As industry experts brace for a potential economic downturn in the next two years, many capital providers see a safe investment in senior living.
By Jeff Shaw
Although the U.S. economy remains strong — employers added 263,000 jobs in April marking 103 consecutive months of job growth — economic cycles can’t last forever. Chuck Harry, chief of research and analytics for the National Investment Center for Seniors Housing & Care (NIC), believes the United States is headed for a recession sometime before the end of 2021.
But he is quick to add that a downturn doesn’t have to be a bad thing.
“Cycles help the market cool off,” said Harry. “If the market was sustaining rapid growth forever, you’d see endless capital flooding the space.”
The comments came during a panel titled “Finance & Development — Is the Sector Still Recession Proof?” at the Argentum Senior Living Executive Conference held in San Antonio on April 15-17.
Harry moderated the panel, which also included Chris Bird, executive vice president and director of rental for seniors housing operator Life Care Services; Kathryn Burton Gray, senior managing director for lender Hunt Real Estate Capital; Gaurie Rodman, director of planning services for design and construction firm Aptura; and Joe Weisenburger, senior vice president of business development for Welltower, a giant REIT with a market cap of approximately $31.8 billion.
Seniors housing is not recession-proof, but it is recession-resistant, contended Harry. The sector’s strong performance following the housing market and financial crisis in 2008 has led many lenders to look to the needs-based continuum of care as a safe alternative to multifamily, office and hotel space as they brace for a potential recession.
Even during the depth of the financial crisis, seniors housing only saw negative absorption for one quarter, noted Harry. The National Council of Real Estate Investment Fiduciaries (NCREIF) calculations show that in the decade since the recession began, seniors housing is the only major property sector to provide double-digit returns to investors.
“We’ve seen quite a bit of investment in the space by a wide variety of investors,” said Harry. “A lot of the capital flooding into the market of late, it’s not just chasing the coming age wave, but the resiliency of this sector has been demonstrated during economic downturns.”
Here come the boomers
The demographic wave is still compelling in its own right, though. Bird noted that in 2000, the ratio of non-seniors (persons under age 65) to seniors was 15 to one. That comparison today is seven to one, and will be at four to one within the next decade, leaving fewer and fewer adult children to take care of seniors, according to Bird.
“Because of that, seniors housing will always be resilient and able to manage through some difficult times. There are still going to be folks in a recession that need services.”
The result of all these advantages in seniors housing is that more capital providers want to be in the space. If many economic experts believe that a recession is on the horizon, and that seniors housing is somewhat resistant to recessions, then this is the place where companies want to invest.
“There’s a lot of access to capital,” said Gray. “At the NIC conference I saw more equity providers than I’ve ever seen. I was tripping over equity.”
“This is always going to be a growth industry,” concluded Gray. “It’s operationally intensive, so cash flow drives the value of the real estate.”
Despite seniors housing being somewhat of a darling for capital providers, Rodman warned that simply plowing money into the sector isn’t enough. Developers and operators need to innovate in order to make sure all seniors are served, she said.
“We’re waiting for the disruption to happen. There’s a massive complication with this boomer population. They can neither afford the very high-end product nor home health, but they have too much wealth to be in the subsidized component,” said Rodman. “What is that product going to be that will serve them? How are all the players going to get together on that — the operators, the technology experts and the caregivers?”
“We’re almost at the cusp of some significant transformation,” added Rodman.
How deep will the recession be?
The speakers expect the recession will be considerably shallower than in 2008, and just a part of a regular economic cycle rather than a massive crash.
Gray said the “silly lending practices” of the pre-Great Recession period have not returned, which should limit the damage of any upcoming recession.
“Banks were lending at 90 to 100 percent loan-to-value. It was really frothy right before the last recession. Now we’re back to normalcy,” said Gray. “That’s always a litmus test: What’s the leverage banks are comfortable with?”
Weisenburger noted that leading up to the 2008 recession, developers had their own reward system set up incorrectly — income was based on the pace of development because they would sell off the property immediately upon completion. Today, most developers’ profits are based on the operational success of the completed communities.
Seniors housing isn’t overbuilt now like it was at that time, said Weisenburger. Still, there will still be winners and losers in the recession, he emphasized.
“There’s a lot of smart equity going to good operators. But there are also some other tourists coming into the industry. Those are the people that are going to get hurt in the next recession, whenever it happens.”
Weisenburger added that there is also a silver lining to a recession: labor costs and construction costs, currently hamstringing developers and operators, would go down to a more manageable level.
Rodman echoed the sentiment that operational success will determine the winners and losers through the next economic recession.
“The people that are going to be successful will recognize the care component they need to bring to the table. We’re going to have much savvier buyers coming in.”
“It will be a shallower recession than before,” concluded Rodman. “There have been a lot of good adjustments for us as an industry since the last recession.”