There are various drivers behind this trend. For starters, the demographics favor continued growth for senior housing as Baby Boomers retire with an eye on their next stage of life.

Also, debt is very cheap and new sources of capital for senior housing is on the rise. "From a borrower's perspective, the availability of transitional and permanent term loan financing remains abundant to support their needs," says Jim Seymour, senior managing director, Capital One Healthcare.

One example is Cambridge Realty Capital, which is expanding its private equity options for senior housing finance. "Cambridge is focused on operators and managers that have plans to expand their footprint but not necessarily the capital," says SVP Brent Holman Gomez.

All of this had led to investor sentiment for senior housing that is very bullish, explains Adam Lewis, national director of Marcus & Millichap's national seniors housing group. "More than half of the owners we speak with are interested in buying more in this category," he says. "We are even finding investors that don't have any investments in senior housing want to get into it."

Separate numbers from CBRE tell the same story. Investor appetite for senior housing remains strong despite higher operating costs, with nearly two-thirds planning to increase their buying over the next 12 months, it said in its US Seniors Housing & Care Investor Survey. "Demographic trends are positive for the asset class, with the baby boomers nearing the traditional age for seniors housing and nearly 9,000 turning 70 every day this year," says Jeanette Rice, Americas head of multifamily research at CBRE.

Who Are These New Entrants?

Many of these new investors are apartment investors that want to sell multifamily properties, which are currently at low cap rates. "They like the idea of arbitraging into senior housing for higher returns," Lewis says.

Some of these investors already have a focus on needs-based real estate and are simply expanding their range. Access Industries, an institutional real estate investment firm, falls in that category. It recently partnered with JEA Senior Living, a senior care provider, to acquire and develop seniors housing nationwide. "Demand for our communities will rise in the coming years, and Access is well-positioned to help us reach potential new residents while maintaining the high standards we have set for ourselves," according to JEA Senior Living CEO Cody Erwin.

The main characteristic, though, of these new investors is that they are private entities; or put another way, they are not REITs. In short, the investor profile has shifted for senior housing: private investors, followed by institutional investors, are now leading the charge as REITs have pulled back significantly, according to Real Capital Analytics.

Since 2014, private investment in the sector has ranged from $5.4 billion to $6.9 billion annually, according to RCA, and for the last three years private investors were the largest investor group.

New Investors, New Risks

The influx of new blood into senior housing is undoubtedly good for the asset class. Yet, as these new companies enter the market, they are facing risks not seen in other CRE asset classes.

Partnering with the right operator, for example is crucial, Lewis said. "If they don't have the right operator that will be a curveball. It's not enough just to have the capital lined up to acquire an asset—you need a partner to navigate the regulations and the actual healthcare."  For an experienced partner, these issues are just part of the day-to-day operations, Lewis continues, "but for new investors it can be a problem."

There are also higher barriers to entry than some other classes of real estate, especially when dealing with the acquisition of licensed facilities, such as a hospital, senior living facility or skilled nursing facility, says David Lari, partner at Cox, Castle & Nicholson LLP.  "If you're dealing with an on-campus medical office building, many of them tend to be ground lease and you need to navigate through those issues."

Investment groups also need to understand their tenant mix and the long-term desires of the local hospital system when they purchase on-campus buildings, Lai continues. "In essence you're doing a joint venture when you're buying an on-campus asset, which has restrictions with the hospital system. If you're not well aware of their short- and long-term plans and how you're going to fit into those, you could get burnt quite easily."

There are other issues these new investors must face, although these are likely to be more familiar. As with other asset classes, costs are rising for senior housing in both labor and construction. Indeed, property operating and development costs remain the top concern for investors (43%), increasing in relevance from a year ago, according to CBRE. Construction activity (oversupply) also increased as a top concern for investors (22%).

The Forgotten Middle

Also the demographics, while indeed favorable, have a downside. Namely, while there will be strong demand for senior housing it is debatable whether all of these new users will be able to pay for senior housing facilities. The US, after all, is in the midst of a retirement crisis, with numerous studies showing that few Americans have saved sufficiently for their golden years. Research released at the National Investment Center for Seniors Housing & Care's Health Affairs Forum earlier this year finds that by 2029, the number of middle-income Americans over 75 years old will nearly double to 14.4 million and 54% of those senior citizens won't be able to afford senior housing and care, even if they've committed 100% of their annual financial resources. In short, while the market for senior housing and care—including independent living and assisted living communities—has been expanding to address a wide-range of complex needs, these facilities are often out of the financial reach of the 8 million middle-income seniors, 75+ years old.

