When Mike Taylor, now with First Midwest Bank, first entered the seniors housing sector 13 years ago, he joked to friends that he was in the “sexy senior living space.” Fast-forward to today, and his comment has proven to be more prophetic than he probably could ever have imagined.
“Everyone and their brother wants to be in [seniors housing], whether it’s development or operations or whatever,” said Taylor, senior vice president and group manager of healthcare lending at Chicago-based First Midwest Bank.
“That’s scary. When there are lenders out there — whether they are traditional or non-traditional sources — that are willing basically to throw money at any and every project, there is going to be a fallout,” added Taylor, who has experience on the for-profit and not-for-profit lending side of the business. “We’re seeing some silly stuff that is taking place in the market,” including attempts to push loan-to-cost ratios as high as 85 percent on construction projects.
The insights from Taylor came during the “Capital Markets Update” panel at the second annual InterFace Seniors Housing Midwest conference. The event, which attracted 265 attendees, took place June 21 at the Westin River North in Chicago.
Moderated by Brian Robinson, senior vice president and commercial division manager with MB Financial, other panelists besides Taylor included: Eric Halpern, national head of healthcare lending, Bank Leumi; Jim Sherman, senior vice president, Dougherty Mortgage; Joshua Rosen, senior vice president, team leader, originations, Capital One; and Jeff Davis, founder and CEO, Cambridge Realty Capital Cos.
Although some banks are pulling back on construction loans due to more stringent capital reserve requirements tied to the Basel III accord, mortgage banker Dougherty Mortgage is closing a “fair amount” of construction deals, said Sherman who is based in Boston.
“If I were to prioritize the kinds of loans I’m seeing, it’s either value-add or construction loans — value-add on acquisitions,” pointed out Sherman. In many cases, borrowers are using capital to buy nursing homes and execute the value-add play by improving the facilities..
“Perhaps they have a nursing home and they want to add assisted living,” he said.
Typical construction loan terms at Dougherty Mortgage include a 65 to 75 percent loan-to-cost ratio for three to four years with a one-year extension, an interest rate of about 4 percent, plus a debt-service coverage ratio of 1.25 percent one year after construction.
Red flags for industry
When asked by MB Financial’s Robinson what keeps him up at night, Rosen of Capital One quipped, “Netflix.” Rosen, who has expertise in the HUD Section 232 Lean program, sees plenty of opportunity for owners and operators. “Borrowers are smarter today. I think operators are king in terms of getting into deals and being able to get a lot more aggressive with what they’ll accept as rents.”
HUD is like a puzzle and is constantly changing, said the Chicago-based Rosen. “There are a lot of ways to help borrowers get through that maze. That’s the kind of stuff we love as lenders.”
What keeps Sherman up at night is the wave of new entrants in the seniors housing business today. “Some of them are getting capital. Some are pairing up with operators. It makes me nervous though that are there are so many.”
Today’s scenario reminds Sherman of the mid-1990s when many companies ramped up their construction pipelines. “And we know what happened in the mid-1990s. Many of them went out of business. In fact, most of them did.”
Big D on watch list
On the construction front, Dallas is among the markets getting saturated with new product, particularly memory care, said Sherman.
The 2,341 units under construction in metro Dallas at the end of the second quarter represented 8.5 percent of existing supply, above the average of 5.6 percent in the top 91 markets, according to NIC.
“It’s scary to think of the number of projects that are going to come on line in some markets. There probably is some market for [the product] over some long period of time, but in a short period of time it’s going to have a negative impact on existing product in the market.”
Sherman questioned the long-term viability of single-purpose buildings for memory care. “The residents — the people moving in — want to see a continuum of care. The single-purpose building is a difficult one to underwrite, especially in some markets. When I see a building that is either all independent living, assisted living or memory care, I have some concerns.”
Taylor of First Midwest Bank observes plenty of 60- to 120-unit facilities getting built that are a combination of assisted living and memory care. “It seems like that in every infill market, if there is five acres of land, someone is trying to throw up an assisted living and memory care building, especially across Chicago.”
Contrarian view
Davis of Chicago-based Cambridge Realty Capital has a different take on the issue of overbuilding in the assisted living sector. He believes growing concerns over the amount of new supply are a bit exaggerated because the problem is market-specific rather than widespread.
Furthermore, the industry has demographics on its side, he emphasized. “One thing we’re not taking into account is just the huge amount of age-eligible seniors that are coming into the market over the next 10 years.”
But Sherman pointed out that 10 years from now is when the real growth in demand will begin. The oldest Baby Boomers turned 70 this year and the majority will likely not need the services of seniors housing for another 10 years.
Looking out further on the horizon, the projected population of seniors age 80 and above in 2040 is 28.5 million, which is 1.5 million higher than the previous estimate based on a review of the latest U.S. Census data and continued increases in longevity, according to the American Seniors Housing Association.
“The demand ultimately will be there,” assured Davis. “It’s a question of who is going to pay rent.”
Published reports have shown how little money the Baby Boomers are saving, according to Davis. The average pre-retirement baby boomer (ages 55-65) has $136,200 saved for retirement, according to a 2015 survey by BlackRock, a global investment management and risk management company. That figure is considered to be a small nest egg, although it doesn’t include Social Security or any pension plans Baby Boomers may have.
While nursing homes are considered riskier than other seniors housing segments because of their dependence on government reimbursement, “they are the only place where you are really going to be getting predictable third-party payors,” said Davis. “Some might argue over time that they are less risky than some of the private-pay assisted living buildings.”
— Matt Valley