Seniors housing developers have noted that both debt and equity have become difficult to secure as a result of the COVID-19 pandemic. Lenders are providing much lower leverage on loans, and many capital partners are staying on the sidelines until the full effects of the virus have passed.
But there may be a silver lining to the halt in new construction. Before the pandemic, an influx of new supply was driving down occupancy. Those oversupply concerns may have come to an end.
“We needed to have a pause in new construction in any case,” said Richard Ackerman, chairman and senior managing principal with Big Rock Partners. “With the overbuilding, we were leaking oil before COVID, and then COVID accelerated the stop that we need in new supply. We look forward to the future when there will be supply constraints in the industry.”
The comments were made during a panel titled “The Development Outlook: Experts Analyze the Smartest Plays for Developers in 2020” at France Media’s InterFace Seniors Housing Southeast conference, which was held remotely. Other panelists included moderator Ryan Frederick, founder and CEO, Smart Living 360; Michael Uccellini, president and CEO, United Group of Companies; Jesse Marinko, CEO and founder, Phoenix Senior Living; and Tod Petty, executive vice president, Lloyd Jones Senior Living.
According to data from the National Investment Center for Seniors Housing & Care (NIC), seniors housing occupancy has hit all-time lows in all types of care as a result of the COVID-19 outbreak.
“There is a really uncertainty with how long COVID will impact our businesses,” said Frederick. “We can tell by NIC data that the impact has been substantial on occupancy.”
With capital providers using much stricter underwriting standards, the domino effect has been a huge slowdown in new projects.
“Banks obviously have tightened their criteria, lowered their leverage, and have put a lot of projects through a rigorous underwriting process with a fine-tooth comb,” said Marinko. “You’re seeing a development pipeline that’s going to slow down. It’s just natural. Lower leverage with higher equity typically means more projects aren’t going to get done.”
Uccellini’s company, though, focuses on active-adult and “independent living light” properties with little to no healthcare aspect. He noted that lease-up and occupancy in those spaces has continued apace, despite the pandemic. This is a result of multiple factors — home values have stayed high, allowing seniors to sell their houses and move out, while those same seniors may be looking for a safe, social place to live during quarantines and shutdowns.
That said, he did agree that both lenders and capital partners have held back on the seniors housing space significantly.
“A lot of construction lenders have pulled back. Some of the institutional equity wants to be in this space, but there’s some trepidation,” said Uccellini. “We’ve had to get creative with the way we’ve raised our capital.”
Creative solutions have included more mezzanine financing and use of debt funds, he added. Ackerman’s Big Rock Partners has even started using nonprofit structures and bond financing to keep projects moving.
“The ramification of that is we don’t have equity in the project, so we lose the upside,” said Ackerman. “On the other hand, we still get our development fees and management fees and continue to fight another day.”
And there’s yet another opportunity amidst construction slowdowns and struggling occupancy, noted Petty. Distressed assets may soon be available at a steep discount, offering new chances to acquire and improve existing properties. With these lower prices, he said, opportunistic buyers can even keep rents lower to appeal to middle-income seniors, and be well prepared for “pent-up demand” that he expects will unleash next summer.
“If we can buy low, whether it’s a distressed hospitality asset or a 20-year-old property that a REIT looking to divest, we can buy it at a lower basis than we can build it,” said Petty. “We can come in at an affordable rate and pick up people that can’t get in now because the price point is too high. That’s a successful business model.”
All panel sessions from InterFace Seniors Southeast are available to watch through Dec. 31. Registration is $275. Click here to register or view the portal if you have already registered.
— Jeff Shaw