By Russell Phillips, Regions Bank
As a real estate asset class serving the nation’s elderly population, the seniors housing sector was faced with serious challenges during the height of the COVID-19 pandemic.
Residents and staff of senior living facilities faced increased risk of illness, various restrictions and an unfortunate loss of life was widely reported in the media. At the same time, many families chose to keep older parents or relatives living with them rather than residing in senior facilities.
Combined, these factors led to an overall reduced demand for units. Unsurprisingly, investor interest, transactions, finance availability and new construction all slowed as a result.
JLL reports that during the onset of the pandemic through 2020, the seniors housing and nursing care sector recorded its weakest transaction volume since 2012. Investment volume decreased 43 percent on a year-over-year basis in the fourth quarter of 2020. However, by the end of 2021, the trend had substantially reversed, and investor interest had returned.
Now, midway into 2022, the outlook for seniors housing and the sector’s finance prospects have strengthened. Market fundamentals have bounced back as restrictions lessen and demand tailwinds persevere. The sentiment of lenders active in the space is on the upswing, following the course of seniors housing’s pandemic-related recovery and growing investor interest.
Of course, seniors housing comprises numerous housing sub-types. Let’s look specifically at today’s outlook for assisted living and skilled nursing facilities, as well as the finance solutions serving these assets.
Assisted living
The National Investment Center for Seniors Housing & Care (NIC) released research in March 2022 indicating demand for assisted living properties is bouncing back after a pandemic-related drop. The NIC research indicates that between the first quarters of 2020 and 2021, approximately 42,100 units were placed back in the market on a net basis, or vacated on a net basis, for 31 identified primary markets. More than 22,000 units were vacated for the NIC’s 68 identified secondary markets, equivalent to a 7.4 percent and 7.2 percent decrease in occupied stock, respectively. At its low point, occupied units stood at their first-quarter 2017 level.
Skilled nursing
Skilled nursing homes are on a bit of a different recovery path. After reaching a 19-month high level of 76.1 percent in December 2021, skilled nursing property occupancy fell 27 basis points to start 2022 at 75.8 percent. The Omicron variant caused COVID-19 cases to spike at the beginning of the year, seemingly stalling the occupancy recovery in skilled nursing. Occupancy remains low compared to the pre-pandemic February 2020 level of 86.1 percent.
Finance availability & options
The NIC Lending Trends Report for the fourth quarter of 2021 (the most recently issued as of writing this article) found key trends. New mini-perm/bridge loans for seniors housing reached a recorded high at just below $1 billion in the fourth quarter of 2021, a five-fold increase from the prior quarter. NIC attributes this increase to lender comfort with mini-perm/bridge loans as opposed to permanent loans as properties build up both occupancy and a longer track record of performance.
NIC’s report also found delinquencies edged a bit higher in the fourth quarter from third-quarter numbers, in both seniors housing and nursing care facility loans. However, delinquencies are still down from pandemic highs recorded in the third quarter of 2020. They are also below 1.5 percent of total loans. Delinquency data includes loans in forbearance for some lenders.
Additionally, NIC found total loan balances declined slightly for seniors housing, but were generally flat, reflecting some maturing loans coming off the books for lenders. Total loan balances increased modestly, 2.1 percent, for nursing care in the fourth quarter while the issuance of new construction loans slowed sharply compared with third-quarter 2021 volume.
GSEs stay in the game
Three agencies offer finance solutions for assisted living and nursing home facilities: Fannie Mae, Freddie Mac and HUD. Fannie Mae and Freddie Mac financing is designed specifically for existing, stabilized and purpose-built seniors housing properties. With typical five- to 15-year terms, as well as fixed- and variable-rate options, benefits of these offerings include customized solutions, flexible yield maintenance periods and competitive pricing. Borrowers seeking to begin a financing relationship with either Fannie or Freddie would be well suited to contact an approved Fannie or Freddie senior housing lender directly to start financing conversations.
HUD offers financing via FHA Section 232/223(f). Eligible properties must have been completed or substantially rehabilitated at least three years prior to the date of the firm commitment application. Fixed-rate and nonrecourse, the program supports borrowers comprising a single asset and single purpose entity (either for-profit or nonprofit).
Rates are determined by market conditions at the time of the rate lock. Given the potential pitfalls, and sometimes rigid process, of FHA/HUD financing, borrowers should seek guidance from an experienced, transparent HUD lender to discuss the finance options open to them and based on their financial projections.
In addition to agency-provided financing, certain national, regional and community banks offer on-balance sheet lending options for seniors housing and/or skilled nursing facility owner-operators, primarily in the form of construction, bridge or short-term loans. Many market participants agree that over the past several years the demand for bank financing for healthcare facilities has increased.
However, many banks stayed out of healthcare financing (or provided limited debt) during the pandemic. Nevertheless, certain banks remained involved within the debt market, especially those also able to provide direct agency financing executions.
Additionally, as facility occupancy and operating incomes fluctuated during the pandemic, bridge financing from the active banks became an ideal option for many borrowers seeking a short-term debt solution as a conduit to future Fannie, Freddie or HUD longer-term permanent financing.
A borrower seeking bank financing today might learn their relationship bank does, indeed, finance this sector. However, if not, experienced regional and national healthcare lenders provide alternative options.
One obvious finance concern for all in seniors housing is rising interest rates. Despite any headwinds caused by rate hikes, however, signs point to lenders, borrowers and investors all remaining bullish on the sector, as the pandemic continues to recede and another surge of baby boomers is on the horizon.
Russell Phillips is managing director of real estate capital markets for Regions Bank, a nationwide seniors housing, multifamily and commercial real estate lender.