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Are seniors housing executives bracing for a bubble, or do they see continued opportunity? The answer may be both, but the majority of owners and operators are not entering slowdown mode quite yet.

KEY LEARNINGS:

  • Seniors housing and healthcare executives are cautiously optimistic about the year ahead.
  • An overwhelming majority of owners expect increased deal volume over the next three years. 
  • The U.S. labor shortage is driving up expenses for seniors housing operators. 
  • The effects of increased competition on the ability to access capital and create sustained returns are top concerns for the industry.

Heating Up or Cooling Down? Taking the Temp of Seniors Housing Investment

A deal-hungry seniors housing and healthcare market is beginning to temper its expectations. Like the rest of the real estate marketplace, the industry is feeling the effects of macroeconomic factors such as fluctuating interest rates and the skilled labor shortage. Yet it also has its unique concerns and opportunities as investors and owners try to meet the particular needs of America’s aging population.

In preparation for the 2019 National Investment Center for Seniors Housing & Care (NIC) Fall Conference, KeyBank Real Estate Capital® conducted its annual survey of seniors housing owners and operators, asking them for their views on the current market and what they see ahead.

As they have in recent years, senior care businesses are continuing to plan for increased deal volume. Those plans notwithstanding, some respondents’ sentiments are tempered by looming causes of concern, including the impact of increased competition for deals.

Measured Optimism Pervades

Once again, seniors housing owners and operators regard the industry with optimism overall, with 67% saying they are somewhat optimistic. However, the percentage who consider themselves very optimistic decreased to only 10%. Another 13% said they are “neutral or not sure”, and 10% said they are somewhat pessimistic.

By contrast in 2018, respondents were more spread across the spectrum: 28% were very optimistic, 28% were somewhat optimistic, 32% were neither optimistic nor pessimistic, and 12% were somewhat pessimistic.

Expect Deal Volume to Keep Climbing

Seniors owners and operators are still thinking deals, deals, deals. The vast majority expect deal volume to increase over the next three years. With 60% estimating their increase to be 11–20% and another 30% saying it will increase 5–10%. Only one in 10 believe their deal volume will decrease 5–10%.

When asked what the greatest opportunities for business growth over the next 12 months were, 30% chose property acquisition (down 20% since last year), 18% indicated new development, 16% selected expansion or renovation, and 14% said refinancing.

The most significant takeaway from this perspective on growth is that owners and operators appear to be significantly cooling on acquisition compared to last year. Other changes from last year include a slight reduction in enthusiasm for new development (down from 25% last year to 18% this year), and slightly less expectation to see growth from expansion and renovation (down from 20% last year to 16% this year).

What’s Tamping Positivity

Seniors housing and healthcare executives may be deal-hungry, but they also have some challenges to face to keep that flow going. When asked about the biggest challenge facing their business over the next 12 months, controlling expenses (30%), competition (23%) and new supply (25%) led the list.

Speaking about the heightened competition, one operator said, “Entrants in the space with no knowledge of the industry [are] causing havoc for experienced & established owner/operators, both in the capital and space markets.”

In response to the question, “What keeps you up at night related to seniors housing and healthcare?” 30% said workforce issues –– from a shortage of operators and skilled labor to the cost of wages. Another 27% said fear of overbuilding and oversupply, 14% selected lease-up and occupancy concerns, and 7% mentioned affordability for the middle-market senior.

One in 10 respondents were concerned about cost of and access to capital. One owner expressed, “I worry that the capital markets are bailing a lot of people out of bad decisions. Lots of supply has come and continues to come, while expenses (primarily labor and insurance) continue to rise at rates that are difficult to pass through in rent increases in many markets. I think it gets worse before it gets better and there will be some pain that people have to reckon with.”

Competition for deals has also led to high valuations, which some owners feel will make it difficult to earn the returns promised during underwriting and needed to sustain their businesses.

Are We on the Bubble?

The survey again tackled the tricky question of a pending recession. The good news is most of those surveyed – 46% – answered “no” when asked if they believe the seniors housing industry is in a bubble. An additional 36% answered with the caveat, “No, but we’re heading in that direction." In 2018, those figures were 40% and 28%. This year 14% believe we’re already in the early stages of a bubble, compared to about 20% last year.

Looking at the overall commercial real estate (CRE) market, the respondents were a bit more pessimistic, with 18% saying, “Yes, the CRE market is in a bubble,” and another 32% saying, “Yes, but only in the beginning stages.”

One respondent observed, “[We’re seeing] high valuations, lots of players bidding on properties, which is driving pricing up.  Will they make the returns they're underwriting? Lots of people could lose money.”

Whether looking at the CRE market as a whole, or at seniors healthcare specifically, some wariness is to be expected now that the economy has been in a record-long expansion. For seniors housing and healthcare businesses, continued prudence in deals now will position the industry well to take advantage of the expected influx of demand as the baby boomer cohort begins accessing care options.

No matter your perspective, Key can help

The issues affecting seniors housing and healthcare investment are complex, so owners and operators need advisors who understand macro-level trends and the uniqueness of their niche. As one of the nation’s leading lenders in the seniors housing sector, let’s connect on your next project.

To learn more, contact

Kevin Murray or Matt Ruark or your healthcare finance mortgage banker.

Visit key.com/nic.