Capital Markets Panel Sees Light at the End of the Tunnel for Borrowers, But Challenges Persist

by Jeff Shaw

By Matt Valley

The seniors housing industry is still reeling from the “triple whammy” that began with a deadly pandemic in early 2020, making 2024 a pivotal year for borrowers and lenders, says Ari Adlerstein, senior managing director with Meridian Capital Group.

“We had COVID, then we had labor shortages, and now we have high interest rates. Folks that I’ve been doing business with for 13 years in my career who are really good operators and who run a great shop with tons of assets and lots of cash flow are hurting — and in turn the lenders are hurting. The lenders have been patient, but there’s only so long that they can be patient.”

The “A” borrowers are still securing loans, said Adlerstein, but for borrowers considered to be on the cusp of a deal “the lenders are looking for more reasons to say ‘no’ than they are looking to say ‘yes’ today.”

The comments from Adlerstein came during the capital markets panel session at InterFace Seniors Housing Northeast in Philadelphia on Nov. 29. France Media and Seniors Housing Business jointly hosted the seventh annual conference at Hilton Philadelphia Penn’s Landing.

Moderated by Chuck Hastings, vice president of finance and business development for Juniper Communities, the panel included Jeff Klar, vice president at Bayview PACE; Kevin Oakley, director at Lument; and Adlerstein.

Volatile stretch for debt market

Since March 2022, the Federal Reserve has raised interest rates 11 times to combat inflation, gradually raising the federal funds rate from near zero percent to a target range of 5.25 to 5.5 percent. 

The 10-year Treasury yield, a benchmark for permanent financing, rose from about 1.5 percent at the start of 2022 to 5 percent in October 2023 before falling to 3.86 percent by year’s end. On Jan. 18, it was 4.14 percent.

As interest rates escalated, so too did the Consumer Price index (CPI), which peaked at an annual rate of 9.1 percent in June 2022. The latest reading of the CPI in December 2023 came in at 3.4 percent, but that’s still hotter than the Fed’s 2 percent target rate of inflation.

The good news is that the occupancy rate for private pay seniors housing for the 31 NIC MAP Primary Markets increased from 84.3 percent in the third quarter of 2023 to 85.1 percent in the fourth quarter, according to NIC MAP Vision.

Against this economic backdrop, borrowers and lenders have tried to take the volatile debt market in stride. Meridian is still closing deals in the skilled nursing and senior living segments, but Adlerstein acknowledged it’s a challenging business environment.

“The sniff test, as we call it, comes pretty early as to whether [the transaction] is worth our time. Guys like me get paid when a deal closes,” explained Adlerstein. “We don’t really want to take on a transaction unless we feel really good that it’s going to close. Otherwise, I’d rather be golfing.”

Oakley pointed out that Lument continues to be an active lender despite the volatility in the debt market, but he said the credit box is smaller and the due diligence process is taking longer than usual.

The key for mortgage bankers is to be adept at matching borrower and lender, said Oakley. “It may take 20 or 21 calls, or it may take one call if you just know the right place to go with the right opportunity.”

Klar said Bayview PACE is actively lending and hopes to extend its momentum into 2024. “There’s always money out there for good sponsors with long track records of success within similar property types.”

Bayview PACE offers a suite of products through its affiliated companies that includes construction financing, bridge, mezzanine loans, and C-PACE financing, the latter of which has become especially popular with the firm’s clients, said Klar.

C-PACE, or commercial property assessed clean energy, is a financing tool that provides long-term, low-cost financing for new and existing buildings. Eligible improvements include energy efficiency, water conservation, renewable energy and resiliency measures such as seismic and stormwater measures. Property owners make repayments via an assessment on their property tax bill.

The C-PACE loan is a fixed-rate, nonrecourse alternative form of financing for a term of 20 to 30 years. The bridge and construction loans are typically three to five years in duration. The company does have the ability to offer a full capital stack solution combining C-PACE with one of the other traditional financing instruments.

