As a population grows, it follows that more housing is needed. So with the number of Americans aged 65 and older expected to at least double by 2030 comes a call for senior housing operators and owners to keep pace.
Low borrowing costs have provided the perfect backdrop for them to do so, bringing new equity players into the market and an unprecedented infusion of capital.
“You definitely have more capital than ever before,” says Jeffrey Davis, founder of Chicago-based senior housing lender Cambridge Realty Capital Partners. “People have stayed away from senior housing for a long time but it’s becoming a much more mainstream asset class.”
The senior housing market is robust, bolstered by strong fundaments and access to cheap capital. That has created intense competition among commercial lenders and fuelled a boom in post-recession construction and acquisitions. However, signs of oversupply have some market players fearing that the current cycle is ready to bust.
Decades ago, owner-operators traded the more than $300bn, according to the National Investment Center (NIC) for Seniors Housing and Care Industry. It has performed better than almost any other real estate sector during and since the recession.
The average occupancy rate for properties in Q2 2014 was 89.9% – the highest since Q4 2007, according to NIC data. Average monthly rents per unit have leaped to $3,439, rising every quarter since the NIC began tracking them in Q4 2005, when they stood at $2,739 (see graph).
Growth beats all other sectors
“It is the only segment of the industry that has continued to have rental growth year over-year across the board,” Javaid says. “You can’t say that about retail, offices or any other commercial real estate sector.”
The scramble to get in on senior housing has contributed to all-time highs in construction and mergers and acquisitions, while increased values give existing owners a large incentive to sell.
A record 206 properties were under construction in Q3 2013 and while the number fell to 182 in Q4 of that year, that figure is still well above the 2006 and 2007 quarterly average of 167, NIC data shows.
In addition, merger and acquisition deals’ dollar volume for the first half of 2014 hit around $9bn by some estimates – more than double that in the first half of 2013.
Among major recent deals, The Freshwater Group and Health Care REIT bought two senior living communities in California for $80.5m. Capital Senior Living also scooped up three in Ohio for $83.6m.
It is reported to have financed two of the properties with a $40m, 10-year, fixed-rate, non-recourse loan with a 4.41% blended rate, and the third with a $21.6m, two-year bridge loan with a 2.9% variable rate.
While the major listed healthcare REITs – such as Ventas, Healthcare REIT and Health Care Property Investors – remain industry heavyweights, investors looking for high yields are feeding the non-traded REITs millions of dollars on a daily basis.
“Traded REITs were always big in this space and drove mergers and acquisitions in 2006-07,” Javaid says. “Now, non-traded REITs have raised a lot of capital to deploy and the metrics are good for a bank to lend because there’s so much equity coming in.”
Banks and private equity team up
Regional banks are teaming up with the private equity firms to cater to the middle and upper ends of the market, while older product is getting the attention of the non-traded REITs, he notes.
Focus Healthcare Partners, for example, teamed up with NewYork City-based private equity firm Garrison Investment Group for the $136m acquisition of four senior living communities in Alabama, Michigan, Oklahoma and Tennessee from Chartwell Retirement Residences.
Refinancing is also driving a significant level of lending. Deutsche Bank recently sold a $940m financing package for a national portfolio of 167 nursing homes operated under the SavaSeniorCare name and controlled by real estate mogul Rubin Schron – one of the largest ever bank commitments for a senior housing portfolio.
The underlying mortgage loan allowed the portfolio’s maturing $920m of existing CMBS debt (funded in 2006) to be paid off. The financing included a $550m A-note, securitised and priced under COMM 2014-SAVA late last month; a $150m B-note; and a triple-tiered, $240m mezzanine loan, which was scooped up by entities including GE Capital and Apollo Commercial Real Estate Finance.
However, as the battle among lenders plays out, the question remains as to whether buyers and developers of senior housing will be able to manage the industry’s immense growth and continue to increase rents and occupancy.
“The sticker shock is appropriate,” says Tom Goodsite, a managing director at Prudential Mortgage Capital Company. “I have been surprised at how much rents have moved up over the past 15 years across some of these assets. “Independent living assets serving three meals a day and not offering a lot of services are getting $3,000 per month,” he added. “I think there’s room for rents to move up, but they may have plateaued.”
The oldest baby boomers will not be old enough to consider senior housing for another decade. Talk of oversupply is creeping into the market, along with fears that a bubble is materialising.
“Demand is increasing as so-called baby boomers grow old and people live longer, but new development in the past 12 months is outpacing the growth in demand,” says Michael Berne, managing director with the senior housing group at commercial real estate services firm Lee & Associates.
There was a senior housing construction boom in the 1990s and by the mid-2000s swarms of investors were burned when occupancy rates didn’t keep pace and occupancy rates didn’t keep pace and lenders pulled back aggressively.
“We’ve been through this boom and bust cycle before,” Javaid says. “Will there be an inevitable bust?Yes. I don’t have the magic crystal ball to tell you the timing, but I do have the magic crystal ball to tell you that it will happen.” ■
Government lends senior housing a hand
The borrowing options for those foraying and expanding into senior housing span the commercial banks, life and credit companies, often with a component of government agency finance.
Freddie Mac’s new senior housing lending dipped to $660m in 2010, but has since rebounded to more than $900m in 2013; Fannie Mae’s similarly shrank to $600m, only to climb back to $1.6bn over the same period.
Lending through the US Department of Housing and Urban Development’s HUD 232 lean financing programme, which provides insured funding for licensed, skilled nursing facilities and assisted living communities, grew from $756m in 2007 to $5.8bn in 2013.
A recent example is Housing & Healthcare Finance’s closing of a $68.7m loan via HUD for a 547-bed, New Jersey skilled nursing facility — one of the largest HUD deals to date.
The agencies typically tolerate higher leverage and more aggressive pricing. In the case of HUD, they also provide up to 35-year fixed-rate loans. But they have historically catered to stabilised senior housing with high occupancy levels. A general lending account not tied to agency funding offers shorter terms but can be much more flexible, says Tom Goodsite, a managing director at Prudential Mortgage Capital Company.
Meanwhile, banks are more comfortable lending on senior housing than ever before, as clients make it a staple of their portfolios. Banks typically provide five-year – and up to 10-year – fixed or floating-rate loans. As more players enter the market, they face pressure to beat competitors and keep rates low.
“Nobody’s bringing borrowing rates up right now; if anything they’re going down,” says Jeffrey Davis, founder of Cambridge Realty, which specializes in both traditional and HUD-insured financing.