The study concludes that this new 'middle market' for the senior housing and care industry is going to require both the public and private sectors to preemptively act so that these seniors can afford the housing and care they will need. As for specifics, well, the report offers little. "The study hasn't created a solution as of yet, it is just putting a spotlight on it from a policymaker or legislative issue," says Beth Burnham Mace, chief economist and director of Outreach at NIC.

"As baby boomers age and want to remain sociable, there will need to be innovative and interesting housing options presented in the marketplace including increased co-living/co-housing options," Mace says.

Fortunately, there are glimmers of this beginning to happen. For example, along with new investors new operators are also entering the market, Holman Gomez says. "Within skilled nursing, for example, there is a whole new generation of operators specializing in this category. They are not held back by legacy operating plans and they are pumping new life and energy into the business, which is getting the attention of capital."

As for the capital markets, he adds, they are realizing that there are various ways this business can be run well.

Also these investors and operators are finding ways to mitigate some of the current concerns of the space. "With new supply beginning to taper, operators will leverage rent growth to help offset rising costs and maintain a healthy bottom line," says Zach Bowyer, who leads JLL's valuation & advisory services for senior housing. "We are beginning to see innovative design trends, operating models and technologies take hold as potential industry disruptors," he adds. "It's a very exciting time to be in this space."

New Medicare Rule Will Trigger More Healthcare M&AS

Medicare has always been a highly complex and intricate government program. So mammoth is its reach, in fact, that even minor changes will have an outsized effect on the healthcare industry, particularly skilled nursing. So it will go with a new change in Medicare reimbursement rules, which Philip Krispin, the director of Eastern Union's Healthcare Group, argues will trigger an uptick in M&A activity in the sector.

Briefly, the federal government has changed the way it reimburses skilled nursing facilities. Last summer, it revealed a plan to switch from a formula based on Resource Utilization Groups and instead adopt a Patient Driven Payment Model system. The new PDPM system went into effect on October 1.

Krispin explains that the outgoing system, which was notoriously paperwork-heavy, had been clustering patients into therapy payment groups based on the amount of therapy they receive, regardless of the individual's unique characteristics, needs, or goals. "Medicare says that the new PDPM approach will now put 'the unique care needs of the patient first,'" he says. "It aims to focus on a patient's individualized needs and characteristics."

The goal of PDPM is to improve payment accuracy and appropriateness, Krispin says. Medicare expects it to also reduce operators' administrative burdens. "The industry agrees that the new approach provides new opportunities for investors in terms of profitability,"—namely that PDPM is expected to reduce paperwork burdens and regulatory risks, while generally avoiding major cuts to operators.

So how will this affect the mindset of owners or operators? And why would such a change lead to more asset sales? Krispin's response: Whenever there's a major change to the industry, it tends to keep the volume going as far as M&A is concerned.

"The most sophisticated owners and investors have long seen the chance to operate their skilled nursing facilities more profitably under the new system," he says. "Operators can't make this happen just by snapping their fingers. The changes are fairly complex, and they involve creating new administrative structures—with a number of new clinical categories—to align themselves with the new PDPM format. Owners and operators who've been properly adapting themselves to the new system will be in the best position to get reimbursed in line with the actual care they're providing."

Investors and companies that have been sitting on the sidelines are the ones likely to lose out, Krispin says. "The winners will be those who have been figuring out ways to use the new system to their benefit, and who make sure they're going to be reimbursed in line with the actual care that they'll be providing."

Acquisitions Versus Development

Seniors housing and long-term care executives are optimistic about acquisitions, but are not so bullish on the development of new properties going forward, according to a survey by Capital One, which found that 36% of surveyed executives believe that acquisitions present the most opportunity for growth, with 30% naming repositioning as the top option.

However, the development of new senior housing and long-term healthcare properties garnered only 14% of the vote in comparison with 24% who said the same in 2018, perhaps indicating a shift in investor appetite as the National Investment Center for Seniors Housing & Care recently revealed that the seniors housing occupancy rate reached its lowest point since 2011 during the second quarter at 87.8%.

Either way, Capital One states that the quality of staff and care was seen as far and away the best way for seniors housing facilities to differentiate themselves from their competition, with 74% of respondents stating so.

"Providing the highest quality of care and service to residents, in the most cost-effective manner possible, will continue to be a primary focus for owner/operators in the senior housing space," says Chris Taylor, managing director at Capital One Healthcare.