Volatility Will Keep Fueling Senior Housing Trades

The senior living sector continues to make a steady recovery from the catastrophe inflicted on it by the pandemic. Occupancy rates have steadily increased throughout 2022, with rents notching their most rapid increase in more than a decade.

As more and more senior living properties stabilize, with occupancy levels approaching 90% and net absorption rapidly filling the number of units relinquished in the pandemic, investors are bidding up the prices for these well-positioned, recession-resistant assets.

A rising tide of capital in 2022 zeroed in on senior living and all of its subsets—including senior housing, assisted living, independent living, skilled nursing facilities, memory care, and a booming new growth sector they’re calling active adult.

Volatility has fueled a frenzy of trading activity in senior living assets that shows no signs of slowing down anytime soon. In September, Walker & Dunlop reported that it sold $1.3B of senior housing and long-term care facilities in the first seven months of 2022, the firm’s highest recorded sales for such a period.

With long-term demographics projecting exponential growth—70 million Baby Boomers, now aged 58 to 76, are approaching the average age of entry (early 80s) for senior living—industry players are expecting the tide of capital to keep fueling transactions in senior living assets despite the rising cost of debt.

“Newmark is seeing significant interest for stabilized cash-flowing assets. We expect that to remain unchanged and to see new capital continue to enter the market,” Newmark Vice Chairman Chad Lavender, who heads the company’s Health & Alternatives Assets unit, told GlobeSt.

“Continued positive net operating incomes and occupancy trends are driving increased transaction volume in the sector, along with demographic tailwinds and historically-low anticipated supply,” Lavender said.

For operators, rising costs are pinching NOI margins as occupancy levels increase. The jury is still out on whether increased costs will some induce owner-operators to put more senior living assets on the market.

“The ownership and capital structure of a company [may determine] whether they’re able to manage through a decrease in operating margin,” Julie Ferguson, executive vice president, senior living at Ryan Companies, told GlobeSt.

“There will be owners who are unable to provide additional working capital to projects if their lease-up is not on track or their expenses are higher than budgeted. It’s hard to say whether there will be more or less these in [2023] because there are a lot of variables that factor into these decisions,” she said.

“I anticipate more properties becoming available on the market. With government funding drying up and increasing labor costs, operators are trying to get their occupancies up so they can sell the assets at a reasonable price,” Edward Pan, a Colliers first vice president who specializes in senior housing, told GlobeSt.

Pan thinks senior living REITs who have been keeping their powder dry while buttressing bottom lines may also jump into the market.

“We’re seeing REITs being cautious on non-performing assets due to the interest rate hikes,” he said. “However, a stabilized and well-performing senior housing asset is still attractive to REITs from a HUD-financing perspective. In today’s market, you can obtain HUD financing for 35 years fixed at 4.95%, typically 175 bps lower than traditional bank financing.”

According to Shlomi Ronen, principal and founder of Dekel Capital, stabilized senior living communities are trading at a premium to pre-pandemic levels and value-add communities are trading at or below pre-pandemic levels.

Dekel currently is focused on investing LP and GP equity—$5M to $15M of equity per deal—in underperforming and distressed senior living communities. Ronen told us to expect continued volatility in the sector before it achieves a full recovery.

“There are still headwinds that operators are contending with that will result in some near-term distress. There’s going to be some volatility to contend with before the sector achieves full recovery,” Ronen said.