​Cap Rate Expansion, Rising Expenses Coming to Seniors Housing

BBG expects capitalization rate expansion and rising operating expenses – if not offset by record-setting rental rate growth – could lead to a decrease in seniors housing pricing this year, according to its US Seniors Housing Investor Survey.

Capitalization rates for all seniors housing care levels are expected to remain flat or expand in 2023 with active-adult and independent living communities having the lowest cap rates and active adult cap rates are expected to be the lowest of all care levels surveyed skilled nursing and CCRC/LPCs are predicted to post the highest cap rates.

Further, “Rental rate growth for all care levels is expected to continue to increase significantly this year, consistent with the trends in the post-pandemic environment,” according to the report, which also sees active adult communities having the highest stabilized occupancy in 2023 and skilled nursing having the lowest.

More than three-fourths of respondents project seniors housing operating expenses to increase by 3 percent to 5 percent in 2023 compared to the same period a year earlier.

R.J. DeBee III, managing director and national seniors housing practice leader, said in prepared remarks that despite the headwinds swirling around seniors housing this year, “the longer-term trend of providing adequate housing to meet the demands of an aging population makes this asset class a highly attractive investment option.”

SNFs a ‘Wildcard’

Andrew Salmon, chief future officer at SALMON Health and Retirement, tells GlobeSt.com that skilled nursing facility (SNF) cap rates “do really appear to be the wildcard due to the complex factors within the market such as staffing costs, fragmented referral patterns from hospitals, and lower than needed government reimbursement.

“We are firm believers that local operators with strong brand recognition will continue to see favorable results over the next year due to their connections to the service areas that they operate within.”

SALMON predicts that assisted living memory care rents will continue to grow due to the increasing acuity within the population and consumer ideology toward SNFs and long-term care; along with what appears to be a higher historical percentage of early onset memory loss diagnosis.

Meanwhile, in operations, he said it’s all about attracting and retaining the right staff to deliver the services needed within the operations.

“For many providers, including ourselves, the focus is on building a staffing pipeline and creating an environment that new graduates from all levels of education want to work in. This will allow senior living operators to be best positioned to manage both operating expenses and the bottom-line margins.”

Maintenance Staffing a Rising Expense

Jerrick Holloway, vice president of asset management of EAH Housing, tells GlobeSt.com that operating expenses will increase in seniors housing this year due to property and maintenance staffing, utility expense, increase in property insurance, and maintenance performance to sustain the asset – more specifically, older assets.

“Additionally, we will also see pressure on margins by not being able to maximize the rent charged at senior properties. Increasing too much could possibly push seniors out, as their income only increases by COLA,” he said.

Peter DeMangus, chief marketing officer at Solterra Companies, tells GlobeSt.com that the labor market continues to be a challenge, “but it seems to be subsiding slightly. We’re seeing a growing pipeline of candidates but it’s creating a challenge to our margins due to the expense of higher wages.”

Moody’s: Ample Reasons to Remain Optimistic

The fourth quarter finished on a positive for seniors housing, though it was slightly behind Q3’s performance due to seasonal slowdown,” Moody’s Analytics associate economist Nick Luettke tells GlobeSt.com.

“Whether that’s a sign of a shift in underlying economic conditions or a minor slowdown remains to be seen, but the outlook for senior housing has been generally positive over the course of the last year and there are ample reasons to remain optimistic heading into 2023.”

Luettke added that “fortunately, America’s senior housing market has a reliable source of new residents compared to many other countries facing greater challenges in terms of aging populations and inverted-age pyramids.

“As an increasing amount of baby boomers age, demand is likely to increase for the overall market with metro-level variation. Broader positive macroeconomic conditions such as positive GDP figures and receding inflation figures without significant labor market shocks have also likely aided senior housing’s positive trend.”

Skilled Nursing Fundamentals Appear to ‘Have Found a Bottom’

Alexander Snyder, portfolio manager at CenterSquare Investment Management, tells GlobeSt.com that high-quality assisted living and independent living is poised to see margin expansion this year as revenue outpaces expense pressures.

