The first half of 2012 has been active for seniors housing developers, operators and lenders. Occupancy rates are recovering and the market has seen stronger rent growth. However, with the approach of a new generation of seniors, many developers and operators are revising their approaches—and their portfolios. Portfolios are smaller, however, with interest in specialized care offerings rather than large CCRC projects. Meanwhile, REITs (real estate investment trusts) have actively pursued acquisitions and mergers. It is a market where the customer demographic is continually replenished.
SHIFTING INVESTOR FOCUS
Because of diminishing home values and cost consciousness, many seniors are postponing senior living decisions. National Investment Center for the Seniors Housing & Care Industry (NIC) President Robert Kramer notes that investor sentiment is growing to develop needs-based properties (higher-acuity assisted living, memory care and post-acute) in response to the new generation of seniors knocking at the door of long-term care. Many independent living settings are adding home health components to forestall transition to a higher-acuity setting.
Michael Hargrave, vice president, NIC MAP, credits the shift in sentiment to the investors’ concerns about occupancy and the pressure they witnessed on rental rates in the choice-driven CCRC and independent living segments during the past recession. A new phenomenon is the interest in freestanding memory care facilities.
According to Imran Javaid, managing director, Commercial and Specialty Finance, Capital One Bank, “Developers are paying more attention to scale…to right-sizing their properties.” He sees operators making do with what they have. Fewer large-scale projects are in development; operators are looking to right-size their projects in anticipation of the consumer’s economic realities.”
THE LENDING ENVIRONMENT
Deals are still being made. “The investment community understands that long-term care is an operations-intensive business,” says Hargrave. Lenders are focusing on developers who understand the business and can adjust to changing market conditions, he adds.
Javaid notes that developers and operators are shopping around for the best rates from lenders for their deals. “Right now, construction lending is the most difficult to secure, but renovation funds are easier to acquire,” he says, noting that many LTC buildings are about 40 years old, often more cost-efficient to renovate than to tear down and rebuild.
NIC’s Kramer sees the current climate as leaning toward the “haves” rather than the “have nots.” He explains: “If you are a good operator with a proven track record and history of meeting your numbers and adjusting to market conditions, lenders will continue to do business with you because they know you will deliver.”
Hargrave adds that for the new entrant—new developer, new operator—securing funding may be very difficult, maybe impossible. “For a new developer you practically need to come up with 100 percent debt equity, especially for new construction. Without it, financing will be hard to get.” Kramer adds, “Unless a new developer can totally handle financing alone, a proven partner is advisable.”
In the seniors housing industry, does the political makeup of Congress and the administration matter? Kramer believes that this is a two-pronged issue. He does not see the election contributing to a slowing of transaction activity. “If anything,” he says, “it might speed things up with pressure to get deals done in 2012.” Skilled nursing is a different story, however. “Some people believe that the election presents a great opportunity, while others want to hold back because of the increased pressure on federal and state budgets. Will we see this huge expansion of Medicaid?” he says.
Hargrave agrees: “There are a lot of questions. What will Obamacare mean for Medicaid and long-term care? What if the ACA gets repealed?” But the industry is not politically driven. “There are many forces that can reshape the market. Many providers and investors see real opportunity ahead.”
Regardless of the November outcome, Javaid does not see lending being affected. “People will be turning 65 every day for the next 10 years. There will be markets at the high and low ends of the project spectrum as affordability will be a prime factor in the decision to move to senior living,” he says.
Industry experts forecast a growing demand for seniors housing. Developers and investors are not standing still; they are actively creating properties that will engage and enable older Americans to enjoy life in an environment designed to meet their needs. Major mergers and acquisitions by healthcare REITs attest to that trend. Seniors housing is and will continue to be an active and vital market.