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Tuesday, December 12, 2017

Senior Housing Reaches New Heights

By Dan Baker (Washington, DC)

The senior housing industry has reached new heights in its relatively youthful existence as a real estate asset class as it continues to distinguish itself from multi-family, health care and hospitality as a viable institutional investment.

A multitude of factors have combined to create one of the largest bull runs in the history of the senior housing market, making it a great time for owners and/or operators to sell, refinance, or otherwise recapitalize their properties: 

  • Low interest rates for construction, bridge and permanent financing;
  • New entrants and capital to the space;
  • Increasingly favorable long-term demographics;
  • Turmoil, high pricing, and decreasing yields in other real estate assets; and
  • A dramatic increase in operator sophistication and transparency.

 Much of the new product being developed today is different from most of the existing inventory in the market. Amenities, such as bistros, game rooms, theaters and outdoor space, are becoming standard. Key-card access, advances in lighting, Wi-Fi, telemedicine, and the use of electronic health records are also commonplace. Larger units and fewer studios (except in memory-care facilities) are what one would expect in a recently constructed senior housing community.

However, the sky is not all blue for the industry, which is beset with challenges from numerous angles. Increasing regulations and media coverage in the wake of recent natural disasters in Florida, Texas, and California have required operators to invest resources into emergency preparedness. Incorporating quickly evolving technologies into communities to be a more appealing partner to other operators in the healthcare space also requires investment in resources and personnel. Additional headwinds are:

  • Labor, in terms of both availability and quality, is the dominant challenge for large and small operators alike;
  • Affordability remains a pressing issue that the industry has yet to resolve, as middle- class prospective residents, who account for the majority of the baby boomer generation, have enough assets to not qualify for government assistance, but not quite enough to afford the high-end product that is mostly being developed today. As one industry observer said: “They’re too rich to be poor – and too poor to be rich.”
  • When entering a senior housing community, the typical resident is increasingly older and more frail, with more complex medical requirements and in need of assistance with daily living activities, further encumbering an already thin labor force.
  • A tremendous inventory of first-generation senior housing, built in the 1980s and 1990s, is on the market seeking a buyer, and there is concern about the competitive abilities of that real estate in the future due to physical-plant limitations.

These factors are often much more burdensome on smaller, individual owner-operators than larger, regional or national operators due to a lack of efficiencies and economies of scale. As a result, a typical seller in today’s senior housing market has only one property, or a small number of them, and is faced with the decision to grow to remain competitive or sell to capture a market where valuations are historically high.

In all, the senior housing market is alive and well, with unprecedented levels of capital chasing returns in the space, but investors and operators must not believe that simple demographics will lead to success. Proactive operations, thoughtful design and development, and properly structured deals will succeed over the long run as new competition intensifies in the space.

(Dan Baker is a Vice-President in Avison Young’s Washington, DC office. He specializes in senior housing dispositions on behalf of REITs, private-equity firms, and individual owner-operators. His career in senior housing began in 2007 working for an operator in facilities.) 

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