How has the rise in interest rates in 2022 affected lender and borrower strategies in the seniors housing space?
Costs flow downhill
By Don Pelgrim
CEO
Wilshire Finance Partners
The rise of interest rates has affected lenders and borrowers, specifically with an increase in both borrowing costs and capitalization rates.
Seniors housing is not immune to the rising costs of goods and services, which may continue to increase until the Fed’s actions take hold and demand is mitigated by higher costs and expenses. Some facilities and communities may need to implement additional resident fee increases. It is likely that today’s loan will have lower proceeds because of the compression in margins and increased rates and costs.
Debt markets have changed
By Aron Will
Vice Chairman, National Senior Housing
CBRE Capital Markets
SOFR rising from virtually nothing to roughly 2.5 percent, coupled with cap costs being exponentially more expensive, has created downward valuation pressures on assets in lease-up, given the cost implication of bridge debt.
Seven- to 10-year fixed-rate agency debt is now infinitely cheaper than bridge debt, which has shifted the majority of core-plus private equity buyers into the “fixed-rate borrower” category. This is a huge shift given private equity funds have historically been more focused on disposition flexibility than anything else, even for longer-term holds.
Adjust your wish list
By Alex Florea
Senior Director, Head of Capital Markets
Blueprint Healthcare Real Estate Advisors
The rapid jump in rates coupled with uncertainty about how much, and how quickly, they’ve yet to rise caused increased market volatility and anxiety in the last three months. Lenders saw coverage going backwards on existing/in-process loans, and struggled with how to prudently underwrite new loans, especially for value-add acquisitions or refinancings.
We’re now past the initial shock, but still face the simple arithmetic problem of higher rates. That’s led to greater emphasis on creative, thoughtful structuring to get lenders comfortable today while giving borrowers a clear path to the wish-list adjustments (proceeds, recourse, etc.) not otherwise attainable today.
Deal volume to be ‘muted’
By Robb Chapin
CEO/Co-CIO,
Seniors Housing
Bridge Investment Group
As we have seen interest rates rise dramatically in the past quarter, we believe transaction volumes and overall capital flows in the sector will be muted as owners and operators focus on driving cash flow from operations through superior services and rate growth.