Uncertainty abounds

The sharp rise in interest rates since early 2022 has curbed developers’ appetite for undertaking new projects because the deals don’t pencil out like they did two and three years ago when the cost of debt was roughly 4 percent, said Klar. 

The higher interest rates have also forced lenders to proceed with caution. “We’re underwriting the uncertainty, which means that we’re still lending but we’re pulling back a little bit from the credit perspective. We’re lower on loan to cost, lower on loan to values, being picky about the sponsors, being picky about the asset types and where the assets are located,” explained Klar.

Oakley said that a rapid increase in interest rates since March 2022 has put pressure on the entire banking system. The continued rise in interest rates can make it harder for borrowers to repay their loans, potentially leading to an increase in loan delinquencies and defaults.

When the Federal Reserve raises the federal funds rate — the interest rate that banks charge each other to borrow or lend excess reserves overnight — it doesn’t directly impact the consumer, but it impacts the banks, explained Oakley. “It impacts where they can borrow, where they can lend, what they’re having to give out in returns.” Ultimately, that can cause the credit market to seize up.

A new day for borrowers

Most banks that specialize in seniors housing are requiring a depository relationship with the borrower in conjunction with new loan requests, according to Oakley. Typically, at a minimum, they are asking for the PropCo and OpCo to both establish depository accounts at the bank for the life of the loan. In addition to being a requirement for making the loan, some banks will offer more favorable terms and pricing based on the amount of the deposits received.

The regional lenders that Meridian has strong relationships with are requiring bank deposits from borrowers in exchange for inexpensive pricing of balance sheet loans, according to Adlerstein.

“If you have a $50 million loan, we need at least 10 percent in deposits, maybe 20 percent, that you’ve got to move over to a bank and just keep it parked there for a year because banks are just chasing deposits,” emphasized Adlerstein.

Borrowers also need to be receptive to recourse financing to obtain favorable pricing, advised Adlerstein. Lenders today want to know the borrower’s net worth and liquidity. “If you don’t have a strong guarantor, let’s go find somebody that might be able to help you beef up your balance sheet.”

The banks that include deposit requirements in their lending programs do so because it enables them to manage their balance sheets by beefing up their cash holdings, said Oakley. A full-service investment bank, Lument doesn’t have any deposit requirements as part of its lending platform.

Lower leverage loans (50 to 60 percent) and recourse financing enable direct lenders to offset their loan risks, explained Oakley. While there are some capital providers that provide nonrecourse financing or that don’t have deposit requirements, they are primarily debt funds or debt fund-like lenders, he pointed out.

“Our parent company (ORIX USA) does a lot of nonrecourse direct lending. It’s more expensive. You are going to pay for those benefits. You’re going to have to offset that loan risk with a little bit higher spread. Leverage is still going to be capped, but it’s mostly going to be capped because of debt-service coverage constraints.”

While some debt financing providers remain on the sideline, other capital sources are stepping up to the plate. 

“Private equity is shifting into more private debt. You’re seeing other kinds of alternative lenders come into play. You’re seeing groups like Lument and some of our competitors that have some of that dry powder being a little bit more aggressive with their bridge lending than maybe they were six months ago,” said Oakley.


The Fed’s announcement in late 2023 that interest rate cuts are likely coming in 2024 now that inflation has slowed considerably will give banks the confidence they need to get off the sideline, said Oakley. “At some point they have to, right? They’re in the business of making loans, and that’s how they make their money.”

Klar anticipates deal volume in 2024 will be similar to that of 2023, “a lower production year,” but he’s optimistic about the near-term outlook. “Our lending programs are getting a lot of interest, especially on the C-PACE side. We’ve got a nice pipeline going into the year.”

On the development front, Klar thinks developers will begin to overcome the sticker shock of what it costs to finance their projects, leading to a greater appetite to undertake projects in 2024.

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