Thoughts on Capital Deployment in the Seniors Housing Sector

By National Real Estate Investor

This commentary provides a summary of some of the considerations debt and equity providers may be thinking about when they deploy capital into the seniors housing sector. Starting with the opportunities are five considerations.

First, seniors housing private equity returns for institutional investors have outpaced those of other commercial real estate for the last 10 years on both an appreciation and income basis. Second, investment in seniors housing provides diversification because the sector is not as cyclical as other property types due to its “needs-based” demand characteristics. Third, while NOI growth may experience a dip in 2018, Green Street Advisors projects seniors housing will outpace the broader major sector NOI averages in 2020, 2021 and 2022. Fourth, with nearly two of every three properties built before 2000, the inventory of seniors housing properties is old, and often a property refresh is needed for design, functionality and efficiency. Fifth, seniors housing is increasingly recognized as being part of solution for population health efficiencies and health care cost containment, a growing social, economic and political reality.

And finally, there are the demographics, which seemingly paint a rose-colored vision for strong demand for many years ahead. Or do they?  The perception of immediate demographic-driven demand by the baby boomers for seniors housing is different from the reality. Anecdotally, today’s typical seniors housing resident is estimated to be 83 years of age or older. Today’s oldest baby boomer is 72 (those individuals born between 1946 and 1964). This suggests it will be several years until demand is directly impacted by growth in the baby boomers.

With a relatively low occupancy rate of 88.3 percent in the first quarter of 2018 (lowest in six years), the industry needs to consider ways to boost occupancy.  One way is to grow penetration rates. (See the January 2018 NREI article on growing penetration rates.) The second is to slow the rate of new supply delivery and the third is a combination of the two.

It is notable that not all markets face the same conditions, however. There is a very wide 17-percentage point difference between occupancy rates for the most occupied seniors housing market (San Jose, Calif., at 95.1 percent) and the least occupied (San Antonio, Texas, at 78.3 percent), according to NIC MAP Data Service.

In addition to occupancy challenges, many operators are facing staffing challenges in recruitment and retention of appropriately trained staff at all levels in the organization. (See the April NREI article that addresses solutions to labor shortages.)

Taken in its entirety, it’s a time for a cautious near-term approach in the seniors housing sector. Operators and investors that had underwritten deals with 90 percent or higher stabilized occupancy rates a few years ago may face pressures if they open in markets with less than 85 percent average occupancy rates.  Moreover, achieving NOI expectations may be difficult when average hourly earnings for assisted living operators are increasing at a 5 percent annual rate.

On the other hand, investors that have partnered with strong operators located in strong markets are seeing outsized investment returns today. And for those who are not yet seeing these returns, they can perhaps draw comfort from the prospects of the demographics coming, although perhaps not immediately.

For those investors with capital, holding money on the sidelines may be a good near-term strategy, if they believe that distressed deals may need capital infusion, recapitalizations and new partners.

This article provided by NewsEdge.