Respondents to Capital One Survey See Opportunity in New Development, Despite Overbuilding Concerns

by Jeff Shaw

MCLEAN, VA. — Is new development good or bad for the seniors housing industry? The consensus is that it’s potentially good and bad.

Some 41 percent of seniors housing professionals expect new development to offer the greatest investment opportunities in the coming year, according to a newly released survey conducted by Capital One Bank.

However, when asked about industry concerns for the next 12 months, more than one-third (35 percent) of respondents cite potential overbuilding as their top concern.

Meanwhile, more than one in four respondents (26 percent) say the repositioning of older properties provides the greatest investment opportunities.

“Interest in the development of senior housing assets continues to grow,” says Imran Javaid, managing director of healthcare real estate at McLean, Va.-based Capital One Bank, a prominent lender in the seniors housing space.

“However, balancing interest in new development with concerns about potential overbuilding requires working closely with financing partners to navigate this evolving landscape,” adds Javaid. “In this market, it is critical to conduct in-depth due diligence and submarket analysis, which could make or break potential developments.”

Survey Background and Highlights

Capital One Bank conducted a proprietary survey of attendees at the IMN Real Estate Private Equity Forum on Senior Housing in Los Angeles on Sept. 17-18.

Respondents included financing professionals, senior housing operators, capital providers, attorneys and other industry professionals. Percentages are based on 100 responses.

Among some of the survey’s other key findings:

• Most respondents expect the pace of mergers and acquisitions activity in the sector to increase in the next 12 months. Specifically, 60 percent believe activity will increase, while 29 percent expect M&A activity to stay flat.

• Nearly one-fifth (19 percent) of respondents see the potential impact of higher interest rates as their top industry concern, while 20 percent cite the continued influx of new capital.

• Compared with interest rates and the influx of capital, fewer respondents express worries about state-specific rate and operating environments (10 percent), or the lack of affordable seniors housing (10 percent).

With seniors housing in such demand among investors, “it’s a great time to be a seller,” says Keith Kodrin, senior director of healthcare real estate at Capital One Bank. That sentiment helps fuel the healthy M&A environment.

Kodrin emphasizes that while it’s an ideal time to be a borrower because of the large number of financing sources available to them today — including agencies, REITs, banks and other finance companies — it’s a challenging time for lenders due to the intense competition.

“It’s a tough life right now for lenders because you want to be selective,” says Kodrin. “You want to be mindful where we are as an industry (in an up cycle), but you also want to be prudent in how you deploy your capital. There are others out there who are much more aggressive.”

Capital providers who are new entrants to the sector haven’t experienced the real estate cycles before in seniors housing, which is an operationally intensive business, explains Kodrin. “They haven’t been through the stroke of the pen risk in terms of  [Medicare] reimbursement, or overbuilding and what that means when you have too much product and you partner with the wrong group.”

Kodrin says it’s refreshing to see that 20 percent of survey respondents cite the continued influx of new capital as their top industry concern.

“Folks are concerned that there is a lot of money coming into the space that may not truly understand the seniors housing sector,” explains Kodrin. “The people behind this money are dipping their toe in the water because times are good, but what happens when things go bad? How will they respond?”

For its part, Capital One aims to be in the seniors housing arena for the long haul. Earlier this year, Capital One Financial Corp. reached an agreement to acquire GE Capital Healthcare Financial Services for approximately $9 billion. The deal includes the sale of healthcare-related loans worth $8.5 billion.

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