Seniors Housing Deals Held Back by Widening Bid-Ask Gap

The bid-ask spread for seniors housing assets began to widen, naturally, along with the rise in interest rates in the second half of last year and it appears to have widened further in 2023, according to Cody Tremper, managing director – Investment Sales at Berkadia.

Therefore, owners “without an urgent need to sell are holding onto their properties for now, while those with an urgent motivation to sell are having a more challenging time trading their assets at discounts,” according to a Berkadia report in which Tremper was quoted.

The firm expects less trade volume in 2023 compared to the past few years, especially given M&A activity is also on the decline.

There are still active buyer groups looking to transact; however, but overall deals are taking a bit longer to get done.

Other hang-ups in the process include buyers requesting longer due diligence periods, term sheets being more difficult to come by, and expanding pricing deltas. Translation: a lack of urgency.

A key part of the rub in deal-making is perceived cash flow at properties, Mike Garbers, managing director – Investment Sales, writes.

“Buyers are still looking at historical financials for performance, while sellers want credit for future revenue growth through planned or recent rent increases that have not yet hit property financials,” he said. “Buyers want to wait to watch the results of rent increases for a few months before giving credit to the seller.”

Berkadia also reports that agencies are not the leading sources for senior housing debt capital and HUD is being looked at more favorably.

“One of the most desired debt executions in today’s market is an agency loan via Fannie Mae and Freddie Mac, and there is available liquidity within both organizations; both expect to do ~$1 billion in volume in 2023, respectively,” according to Austin Sacco, Managing Director – Mortgage Banking, Berkadia.

But holding back agency lending is that many properties do not currently qualify for permanent financing as margins have been depressed across the industry. Meanwhile, HUD is open for business and remains the best option in terms of long-term, fixed-rate debt.

Banks are facing a “severe” lack of capital and national banks have largely been on the sideline since mid-2022, according to the report.

“Most lenders will stay in the current holding pattern until there is more clarity on if we will actually enter a recession in fall 2023 before making any changes to their credit parameters.”