Investor Views on Senior Housing

By: Cambridge Realty Capital

Earlier this month, the Salus Valuation Group released the results of its annual senior housing investor survey. The survey had 307 respondents ranging from U.S. and foreign investors, to operators, lenders, underwriters, credit officers, appraisers, REITS, and private equity funds. It provides a revealing view of where these industry participants think the senior housing industry is today, and where it’s headed in 2014.

The Current View on Senior Housing and The Outlook for 2014

According to the survey, a growing number of investors feel that senior housing has become a preferred asset class offering stability, diversity, and higher risk adjusted returns than other real estate asset classes. Because of this status, the senior investment market has become increasingly attractive to a broad array of investors. While public and private healthcare REITS continue to be at the front of the pack, there are also many new domestic and foreign investors that have entered the market. These include private equity funds, pension funds, and insurance companies to name just a few. Having more investors in senior housing has been good for the space, but it has also created some tension with veteran investors who worry that new participants might overbid on projects without understanding the underlying fundamentals and economics of the industry.

The survey also found that a significant portion of investment capital tends to gravitate towards class-A assets. These are communities that are positioned well and are in attractive locations. The most targeted communities on this list are assisted living and memory care facilities. Independent living facilities have also made gains with investors. While class-A assets remain in demand, some investors are selectively seeking class-B assets as well. These are assets that are in the value-add and opportunity segments. Many of them were built in the late 1990s and early 2000s, need significant renovations, and are not in highly desirable locations. Because of the risk associated with these investments, Class-B investors are highly selective, but remain willing to invest in these properties because of the potential for strong gains, and the reduced competition in this area of the market.

The Outlook for 2014

With respect to 2014, respondents were generally split on what will happen with cap rates, but a small majority of them believe that they will increase. The survey’s respondents also believe that new construction in independent communities, assisted living, and memory care facilities will either continue at its current pace or accelerate next year. With respect to financing and transaction activity, respondents believe that financing will remain available for experienced developers and operators in the coming year and that potential gains from large projects that can take advantage of their scale, might lead to an increase in transaction activity and mergers and acquisitions as well.

Overall, the survey’s respondents are bullish on the industry and predict continued improvements in operations, stronger rents, increased occupancy, and improved operating margins in 2014. Many respondents also believe that the national economy and the housing market will also improve, and that this will also benefit the senior housing industry.

The survey closes with Salus echoing the outlook of its respondents by stating that “we have to agree with our respondents – it is a remarkable time to be a participant in this market. Despite the challenges, the agents for growth and investment are abundant. Fundamentals are on our side and selective, thoughtful risk-taking is being rewarded. For those prepared and ready for the ride, it should be a great and rewarding adventure.”