Similar to other commercial real estate sectors, seniors housing has been impacted by persistent inflation, continued growing interest rates and limited supply. This was highlighted in Partner Valuation Advisors’ recently released inaugural Seniors Housing Investor Survey Report.

The survey tapped into the knowledge and experience of sector experts, including lenders, investors, developers and investment sales professionals. The primary concern expressed by the respondents? Availability of financing and increased interest rates. Furthermore, respondents noted that property values have declined due to the increased cost of capital and increasing cap rates.

According to Brian Chandler, senior managing director with Partner Valuation Advisors, these and other survey responses weren’t all that surprising, especially given the current market conditions and debt market pricing metrics. “The impact of increased interest rates and cost of capital has buyers and investors cautious due to the capital markets’ volatility in all commercial real estate sectors, not just seniors housing,” he told Connect CRE.

What Capital IS Available?

The survey noted that lenders financing the sector tended to be more conservative regarding loan-to-value ratios, capping it at 75%. However, survey respondents indicated they needed more leeway regarding LTV, with 52% requiring a 65%-70% LTV. However, more than 45% of those asked see loan limits of 55%-65% because of those more conservative lending requirements.

Furthermore, increased Effective Federal Fund Rates mean floating rates become more attractive to borrowers. And “as new investors/borrowers consider additional avenues of entry, interest-only loans become ideal for conserving short-term cash flow, while upfront/ramp-up expenses give way to stabilized operations,” according to the survey report.

Finally, Chandler noted that, based on discussions with survey respondents, HUD, FHA and SBA provided some alternative financing options, along with the GSAs. “In addition, several life companies have provided options,” he said.

The Slowing Transactions

According to the majority of the respondents, assets typically remained on the market for nine to 12 months, from the day of listing to the day of closing. Chandler explained that deals take longer because buyers want extended due diligence periods.

Then, there is an ongoing disconnect between buyers and sellers. “Owners willing to sell in this market want credit for any future rent increases and potential occupancy growth,” he said. Meanwhile, active buyers are still interested, “but there continues to be a wider spread now from the asking price and bidding price.”

Furthermore, supply will likely continue to be constrained as the number of units under construction is at its lowest since 2015. The reasons include increasing development costs and pandemic-created labor shortages.

“In the short term through 2024, new construction/inventory growth in the sector will most likely remain slow due to lending constraints, high construction costs and current market uncertainty,” Chandler said. Nor will this likely improve over the long term, he added.

Brushing Off the Crystal Ball

Most respondents noted that cap rates will likely increase over the next 12 months. Many also pointed out that the largest investment opportunities in the sector would be active adult and assisted-living communities.

Chandler acknowledged that labor market challenges, high interest rates, higher cap rates and increased construction costs “will make the next 24 months for the sector challenging, at best.”

But there are a few lights at the end of the tunnel. One is that capital is still on the sidelines, ready to be deployed when the current economic volatility settles down. Then there is demand for the product.

“Strong demand drivers will continue to provide a bright outlook for the sector, as the effects of an aging population will continue to impact demand in the sector,” Chandler explained. Thanks to the demographic fundamentals, seniors housing “has been proven a top performer during recessionary periods due to the needs-based nature of the sector,” he added.