With seniors housing property sales in 2014 hitting $17 billion – exceeding the $15 billion recorded last year – industry executives predict no slowdown in the acquisitions market in the year ahead. Capital continues to flood the sector from established and new players alike, as property prices are expected to continue to rise amid fierce competition for trophy facilities.
By Jane Adler
“There’ll be lots of acquisition activity in 2015,” says Scott Brinker, executive vice president and chief investment officer at Health Care REIT, Inc., (NYSE:HCN) a Toledo, Ohio-based company with 1,246 properties. He describes a perfect storm for continued strong property sales as sellers recognize that cap rates are low by historical standards and buyers see strong operating fundamentals and attractive risk-adjusted returns. “Plus the financing markets are liquid,” says Brinker, adding that he expects HCN to be an active buyer in 2015.
Class A, standalone assisted living properties are trading at a 7 percent cap rate, or less, according to Mark Myers, executive director at Institutional Property Advisors, a division of Marcus & Millichap, Chicago. “Property prices will continue to climb because there is less and less to buy,” Myers notes.
The big push into seniors housing by the non-traded REITs has had a significant impact on seniors housing sales. Shares in non-traded REITs are sold to retail investors who can earn returns of 5 percent or higher. Because of the relatively high returns, non-traded REITs are flush with cash that has to be put to work.
It’s expected that non-traded REITs, of all property types, will raise about $30 billion in 2015, according to Robert A. Stanger & Co., Inc., Shrewsbury, N.J. Much of that capital is being used to buy health care properties, including seniors housing. “The REITs are under pressure to buy,” Myers says.
Amid intense competition for well-performing existing properties, development has ramped up and raised concerns that some markets could overheat in the upcoming year. Texas markets are showing signs of overbuilding, sources say, especially in Austin, Dallas and Houston. “Caution is the word there,” says Bruce Gibson, principal, Senior Capital Advisors, North Miami, Fla. He adds, however, that even those markets shouldn’t necessarily be avoided. “If you have a better located and better run property, an operator can do fine,” Gibson says.
In late 2014, Belmont Village Senior Living opened a new property in Houston. “It’s the single best opening we’ve ever seen in our history,” says Patricia Will, president at Houston-based Belmont. The company worked for 14 years to secure the site, a prime location in the Memorial area. “Our belief is a site like this will always do well,” Will says.
Overall, Will is bullish on 2015 for seniors housing as the general economy continues to improve. The company currently has a 93 percent occupancy rate portfolio-wide, its highest in history. Belmont plans to break ground on two new projects in early 2015, in Berkeley, Calif., and Calabasas, Calif.
Capital should be readily available in the upcoming year. Private equity and institutional investors continue to provide liquidity to the market, along with the REITs. Small operating companies may find it somewhat difficult to secure capital, however, notes Gibson at Senior Capital Advisors. The big capital providers are seeking partners with a steady pipeline of deals, so small companies can expect to pay higher rates for funds.
New opportunities ahead
What’s the biggest challenge facing the industry in 2015?
Health Care REIT’s Brinker thinks it will be proving the pundits wrong by delivering continued occupancy and rent growth despite the new supply of product in a few local markets.
Managing growth will be an opportunity and challenge for the industry in the years ahead, says Gibson at Senior Capital Advisors. Though the amount of new development could cause problems in the near term, he believes there will be an undersupply of product in 5 to 10 years. The age and income-qualified population is projected to double in 15 years, though the number of seniors housing communities is not. “It will be a challenge to make sure there is enough supply at the right time,” he says.
Recruiting and training qualified workers for the industry will remain a challenge, according to Belmont’s Will. The industry is doing a better job at recruitment than it has in the past, but more emphasis should be put on the effort, she says. “We need to provide upward mobility for managers and hands-on caregivers alike.”