Investors Eye Senior Housing Amid Changing Interest Rates

While the Federal Reserve’s decision to cut interest rates will take time to impact commercial real estate valuations, this shift could significantly influence the market for senior housing and nursing homes in the short term. A new analysis from Cushman & Wakefield reveals that a confluence of dry powder from institutional investors, decreasing debt costs, and increasing maturities may create favorable conditions for opportunistic investors in the sector over the next 12 to 24 months.

Sales volume in the first quarter of the year hit its lowest level since the Great Financial Crisis, but rebounded by 65% to $1.43 billion in the following quarter. Nonetheless, the rolling annual volume for senior housing and nursing care facilities continued its decline for the tenth consecutive quarter, reaching $5.87 billion by the end of June.

“With most investment activity comprising opportunistic investments, these pricing trends are likely somewhat exaggerated, as well-capitalized owners have been waiting on the sidelines for certainty to return to the capital markets,” Cushman & Wakefield noted.

The analysis found that the average transaction price per unit rose to $130,000 at the end of the second quarter, signaling an upward tick in valuations. Conversely, pricing per unit for skilled nursing facilities plummeted to its lowest level since the third quarter of 2020, at $82,176.

Institutional investors were net sellers in the first half of the year, while the relatively low cost of capital for REITs has kept them active in recent months. According to Cushman & Wakefield, private investors have emerged as the most active buyers amid a slowdown in transactions over the past four years, primarily pursuing opportunistic strategies with strong fundamentals and distressed properties.

Approximately $19 billion in debt for nursing homes and senior housing is set to mature over the next two years, potentially forcing some investors to sell and creating opportunities for those with low leverage.

A fraction of surveyed investors reported underwriting negative leverage for up to two years, indicating that unlevered opportunistic transactions are becoming increasingly common. Although the senior housing and nursing home market faces a tough transition post-pandemic, falling debt costs and rising maturities could present significant opportunities for well-positioned investors.