“Skilled nursing is still struggling, though we appear to have found a bottom in fundamentals,” Snyder said.

“Labor pressures are easing, occupancy continues to steadily climb, and the industry should see rate increases from both the States and Federal government this year. Select operators still won’t make it all the way through to the light at the end of a very long tunnel, but for the most part, we’re in the darkness before dawn. Recovery is in sight.

He said the cap rate of every asset class in real estate has risen in the past 12 months.

“Real estate is heavily influenced by the cost of debt and thanks to the Fed’s aggressive rate hikes the cost of debt has increased dramatically. So yes, cap rates are rising, but we largely believe it’s a function of the debt markets, not an issue with fundamentals,” Snyder said.

‘In-House’ Funds Will Find the Best Opportunities

Frank L. Reed, Jr., MAI, is a partner located in the Gulf Shores office where he leads the Senior Housing Valuation Service Line for HealthCare Appraisers.

He tells GlobeSt.com, “A continued rising interest rate environment will create an increase in capitalization rates for those investors who are seeking to acquire senior housing units using traditional debt financing through banks and will most likely be second or third in the bidding process.

“Private equity and REIT transactions, which utilize “in-house” investor funds, will find the best opportunities, and are considered most likely to acquire assets in the coming 12 months.”

Cap Rates Flat for ‘Trophy’ Assets

Alex Loo, Director of Originations at Hudson Realty Capital, tells GlobeSt.com that in light of the Fed’s indications, “we see further expansion capitalization rates for senior housing communities, particularly the ones without strong in-place cashflow.

“Capitalization rates are likely to stay flat for selective trophy and stabilized assets. Cash-in refinances will likely become more common considering expanding capitalization rates and flat margins.”

High Occupancy Driven by Undersupply

Eddy O’Brien, co-founder and managing partner of Blaze Capital Partners owns three active-adult rental communities in Georgia and Texas. He tells GlobeSt.com, “We are seeing high occupancy driven by undersupply in the segment combined with growing demand from 55+ renters seeking maintenance-free living and a sense of community.

He also is seeing low turnover from existing residents.

“This is combined with more prospects coming in the front door as there is better education and awareness of the benefits these communities provide; specifically, what these communities are and perhaps more importantly, what they’re not.

“We expect continued outperformance in the sector driven by secular tailwinds and continued focus on delivering premium lifestyle at reasonable rates.”

Operators Serving Affluent Residents Succeeding

Stephen Ordway, Senior Vice President of ZOM Senior Living, tells GlobeSt.com, “Since the pandemic, high rent growth across all care types was needed to take care of rising wages, basic needs, and insurance costs.

“Operators thought by 2021 if the rent growths continued to elevate that residents would hesitate—but communities that cater toward a more affluent demographic have been able to weather rising costs and maintain operations.”

Florida Gulf Coast Welcomes Resort-Style Luxury Communities

Ben Wilson, COO​,​ Florida Gulf Coast for Suffolk, tells GlobeSt.com that Southwest Florida continues to enjoy a robust seniors construction market, following suit with the overall population growth of Florida.

“In the past couple of years, Suffolk has seen expectations increase among senior living project developers, which are supported by a strong demand for new, luxury, senior living products.

“Senior living projects in the area are now seeing finishes that resemble high-end oceanside condominiums; builds often include custom interior buildouts, wood and stone finishes complimented by resort-level pools, spas, and amenities.”

Gensler Clients Considering Active-Adult Products

Jeremy Southerland, senior living practice area leader at Gensler, tells GlobeSt.com that BBG’s report confirms the industry trends he is observing at Gensler, particularly with active adults leading occupancy stabilization.

“Many of our clients are considering active adult products in response to rising operational costs and staffing challenges associated with more intensive service models. Furthermore, our studies into resident experience show that today’s older adults value community integration, want to self-direct their care, and are prioritizing educational and cultural experiences.

“In response, we have worked closely with our clients to design comprehensive communities for our residents to live in that are both age-friendly and longevity-ready.”