By Charlie Shoop
In recent years, our economy has weathered rising interest rates and labor shortages, proving to be tough challenges for the seniors housing sector. Despite these hurdles, two-thirds of seniors housing owners, operators and other professionals responded optimistically to a survey about the current direction of the industry.
KeyBank Real Estate Capital surveyed a group of seniors housing owners, operators, investors, investment bankers, lenders and brokers in late 2023 to understand their perspectives on the current state of their businesses and the industry at large. Respondents were most active in memory care, assisted living and independent living communities.
Among the key findings from the survey:
• While 60 percent of respondents expect deal volume to increase over the next year, almost a third expect a decline in deal volume.
• Acquisitions, renovations and expansions dominate growth opportunities over new development.
• Staffing and rising interest rates are tied for the biggest challenge facing seniors housing businesses over the next 12 months.
• Refinancing emerged as a top challenge for over half of respondents.
Optimism persists, but turns more cautious
More than half of those surveyed indicated they feel somewhat optimistic about the direction the industry is headed over the next 12 months, and 13 percent feel very optimistic — on par with the 2022 survey.
The rosy perspective may have to do with the fact that most respondents are anticipating growth in 2024 and 2025. Forty percent predict an 11 to 20 percent increase in deal volume, and another 20 percent expect to see a more modest increase of 5 to 10 percent.
However, not all survey respondents had such a positive outlook. Almost 27 percent of those surveyed reported that their deal volume is likely to decrease over the next 12 months — nearly double the 14 percent in the 2022 survey. Also, while none of the respondents in 2022 said they were very pessimistic about the direction the industry is headed, 7 percent expressed that opinion on the current survey.
Refinancing emerges as a top challenge
Survey participants were allowed to select multiple answers in response to the question of what obstacles they expected to face in 2024. In the 2022 survey, 75 percent of respondents cited staffing as a major obstacle. That number dropped slightly in 2023, to 67 percent, in line with other industry research studies that show labor shortages easing.
Concerns about expense control and managing rising costs have also waned as inflation cooled and supply-chain bottlenecks subsided.
Meanwhile, worries about rising interest rates skyrocketed, with two-thirds of respondents citing that issue as a major worry in 2024, versus 41 percent in the previous survey. Additionally, “refinancing or working out expiring loans” was named as a primary obstacle faced by leaders in the seniors housing and healthcare industry. While none of the participants in the 2022 survey expressed concern about refinancing, more than half of those surveyed (53 percent) in 2023 did.
What’s behind those responses? According to a Mortgage Bankers Association survey, over $11 billion of seniors housing commercial mortgages spread across 940 loans will mature in the next 24 months.
Borrowers with loans written when rates were closer to 2 percent will be forced to refinance those mortgages at rates more than double that amount or seek extensions, which experts believe will be hard to come by due to lack of lender appetite and more restrictive lending terms.
Growth shifts away from development
Until interest rates, construction costs and lending sources become clearer, seniors housing leaders appear to be delaying new construction and redevelopment projects in favor of achieving growth by acquiring, renovating or expanding existing structures. Numbers bear that out, as new construction starts have fallen to historical lows in 2024.
When asked about their greatest opportunities for business growth in 2024 (another question that invited participants to provide more than one answer), property acquisition was the top response, named by 67 percent of those surveyed and up from 59 percent in 2022.
Expansion or renovation ranked second, cited by one-third of respondents. Only 13 percent of respondents reported new development as a focus area for growth in 2024, down from 32 percent the previous year.
Tips for identifying an ideal banking partner
High interest rates and maturing debt present financial challenges across the commercial real estate spectrum, and seniors housing is no exception. But with the U.S. population getting older each year, demographic trends point to an ongoing need for housing and healthcare facilities that serve older populations, which translates to opportunities for businesses that can effectively serve that demand.
In the short term, higher interest rates and unpredictable capital markets have made it significantly more challenging to finance seniors housing facilities. The market is showing signs of continued strength despite challenging capital markets, as recently noted by NIC. Looking ahead, however, strengthening occupancy levels indicate that the sector’s long-term outlook is bright as the U.S. population ages.
M&A transactions that are occurring in this market are typically driven by pending debt maturities, covenant issues or an investor seeking an exit. Government-sponsored entities (GSEs), including Fannie Mae, Freddie Mac and FHA, are still active in seniors housing debt purchases, but agencies are looking closely at their portfolios and how sponsors are performing. Even if a sponsor has achieved pre-pandemic occupancy levels, their net operating income may not be enough to cover today’s higher debt service.
Many loans today require recourse with loan-to-value ratios below pre-pandemic levels, stricter loan covenants and higher all-in rates.
The single biggest change in recent years is the emphasis on in-place cash flow to cover debt service. If current cash flow from operations is not sufficient to cover debt service, as in a turnaround or lease-up business plan, a project sponsor will find it difficult to obtain a traditional bank loan.
The right financing team should provide the information needed to consider all available tools and make a wise decision so the business is positioned to remain healthy and competitive. Seniors housing business owners should be bold in asking their potential financing provider the tough questions so they can truly evaluate and select the ideal team. For example:
• Do they understand my organizational structure and how this transaction needs to be customized to meet my business requirements?
• Do they make time to listen to me?
• Do I feel like this financing provider wants to see my business succeed, and will they guide me through the entire process?
• Can they accommodate my needs for customized payments to match my budget?
• Is this a well-established finance team that has survived economic ups and downs, and are they experienced in the seniors housing business financing?
Many bank balance sheets continue to improve as they work through real estate loan portfolios. That, coupled with positive operating trends and nominal new supply in the seniors housing sector, is expected to provide a much enhanced lending environment as conditions improve.
Charlie Shoop is senior vice president, healthcare and mortgage banking at KeyBank.