By Matt Valley
The pandemic raised the profile of the active adult sector, which anecdotally experienced healthy rent growth and stable occupancy during the health crisis due to “sticky tenants” who tend to stay anywhere from three to seven years. What’s more, the sector hasn’t had to contend with the workforce challenges facing the more operationally intensive skilled nursing and private-pay seniors housing segments.
Despite that positive storyline, arranging financing for active adult properties remains a tall order, said Ari Adlerstein, senior managing director at Meridian Capital Group and head of the company’s seniors housing and healthcare team. The reason? There simply isn’t ample empirical data available regarding this burgeoning real estate niche.
“Lenders love data. So, I can finance the craziest deal in the world at 98 percent loan-to-cost as long as I can say, ‘Hey lender, here’s A, B and C that supports my thesis’ and then have that thesis supported by a strong appraisal,” explained Adlerstein. “The lack of data for the active adult space has made it incredibly challenging.”
The veteran mortgage banker’s comments came during a panel discussion at the InterFace Active Adult Conference, held June 2 at the Dallas Marriott Downtown. The second annual event — the industry’s only in-person conference devoted entirely to the active adult/55-plus niche — drew 334 registrants from across the sector.
Zach Bowyer, senior managing director of the valuation and advisory residential practice group at Cushman & Wakefield moderated the discussion. Joining Bowyer and Adlerstein on the panel were Mark
Marasciullo, chief investment officer with the United Group of Companies, which specializes in all phases of real estate including development, financing, acquisitions, repositioning and property management; and John L. Sweeny Jr., senior vice president of the national seniors housing capital markets team at CBRE.
Defining active adult
Before the performance of the active adult sector can be adequately measured, it must be clearly defined. The National Investment Center for Seniors Housing & Care (NIC), in conjunction with a team of industry leaders, has come up with a working definition of active adult communities: “age-eligible, market-rate multifamily rental properties that are lifestyle focused; general operations do not provide meals.”
In response to the rapidly rising popularity of active adult communities, there is a high demand for visibility into the property sector’s performance and growth, acknowledged Beth Burnham Mace, chief economist and director of research and analytics for NIC.
“I’m excited to say that as the leading provider of seniors housing data and analytics, NIC MAP Vision will bring more transparency to the segment, and it’s a high-priority project,” said Burnham Mace. The veteran economist told Seniors Housing Business in mid-July that more information on this NIC initiative will be released in the coming weeks.
Smorgasbord of investors
Sweeny said interested buyers of all stripes are kicking the tires in the active adult space, which he believes is really coming into its own. “We see multifamily crossover buyers. We see seniors housing buyers. We’ve seen new private equity money. We’ve seen DSTs (Delaware Statutory Trusts) that are more cash buyers.” Even REITs are active.
Bowyer asked the panel which product attracts the bigger investor pool, standalone active adult communities or those that are part of a continuum of care in a campus setting.
“I would say standalone active adult for sure, especially if it’s stabilized,” said Sweeny. “Folks see that when these communities get stabilized, they stay stabilized. And there is real opportunity for a compound annual growth rate because of the sticky tenants, the long length of stay. Once it’s a community and it’s a lifestyle, it’s hard to leave.”
Sweeny said that in his capital markets advisory business he has not come across many developments that include active adult, assisted living and memory care all in one campus setting.
He explained why active adult is attracting a growing number of tenants: “It’s easier to downsize or to move to active adult because it’s kind of viewed as a third stage in life where the residents are focused more on experiences and lifestyle. I don’t think people are overly excited to move into seniors housing. It’s more of a needs-based product. It’s a realization that ‘I need help, I’m losing my independence,’ whereas active adult is a phase you go through.”
Active adult attracts the “crossover” investors from both the multifamily and seniors housing arena, Sweeny pointed out. “It’s much less complicated than seniors housing. So, if you are coming into the sector and you are bullish on aging demographics, it’s a good defensive place to start in an uncertain world.”
Large buyer, small market
In February, the United Group of Companies sold Deerfield Place, a 156-unit apartment complex in the Upstate New York community of Utica, to Welltower (NYSE: WELL) for $40 million, according to Marasciullo. Built in 2016, the institutional-quality asset offers amenities such as a pool, resident lounge, fitness center, conference room and dog park.
Marasciullo said the transaction was an eye-opener. The fact that Welltower, a large publicly traded healthcare REIT with a market cap of $37 billion, would enter into a $40 million multifamily deal in Utica surprised Marasciullo. “I would have bet you a million bucks that would never happen, and I would have lost a million bucks,” But the deal speaks to the strong fundamentals of the multifamily sector, emphasized Marasciullo.
Uncertainty ahead
The significant rise in interest rates since the start of the year has clouded the investment sales and lending outlook for active adult and multifamily in general, according to Adlerstein. Bowyer said he’s already observed some slowdown in investment sales activity due to higher interest rates.
The 10-year Treasury yield, a benchmark for permanent fixed-rate financing in commercial real estate, has climbed from 1.6 percent to about 3 percent since the start of the year.
“I sat with a major REIT yesterday morning, and we were just chatting about the pipeline and deals going on. I got the very clear direction that we’re on hold for the next three months at a minimum,” said Adlerstein. “That was kind of shocking for me to hear. It is one of my largest clients. They said ‘pencils down on anything that is not super, super attractive on the surface because we think this market needs a correction.’”
But Adlerstein understands why the client made that statement. “We’ve all seen some deals that are getting traded that we’re scratching our heads and asking, ‘How is that making any sense?’ I think that particularly applies in the multifamily world.”