Pricing Isn’t Following Cap Rates for Senior Housing

Recent data from CBRE says that there hasn’t been a lot of movement in cap rates for senior housing.

“Across the board, cap rates haven’t moved that much for a stabilized product,” said Spencer Levy, Chairman of Americas Research and senior economic advisor for CBRE on the company’s The Weekly Take podcast.

But cap rates aren’t the only things that affect value. Changes in NOI and operating costs also impact what a property is worth.

So it shouldn’t be surprising that in some cases, cap rates are diverging from valuations.

That phenomenon is playing out in the senior sector right now, partially because people are removing the temporary operating costs associated with COVID from the cap rate equation.

“For the stabilized assets, the cap rates really haven’t changed all that much,” Lisa Widmier, EVP of CBRE’s Senior Housing Capital Markets practice told podcast listeners. “But returns have gone down to investors because of the fact that you can only get 50% leverage versus 65% leverage. In a logical world, debt is less expensive than equity. So the average cost of capital is impacting our pricing.”

Levy says there hasn’t been price discovery into what distressed pricing will do to cap rates. “Certainly NOI may have moved,” Levy says. “We don’t know where pricing is going.”

Joel Nelson, CEO of LCS, a Des Moines, Iowa-based senior living company, agrees that there is not yet enough transactional volume to reach any pricing conclusions. But he says there are some encouraging signs.

“We’ve seen capital come back into the development stages, and then we’re seeing some deals that were tabled initially with COVID coming back onto the market,” Nelson says. “And we’re not seeing a lot of pricing change in terms of expectation and buyer interest.”

Levy points out that buyer interest isn’t just strong. New bidders are also entering the fold. New institutions and other investors are showing interest in the senior housing sector as they move away from sectors that have been harder hit by the COVID-19 pandemic.

“There’s a lot of new capital that’s reallocating from theaters and retail centers, [and] convention hotels into the space,” Widmier says. “And that’s not only just for domestic capital, but we’re seeing an uptick in global interest in the United States senior housing market. So we’re pretty optimistic about 2021.”