With interest rates rising, new construction lending appears to be slowing in the senior housing sector — but that doesn’t mean debt isn’t available, either.
So long as developers have the track record to quell lenders’ concerns, they are finding ways to source financing for their new development projects.
The National Investment Center for Seniors Housing & Care (NIC) last month released its 1Q2022 lending trends report showing that new construction loan closings were up from the fourth quarter of 2021, with lenders issuing just under $330 million for new construction projects in senior housing.
That’s a quarter-over-quarter increase of 39.4% on a same-store basis; however, new construction lending was down from its recent, post–Covid-19 peak in 3Q2021. The up-and-down lending rates of the last few quarters could signal an accordion effect on the economy with expansion of the bellows contracted amid the Covid-19 pandemic.
Currently, the U.S. economy is facing growing cost inflation in a variety of goods and services, even as other costs, such as gas prices, are falling.
U.S. Federal Reserve Governor Chris Waller and Chair Jerome Powell each signaled strong support for the third 75 basis-point interest rate increase this year, perhaps coming as early as this month. For Powell, the aim is to return U.S inflation rates to 2%, something he is very serious about in the eyes of NIC Chief Economist Beth Mace.
“Inflation is a tax on everybody,” Mace told Senior Housing News.
As a result of inflation, consumers could assume a mindset of ever-increasing prices, causing a rush to buy products immediately to beat expected price increases down the road.
“The Fed really wants to make sure that doesn’t happen. So, to do that, it’s going to slow the economy down as much as it can,” said Mace.
As a result, lending activity is down, “which is exactly what the Fed wants,” she said.
That said, there are developers embarking on new projects with construction lending in hand, including Anthology Senior Living, which is an affiliate of Chicago-based real estate development firm CA Ventures; and Ryan Cos., a prolific senior living developer based in Minneapolis.
Lending starts to tighten
Mace believes the new construction lending environment is tightening, the result of a cautious shift by banks to ensure their investments are as risk-averse as possible. Based on third-quarter lending data expected to be out this October, Mace now expects to see a slowdown in construction activity and in construction starts.
In the second quarter of 2022, the number of units currently under construction was at the lowest level since 2015 she said.
“As a result of that tighter lending environment, it’s translating into less starts, which translates into less construction,” said Mace.
Lenders like Capital Funding Group (CFG) are well aware of the need for security for the loans they issue and have had some deals fall through, according to CFG Managing Director, Senior Housing, Kenneth Assiran.
“You have higher rates, higher operating costs and higher construction costs, and then revenues aren’t creating a balance with the increases,” Assiran told SHN. “Deals in good markets with high barriers of entry and strong demographics are probably going to go forward — deals in secondary markets probably aren’t.”
Baltimore-based CFG in July closed on a $32.9 million construction loan with Griffin Living for the construction of a 108-based assisted living and memory care community in Temecula, California. About a month later, CFG and Griffin closed on a $40 million refinancing loan for a Simi Valley, California-based AL and memory care community.
Capital Funding Group’s confidence in Griffin Living highlights the more important aspect of new construction lending: track record. And even though the overall landscape is tightening, for those developers with strong relationships and a proven track record, there is still money for new projects.
But, once the building is built, it needs a quality operator. And CFG is as focused on the operator’s track records as much as it is on the developer’s.
“We really look for developers with strong experience and a strong track record,” Assiran told SHN. “We look for really strong operators then we scratch the surface and get into the market.”
Taking into account broader economic headwinds, Assiran thinks that pushing through the economic challenges of the current times could become a differentiator for strong developers.
“There are a lot of headwinds right now for developers,” he said. “But there’s a contrarian view. [Developers] that do get things done in this period are probably going to open the doors with less competition, because there will be fewer starts across the board.”
Track record eases concerns
While lenders are more cautious, those senior living developers with strong relationships and strong track records aren’t discouraged from the current state of the debt market for new construction.
“There are certainly some noteworthy lenders that have pulled back in the past couple of months I’d say, [but] I don’t think it’s had a widespread negative effect on the industry,” Anthology Senior Living VP of Acquisitions and Capital Markets Joe Marinelli, told Senior Housing News.
Marinelli, VP of acquisitions and capital markets with Anthology Senior Living, believes there are plenty of opportunities out there. “We’ve closed seven new construction deals since July 2021 … five of which came in the second half of 2021, and two have closed year-to-date,” he said.
Anthologymost recently closed on a new construction deal to build a 206-unit luxury IL, AL and memory care community in the Portland, Oregon, suburb of Beaverton.
Anthology’s bread-and-better senior living community type is either 90- to 120-unit AL and memory care communities or 150- to 200-unit IL, AL and memory care communities. Despite having a typical community-type preference, the company is still aiming to diversify its portfolio.
The other new development Anthology closed on earlier this year will be a stand-alone 120-unit independent living community in the Seattle area, a “super high barrier to entry,” location according to Marinelli.
The market demographics for all of Anthology’s new development projects align with Assiran’s observations.
In addition to Seattle and Portland, Anthology’s new development projects are in or near: Boston; Miami; Austin, Texas; and Dallas.
Being smart about both location and operational partners are front-and-center for Minneapolis-based senior living development firm Ryan Companies.
When it comes to future development projects, Ryan is “trying to be smart about the locations we’re going into and marking sure that we’re being as stringent in our underwriting and … not just doing deals for the sake of doing deals,” Anders Pesavento, senior VP of capital markets with Ryan Companies told Senior Housing News.
“We’ve been very lucky that we’ve got very strong local, regional and national banking relationships and we have not been limited on the deals we’re doing because of that capital,” Pesavento added.
That said, Ryan is changing how it underwrites, accounting for higher interest rates and that added cost those rates will have on the overall development budget. In order to do that, Ryan must be confident with the rent rates in the underwriting and with its operational partners so as to execute the strategy put in place.
“At the end of the day, [the key] is standing behind what you say you’re going to do,” Pesavento said.
