Last week, the U.S. Federal Reserve cut interest rates by 50 basis points, lending new cautious optimism for companies looking to grow in 2025.

While the bigger impacts of those cuts likely won’t be felt until early next year – and likely not until larger rate cuts down the road – they do offer “psychological relief” for the time being, according to Lisa McCracken, Head of research and analytics at the National Investment Center for Seniors Housing & Care (NIC).

Indeed, the prospect of rate cuts were already “baked in” to many investors’ forward plans, according to Steve Ervin, senior vice president and head of FHA and seniors housing finance at Berkadia.

To Ryan Saul, managing director at Senior Living Investment Brokerage, the rate cuts come as “a shot in the arm for the market,” and could mean an uptick in new mergers and acquisitions as soon as the first quarter of 2025, according to Saul.

“I do think there is going to be a surge of activity with the rate cut, though I think everybody was anticipating it,” he told Senior Housing News.

According to Aron Will, vice chairman of national senior housing at CBRE Capital Markets, the new rate cuts also could lure institutional investors off of the sidelines and help thaw once-frozen sources of senior living M&A capital. And they will likely improve investors’ sentiments of the sector as a whole.

The senior living industry currently faces a wall of debt maturities totaling about $19 billion in the next two years. As such, the rate cut will benefit companies with communities financed floating-rate loans in 2020 or 2021, according to Bill Kauffman, senior principal of research and analytics at NIC.

“Those with high leverage and properties financed with floating-rate loans stand to gain the most. Lenders may see an uptick in refinancing requests and new lending opportunities as borrowers seek to take advantage of lower rates,” Kauffman said.

While the rate cuts won’t have much of an immediate effect on the cost of availability of land for new development projects, they could make getting construction financing easier for some, he added. Even so, “the availability of development capital will still depend on lenders’ appetite for risk,” he said.

“Some lenders remain open to construction financing, but many are still cautious and will scrutinize market fundamentals like supply and demand,” Kauffman added. “In addition, there is still discussion about challenges with development deals penciling out as acquisitions may make more sense from a cost perspective, given the compounding increases of construction costs since 2020.”

Looking ahead, Kauffman said the industry is “cautiously optimistic.”

“There is optimism regarding an improving interest rate environment, which would help senior housing operators and investors better manage debt loads and potentially improve cash flow margins,” he said.

Market moves away from distress-fueled transactions

In recent months, distress drove new M&A, mostly related to companies and properties with looming debt maturities that couldn’t wait any longer. But that is rapidly shifting as companies with variable short-term debt find more relief and can more easily cover debt service.

As such, those investors and owners will likely feel like they have more net cash that can be put towards a future acquisition, according to Grant Blosser, managing director at Vium Capital.

But while the latest rate cuts have a largely psychological benefit to start with, that will go a long way in priming the market for more investments down the road.

Even before the rate cuts, the number of senior housing and care transactions had risen steadily in 2024. According to data from Irving Levin Associates, there were 183 publicly announced senior housing and care transactions in the second quarter of 2024, amounting to an increase of 21% over the 151 transactions in the first quarter of the year.

Though many senior living stakeholders anticipated some interest rate relief in 2024, the most recent cuts could signal that further ones from the Fed are on the way “sooner rather than later,” Blosser said.

“I think seeing those come to fruition will really be another big boost of confidence to the market,” Blosser told Senior Housing News.

Ervin said he has observed more willing buyers and sellers entering the market, and that should continue with the lowered interest rates.

The rate cuts have also meant that buyers and sellers can move closer together, and potentially find it easier to make deals that were harder to pencil under previously higher interest rates.

“I truly believe we’re at the beginning of what is going to be more flow business, flow transactions than we’ve seen in quite a long time, and not distress transactions,” Ervin said. “I really feel very positive about the industry today.”

He added banks are becoming more willing to be involved with lending and even those who were active are seeing more competition springing up in the space, resulting in positives for the market. However, for the time being, the market will likely still continue to better support cash buyers like private equity and real estate investment trusts (REITs), he added.

Indeed, “any buyer that has been on the sidelines with a war chest of cash is going to be in a good position, even though interest rates have gone down,” Saul said.

“Still, on the lending side, more equity is being needed for opportunities,” he added. “So it does level the overall playing field and opens it up for both institutional investment and private investment.”

But even while REITs will remain at an advantage, at the end of the day “growth will still depend on market-specific factors such as regional performance and operator capabilities,” Kauffman said.

Not much effect on development for now

The senior living industry currently faces a $275 billion “supply gap” that must be overcome by 2030. But while the interest rate cuts may make some new projects a little easier, they likely won’t accelerate new development on the whole for now.

One barrier to new development projects in recent years has been the lack of financing for new projects. As Kauffman noted, the interest rate cuts could mean construction financing is easier to obtain in the months ahead.

But interest rate cuts don’t affect some of the other major barriers to new development, such as the cost basis of new projects. Will noted that it will likely still be easier to buy existing communities at a discount than to develop new ones, save for rare circumstances where project planners find an “extraordinary piece of real estate that is truly irreplaceable.”

And Blosser said that “most capital markets companies are going to look at ground-up new development as the most risky suite in their lending product.”

“I think the rate cut will help ground up new development financing, but I think that will take the most time,” he said. “Maybe later next year, you’ll start to see more development starts — but it will help.”