The New Crowd

Healthy returns, favorable demographics lead a rush of investors and lenders into the seniors housing space.

By Jeff Shaw

The story of the seniors housing sector is certainly enticing for investors. Average yields are higher than most property sectors, with capitalization rates averaging 7.2 percent over the last 14 years for private-pay seniors housing, according to Real Capital Analytics. By comparison, cap rates averaged approximately 5.5 percent for mid- and high-rise multifamily properties and 7.3 percent for suburban office buildings during that same period.

As a needs-driven product, seniors housing tends to be recession-resistant compared with other sectors. For example, while general multifamily experienced falling rents during the Great Recession, private-pay seniors housing saw continued rent growth — never falling below 1 percent per year, according to NIC.

Then, to sweeten the deal, there’s the demographic story of which we’re all aware. The baby boomers are reaching retirement age, with an average of 10,000 people turning 65 every day for the next 20 years. Seniors housing is at the end of a massive fire hose of new, qualified residents that’s about to be turned on.

Although the seniors housing industry faces a plethora of unique challenges, it’s no wonder that investors look at the raw numbers in this sector and decide they want to wet their beaks.

“Ever since the durability of the industry was showcased throughout and after the recession, as well as the shifting demographics in the U.S., billions of dollars of new capital have entered all segments of the industry,” says Isaac Dole, CEO of Birchwood Healthcare Partners, a Chicago-based private equity investor. “Investors are hungry for yield.”

Perhaps a bellwether for the rest of the industry, several brokerage and financial service firms are beefing up their seniors housing teams. Early this year, Newmark Knight Frank (NKF) hired away five employees from HFF and two from Berkadia to launch an effort to become a major player in seniors housing. JLL made a similar move, hiring two Greystone veterans to head up a renewed seniors housing effort.

“One thing that immediately jumps to mind is how NKF — not known at all for its role in seniors housing — just hired HFF’s entire seniors housing team. So, obviously NKF plans to become highly involved in this sector,” says Jim Costello, senior vice president with Real Capital Analytics (RCA). “These are companies focused on providing services to a wide range of investors. If they’re doing that, it’s clear that they’re reacting to what they think their clients will want.”

Ryan Maconachy, vice chairman of healthcare and alternative real estate assets for NKF and part of the former HFF team, explains that “there has been a significant amount of institutional core and core-plus capital raised specifically for seniors housing investments during the second half of the current real estate cycle. This investor shift from opportunistic to core/core-plus returns is a direct result of the performance seen by investors during the last two investment cycles, as well as the rapidly approaching ‘Silver Tsunami’ of baby boomer generation seniors.”

JLL similarly cited changing demographics and investor interest as the reason for bolstering its seniors housing team.

“There is no question that as the population continues to grow older, the need for seniors housing will remain robust,” says Brian Ranallo, international director for JLL’s multifamily business. “By bringing on the right kind of talent that fits our culture, we can better serve our clients focused in this space.”

“We are seeing increased interest in seniors housing across the spectrum of capital providers. This includes private equity, family offices, debt funds, institutional investors, life insurance companies and foreign capital sources,” continues Ranallo. “In addition, our capital markets team is actively advising a number of capital providers who are seeking to enter the seniors housing sector. Since seniors housing is viewed as both a growth market and a recession-resistant real estate segment, we anticipate that the sector will continue to attract new capital.”

Fannie Mae and Freddie Mac have long been major players in the seniors housing space, points out Shahin Yazdi, principal with capital advisory firm George Smith Partners. “Now, large regional banks, national banks and debt funds are becoming more aggressive to win business away from the agencies. This category is becoming more and more attractive to institutional investors, with larger operators dominating the space.”

A diverse roster

The move by investors to diversify their holdings and enter the seniors housing space makes perfect sense given the history of the sector, explains Costello. Formerly owned almost exclusively by mom-and-pop shops, the gradual introduction of corporate owners has morphed the industry into its current state.

“The whole thing doesn’t surprise me. Fifteen years ago seniors housing was more privately owned. As REITs moved in, they brought professionalization to the industry. These companies are just reacting to where this market has gone.”

But REITs have been net sellers of seniors housing for several years, and noticeably reducing their investment in the sector. As a result, a variety of new types of investors have moved in to fill that void — including crowdfunding platforms, EB-5 foreign investors, new types of bond issuers and even cryptocurrency investors.

