How about this: It’s never been an easy ride for the seniors housing industry, even in the good times, but the last few years have been particularly turbulent.
“Our industry has been through a real roller coaster the past couple years, starting off with the pandemic,” said Rick Swartz of Cushman & Wakefield. “That was a real challenge to occupancies and operations. We then had a successful roll out of vaccines that led the recovery and created a lot more bullishness in the industry. However, our robust economy has led to challenges in staffing, operating expenses and finally rising interest rates are putting a damper on transactions and valuations.
“But with all of that, there’s still a lot of optimism and investor interest.”
Swartz’s comments came during an Oct. 11 Seniors Housing Business webinar titled “No Crystal Ball… But Let’s Talk About the Outlook for Seniors Housing Investment and Finance.” Industry experts discussed market confusion and uncertainty in the seniors housing industry — what is happening now and what may happen in the fourth quarter of 2022 and into 2023.
The panel included speakers from a brokerage, a lender, an investment firm and an owner-operator. Swartz moderated the discussion, which also included Chris Clare of Greystone, Elliot Pessis of Harrison Street and Jesse Marinko of Phoenix Senior Living.
All four panelists expressed extreme optimism in the long-term health of the seniors housing sector, despite the many headwinds currently facing the industry.
Swartz led the discussion by asking if rising interest rates were affecting valuations for seniors housing acquisitions.
“The long and short of it is yes, but I’m hesitant to give a one-size-fits-all answer,” replied Pessis. “I’d be remiss not to mention two items: Interest rates are still low by historical standards. While there’s been a steep rise of late, we have to keep it all in perspective. And also, I wouldn’t conflate where interest rates are now with what’s going on from a positive perspective, from an occupancy tailwind perspective. I would trade a short-term disruption with long-term good prognosis any day.”
Marinko noted that when seeking an acquisition, it has become harder to sell lenders on the upside of a value-add proposal, where Phoenix plans to implement renovations and improve operations at a community. However, he added, times like these also allow companies to tighten their ships — a long-term good.
“While this is momentarily hard right now to get things done, there are a lot of positive effects that come through times like these,” said Marinko. “It’s a healthy process to go through, but that doesn’t mean it’s not painful.”
Another silver lining noted by Clare: investors are seeing higher capitalization rates, meaning higher return on investment for acquisitions. He said active adult and independent living cap rates have gone up 25 to 50 basis points, while assisted living and memory care cap rates have gone up 100 to 150 basis points.
“As interest rates rise, the underlying assets support less debt,” said Clare. “We’re routinely seeing where buyers need to bring 40 to 50 percent equity to the table, which is a real drag on their returns. They may seek to renegotiate and get a lower price, and thus a higher cap rate.”
Pessis noted that the active adult sub-sector in particular is still receiving lots of transaction interest “that would suggest very little impact due to rising rates,” and that investors are still extremely active in all areas of seniors housing.
“We’re being judicious with our capital, but we’re continuing to play the long game, to deploy,” he said. “We know we’ll get through these moments of economic shock.”
To view the full webinar, click here.
— Jeff Shaw