Senior Housing Presents Good Opportunties in 2011 and Beyond

For investors who like commercial real estate, but have no experience in or exposure to senior housing, now may be the time to investigate. Mel Gamzon, an industry veteran and a board member of The American Seniors Housing Association, recently shared his thoughts in an article on Commercial Property Executive. It's not news to us, but his article is a well-written, succinct summary of the market.

He shares several key factors that support why senior housing is and should continue to be a good investment.

• Occupancy levels push 90%+
• There is a relatively low industry loan default rate
• Historically controlled development
• Strong trending demographics

We would also add there are typically strong operating margins, at least on the assisted living side, which can push 40% (before rent charges). As Mr. Gamzon points out at the end of his article, there were more than $6 billion worth of non-skilled nursing facility transactions either announced or closed in the second half of 2010.

This is important for two reasons. First, there is a significant amount of focus, and consequently capital, on senior housing. Second, independent and assisted living continue to be the investment of choice, not necessarily skilled nursing.

We have seen both of these trends. There are well capitalized investors with whom we deal, such as REITs, equity funds, foreign investors and high-net worth individuals, that have shown a strong desire for senior housing and are primarily interested in non-skilled nursing. The exception to skilled nursing is when there is a continuum of care model, either as a full CCRC (rental, not buy-in) or with just assisted and skilled. That's not to say there is no interest in skilled nursing, but being significantly more reliant on Medicaid/Medicare creates a different investment model that is not as inviting as assisted or independent living.  

Because new development shut down with the rest of the real estate market, there is a deep need for new facilities to start being built. Construction financing remains very hard to obtain and the traditional GSE capital sources for senior housing (HUD, Fannie, Freddie) present so many challenges. This has created a need for alternate financing solutions and why all of our current senior housing engagements are to source construction and development capital.

According to The State of Seniors Housing 2008 report, nearly half of all independent and assisting living facilities were built before 1995. While we haven't seen the 2010 report, we can only believe that percentage has grown due to the limited development in the last couple years.

2011 is already looking like what most people thought 2010 was supposed to be - the year to rebuild. Though banks remain tight-fisted, capital is flowing from other sources. We believe that capital should and will be focused on senior housing. As everyone loves to talk about, the boomers are coming.

Assisted Living is Up But Is New Construction Slowing?

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.

Senior Housing Update - Rents Up, Occupancy Slightly Down

NIC recently released its latest data on the senior care market. NAREIT also published a story on the results. The data showed slowing activity in construction, slight declines in occupancy, but a small uptick in rents. These results seem to be in line with the regional activity we're seeing. The attached chart highlights changes from the 4th quarter in 2008 to 2009