According to a story published this week by NREI on a new National Investment Center report, assisted living is seeing positive trends, which is helping stabilize some minor backward trends in independent living. AL facilities in the 31 largest MSAs saw absorption of about 40 basis points, while IL dropped about 40 basis points.
Most interesting is that the article says the pipeline for new construction is slowing and that a number of new facilities expected to open this year have been delayed. The primary culprit - financing. This is exactly what we've seen as well. There is significant pent up demand for new facilities, but finding money to get them off the ground is challenging. The typical senior care lenders, e.g., HUD, Fannie, etc., are not putting new construction high on their list, if at all. Even if they will look at them, it could take up to a year to get a deal approved. Traditional banks might do a deal, but need a well-capitalized borrower who will guaranty the debt with effectively full recourse.
As an alternative, we have had success assisting clients through alternate financing structures, primarily a sale-leaseback. There is significant capital ready to get these deals done, albeit at a higher cost of capital than traditional financing. But most clients are willing to swallow the higher cost to get these facilities on line. The upside is too big to wait for the debt markets to return.
As the senior market continues to stabilize and absorption trends up, our guess is that the construction pipeline is going to grow. Contrary to the article's premise, we don't think the construction pipeline is slowing - we think it's growing but with a bottleneck in the way hindering getting the deals actually done. Expect to see an explosion of new construction once the debt markets really do come back.