Seniors Housing Cap Rates On The Rise

The pandemic has a significant impact on the seniors housing sector. 

In its new CBRE’s Seniors Housing & Care Investor Survey shows just how much has changed in the sector from February, when the company did its first survey, to the second half of the year.

Year-to-date investment in the sector plummeted 48% in the industry from February to the second half of the year, while cap rates increased 27 basis points.

However, the increase in cap rates wasn’t uniform. Cap rates for Class A assets increased 27 basis points overall. When active adult was excluded, cap rates for A assets only increased 12 bps. Cap rates for Class B and Class C assets increased 28 and 22 bps, respectively.

In all, 36% of respondents expected an increase in cap rates in the future. In the previous survey, only 13% expected increases. In the most recent survey, 53 of respondents expect no change in cap rates in the near term.

Investors showed the most interest in assisted living (33%). While investors traditionally flocked to active adult communities (15%), they’ve backed off this segment in recent years. It fell to third place behind independent living (22%). CBRE also noted that investor interest in memory care (12%) tripled since the first half survey.

The fundamentals picture hasn’t been good in 2020. Senior housing occupancy fell 2.6 percentage points in the third quarter of 2020, from 84.7% to 82.1%, according to new data from NIC MAP Data Service provided by the National Investment Center for Seniors Housing & Care.

This is the second quarter in a row where occupancy fell more than 2.5 percentage points. With two consecutive quarters of deteriorating occupancies, the senior housing sector is now experiencing its largest drop in occupancy on record, according to NIC.  

While the year has been challenging for senior housing operators, 70% of respondents expect occupancy to increase over the next year. Only 53% predicted that in the H1 2020 survey.

As the pandemic worsened, expenses also jumped for senior housing operators. CBRE says these expenditures were mainly centered on sanitation, personal protective equipment and payroll. More than 72% of respondents reported the net monthly operating expense increase ranged from between flat ($0) and $250 per unit. However, some said that increased expenses were beginning to abate.

Looking forward, 62% report underwriting practices that incorporate elevated COVID-19 related operating expenses for the coming six to 18 months.