Welltower Sees Senior Housing as the Next Decade’s Trend

It isn’t unusual for a company investing in a particular niche to talk up the future. Healthcare infrastructure investor Welltower is doing just that with senior housing, based on two general areas of imbalance: the tension between supply and demand in senior housing, and a scarcity of equity and debt capital at a time when many senior housing owners, operators, and funds need it.

The result is an “unprecedented capital deployment opportunity” over the next decade, as the need for senior housing sharply increases while financing to increase volume faces strong impacts.

Starting this year and increasing, Welltower points to a sudden shift in senior housing demand. Trailing twelve month absorption had been on a long-term increasing quarterly basis from the beginning of 2010 through the end of 2019.

Then came the pandemic. There were high mortality rates in senior facilities. Many residents were removed, and facilities shut down. Absorption shifted from mid-20,000s to falls that surpassed negative 70,000 in the first quarter of 2021.

Conditions finally changed, the pandemic came under control, and normalcy returned to life. Suddenly, with an elderly population still needing help was being amplified by the ongoing aging of baby boomers. Practically overnight, TTM absorption since Q1 of 2022 not only hit the pre-pandemic average but jumped an additional 135%.

As demand has increased, supply continues to fall. The pre-Covid average of construction was about 7,000 units a quarter, which is a misleading number. Quarterly construction at the beginning of 2010 was less than 3,000 units. From 2016 to 2019, that average was closer to 9,000 units a quarter with some peaks of about 12,000. By the first quarter of 2024, the figure was back to 2010 levels, a 75% decline from peak numbers.

Now for debt and equity funding. “Many seniors housing closed-end funds remain out of the money on promotes, incentivizing asset sales and return of capital to LPs in order to begin capital raising for next vintage of funds,” Welltower wrote. That’s now left investors overallocated to real estate. “Loan underwriters are placing a greater emphasis on sponsor net worth, liquidity and overall quality given elevated levels of agency (Fannie Mae and Freddie Mac) portfolio defaults and credit challenges.” Instead of recycling capital from repaid loans into new construction, lenders are now reducing their overall exposure. They’re also looking for solutions to the “extend-and-pretend” method of handling distressed loans.

And agency lending, which used five-year interest-only periods before refinancing, is seeing $13 billion in loans from 2018 and 2019 facing a need for refinancing that will be difficult. Interest-only periods went down to three years, so now loans from 2021 and 2022 are coming due in 2024 and 2025. In total, there are $19 billion in seniors housing agency loan maturities in the next 24 months.

Greater need, tighter financing, and growing maturities add up to distressed sellers, lenders that don’t want the properties on their books, and an opportunity for well-capitalized investors.