 2017 and written into the Tax Act, it was an economic stimulus program. I think it’s even more so [now], prepared to impact economic recovery,” he said.
On the other hand, even though the 10-year hold period for opportunity zone investment seems tailor-made for senior housing, interest in the product varied when the markets were strong. Now, some funds will not even consider a senior housing pitch in the short term, thanks to a combination of confusing media reports on the coronavirus’ impact on the long-term care space and how much is still unknown about the virus.
A byproduct of the 2017 Tax Cuts and Jobs Act, opportunity zones allow investors to re-invest capital gains earnings into new investments, without having to pay taxes on the gains. There are over 8,700 opportunity zones in the United States.
Favorable demographics, recession resilience
Based in Seattle, Pinnacle partners with best in class developers to build developments in opportunity zones. The firm is now on its fifth fund and has raised over $200 million to date, almost exclusively multifamily including affordable housing, workforce housing and senior housing.
“We think these product types are resilient to recession, as opposed to office or retail or hospitality,” Feinstein said.
Pinnacle prefers opportunity zones in West Coast markets because the firm’s research indicates that these areas have positive demographic trends. It successfully capitalized projects in Seattle, Tacoma, and Los Angeles and is planning a senior housing development on a waterfront location in Oakland, California. Market studies revealed that the area is undersupplied with senior housing, he told SHN.
Pinnacle formed an advisory board to offer advice and guidance for its developments. One member of that board is David Eskenazy, the former president of Merrill Gardens who left last October and became chairman of the new U.S. management arm of Montreal-based real estate firm Cogir. Eskenazy’s consulting with Pinnacle is separate from and unrelated to his responsibilities with Cogir.
Eskenazy believes that senior housing is poised to capitalize on post-coronavirus investor interest in the long-term. Senior living’s response to the pandemic has been as fluid as the virus itself, and positive cases in new hotspots such as Arizona, Florida and Texas have been predominantly people under 30, proving the case for senior housing as a safe haven for the elderly.
“Safety is the new sexy,” he said.
Once the dust settles from the pandemic’s disruption, Feinstein believes that opportunity zones will be even more attractive to investors that decided to sell stocks and other passive investments during the pandemic’s early weeks, and that senior housing’s long-term investment thesis dovetails perfectly with IRS opportunity zone guidance.
“Our supposition is that there’s a lot of people with [capital] gains now, and they would like to get the tax benefits. They also would like to invest in alternative assets, i.e. real estate, as opposed to stocks and bonds. So I think there’s going to be a significant uptick,” he said.
Covid-19 investment fear
Other fund managers believe the pandemic has cooled interest in senior housing for the foreseeable future. And, opportunity zone activity as a whole has been curtailed in the near-term by Covid-19.
Investors in the opportunity zone space appear to have retreated to the sidelines while the pandemic continues, similar to traditional investors during the crisis’ early weeks. According to a survey of 108 people active in opportunity zones released last week by Economic Innovation Group, 52% responded that the pandemic had a negative impact on their opportunity zone activities. Those that continue to seek opportunities in the space indicated that sustaining enthusiasm for investment hinges on whether the federal government will extend the investment deadline beyond 2026.
Capital Gains Opportunity Funds will not even consider higher-acuity senior housing projects in the short term, Managing Director Tom Ablum told SHN. His fund plans to raise up to $250 million to deploy in real estate projects in opportunity zones nationwide. The fund prefers independent living and active adult housing, and is looking to finance a 250-unit independent living community in Orlando.
Ablum believes that senior housing will struggle for interest as a result of news reports lumping higher acuity levels of care such as assisted living facilities with skilled nursing, which was hit particularly hard by the virus. That perception will be hard to overcome for developers and operators seeking financing from opportunity funds, even as industry groups and third-party marketers launch campaigns touting the resiliency of senior living throughout the pandemic.
“For investors, the perception is that assisted living, memory care and [skilled nursing] is where the problems are,” he said.
Fund managers will need to contend with serving their investors moving forward, and funds such as Capital Gains Opportunity Fund do not have traditional, institutional investors in its pool that are savvy to market trends and disruptions. Its investors run the gamut: individual retirement accounts, high net worth individuals, and some family offices.
Those investors take their cues from what they see and read in media reports. As a result, they do not want to invest in anything outside of a traditional multifamily deal in the near future. Senior housing is out, hotels are off the table and student housing is a non-starter.
Capital Gains Opportunity Fund is even doing due diligence on multifamily opportunities, Ablum told SHN.
“We’re only looking at deals in primary or secondary markets,” he said.
The fluid nature of the pandemic and the response from senior living may keep the fund’s investors cool to the product throughout 2020, and beyond.
“I think a year or two years from now, we’ll look back and be able to better assess what happened,” Ablum said.