“We were pitched on a platform that uses cryptocurrency to invest in commercial real estate,” says Dole. “We were also pitched on a private exchange for retail and high-net-worth investors where investors purchase shares of a fund for specific commercial real estate asset types. The exchange provides liquidity for the investors, who can buy and sell their shares more easily than in a private placement.”

One source of capital that is gaining some momentum is IRS Section 142(d) bonds, which allow for-profit seniors housing developers to access the nonprofit bond market as long as 20 percent of residents earn 50 percent of area median income or below. 

“We can do some creative structuring between our senior bonds and these structures that make a compelling argument for some new construction deals in the right markets with the right sponsors,” says Don Husi, managing director and co-head of the Senior Housing & Care Finance Practice for Ziegler, a specialty investment bank.

Crowdfunding platforms, which allow small investors to pool their money to invest in commercial real estate, have seen some limited play in the sector. One company, 1031 Crowdfunding, has acquired at least two assisted living properties in Oregon totaling 128 units for $33.1 million. 

In both acquisitions, the buyer partnered with Seasons Management as operator. Husi warns that the operational partnership is a key component for investors attempting to break into seniors housing.

“Crowdfunding hasn’t been super strong in terms of folks actually being able to execute. People go into crowdfunding, they don’t know what they’re doing, the deal goes sideways and it ruins it for everyone.”

Husi also sees great future possibilities stemming from Opportunity Zones. The program, part of President Trump’s Tax Cuts and Jobs Act passed in 2017, grants preferential tax treatment for developments in economically distressed communities. Although there has been little movement so far, Husi expects this program to be a driver of growth once developers figure out exactly how to use it.

“You’re going to hear a lot of about Opportunity Zones for a while to come, but we’re in the infancy stage. They have strong economic characteristics for the right investors.”

The rise of debt funds

Two categories of investors greatly increasing their role in seniors housing are debt funds (where investors put their money into loans rather than directly into real estate) and family offices (private wealth management advisory firms that serve ultra-high-net-worth investors).

Debt funds allow existing investors to put more money into seniors housing, but at less risk than a direct ownership stake, explains Costello. If the borrower defaults on the loan, seniors housing specialists in charge of the debt fund can take over the real estate and hopefully turn around the property.

“If an investor owned some debt, they get a lower return but it’s more stable because from a mortgage position — if there’s a default, if there’s a recession — they’ll get something back,” says Costello. “The rationale is, ‘We understand the market. If something goes wrong with the loan, we know how to run things. If we end up as the owners, we know how to manage it.’”

Trace Wilson, principal with PGIM Real Estate Finance, believes that debt funds are a “huge and relatively new” source of capital for seniors housing. The method is great for diversifying portfolios and mitigating risk, he adds.

“There will be more opportunities over the next two years for debt funds to capture more of the seniors housing space. It’s certainly something to keep an eye on. The returns are somewhere between core mortgages and private equity, which is attractive to people,” explains Wilson.

Breaking out of the niche

The acceptance of seniors housing as a standard asset class, coupled with the rise of large, national players rather than mom-and-pop companies, has opened the doors for family offices as well. Fueled by high-net-worth investors, this increase in interest shows that seniors housing has become less foreign to the general public.

“I can tell you that private equity, particularly family offices, are much more intrigued and interested in this space,” says Husi of Ziegler. 

“They look at real estate classes. Where do they want to deploy their capital? There are a large number of family offices that are interested in senior living,” adds Dan Hermann, president and CEO at Ziegler. “They want to be programmatic. They forge a partnership with a developer and manager to follow the footprint of what they think will be successful.”

“If you follow NAREIT, the asset classes that really elevated in the last decade are student housing, seniors housing, storage and data centers,” explains Hermann. “Those were not mainline sectors before, but they’ve become institutionalized because of growth and professionalization.”

Wilson notes that guessing the future of capital sources in seniors housing “would’ve been really easy a few years ago,” but that the influx of new players has made the vision murky. While he agrees that seniors housing has made huge strides, he still thinks that it hasn’t fully broken out of its shell. Because seniors housing is so operationally focused, multifamily investors will always expect a premium on returns for the extra risk.

“There’s a lot of good information out there on why seniors housing is a good investment,” says Wilson. “But until cap rates and/or mortgage rates are one-to-one with multifamily, you can’t say it’s the same as multifamily.”

Although Dole notes that the comparatively small size of the seniors housing industry is holding back more rapid growth — “one inhibitor to many capital providers is the lack of large deal volume” — he believes that the number of investors that wish to deploy capital into this real estate sector will continue to grow.

“It seems like the industry is squarely becoming an investment class of its own, which will continue to attract more capital providers.” n