How is persistently high inflation impacting investment and development activity in the seniors housing space?
An economic double whammy
By Chris Blanda
Senior Managing Director
VIUM Capital
This a well phrased question because both inflation and, in turn, high interest rates have doubled down to restrict development activity.
It’s been a compounding effect that has moved several major levers to the economic viability of development projects in the wrong direction. Inflation has pushed development budgets and operating cost budgets up, while high interest rates have pushed construction leverage points down, leading to a gap in the capital stack not easily filled by more equity.
Subordinate capital sources (mezzanine debt and preferred equity) have become much more selective when considering development projects, so developers are forced to raise more equity capital for projects than in recent memory (at lower returns as well).
One bright spot has been the ability to drive rent increases at existing projects. Many of our clients are reporting over 10 percent year-over-year rent increases because of the growing demand and constricted new supply in certain markets.
Expect slowness ahead
By Brian Sunday
Managing Director, Seniors Portfolio Director
AEW
It’s taken awhile for investors to adjust to a market that consists of higher debt costs, higher cap rates and reset valuations. This has directly caused investment activity to slow down and bring development activity to a standstill.
Go-forward fundamentals in this sector are as strong as ever, which will be a catalyst to increasing transaction volume in the near future. However, development activity will stay slow for some time.
Investors are gun-shy
By Bryan Schachter
Chief Investment Officer
Watermark Retirement Communities
One of the main impacts has been on the willingness of equity groups to commit to investments, particularly developments.
Today, it seems that debt can be sourced for a development project if the equity stack is solidified, but investors are hesitant to commit at this time. This is due to a combination of uncertainty around expense inflation, high interest rates and construction costs, cap rate expansion and the expectation that there will be distressed acquisition opportunities of newer vintage communities that can be purchased at a steep discount to replacement cost.
Find creative options
By Brent Holman-Gomez
Senior Vice President
Cambridge Realty
Capital Cos.
While inflation is now manageable for operational business planning, capital transactions pose challenges in long-term care.
Lenders are hesitant to form new relationships, and loan renewals demand low loan-to-value ratios and support for the new, higher debt service rates. Lease rates no longer match the increased capital costs, driving more ownership changes.
Cambridge has been able to reduce these impacts by using long-term interest rates and by offering an early rate lock option, allowing the borrower to take advantage of momentary dips in the market to further increase their confidence in a successful closing.
Many negative forces converge
By Tami Antebi
Senior Vice President,
Head of Healthcare
BHI
High inflation and a continuation of high interest rates have made it harder for certain projects to reach completion for both investors and lenders alike.
Opportunities that made sense two years ago are much more expensive, and owners are having difficulty attaining financing in today’s market. Additionally, many banks have become conservative in their credit appetites and aren’t lending for new construction. Meanwhile, owners are struggling to refinance maturing construction loans during lease-up.
Increased rents combined with decreased residential homes sales have both led to slower lease-up at seniors housing facilities.