Seniors Housing Market
REITs More Selective, Providing Additional Opportunities for Private Buyers And Equity Funds in Seniors Housing
Favorable demographic trends and a bright economic outlook will propel the national seniors housing market forward in 2016. The number of individuals age 65 and older is steadily rising as our nation’s baby boomer generation is on the cusp of retirement. Growth in this age tranche has encouraged development in the seniors housing segment, and mounting home prices across the country are encouraging some seniors to monetize their equity and redeploy proceeds into smaller, age-restricted dwelling units. As a result, luxury communities featuring a multitude of amenities such as golf courses, tennis courts, pools and community centers are becoming more popular among older households seeking to maintain an active lifestyle. Thousands of units are underway this year and the construction pipeline remains full, causing some supply-side pressure in select markets and softening fundamentals. Southern markets are particularly affected as units underway represent more than 10 percent of current inventory and thousands more units are planned. As the baby boomer age segment moves closer to retirement in the next few years and desires the services provided by senior communities, demand for housing will heighten, strengthening property operations and easing concerns of overbuilding in many of these areas. Tight conditions and limited supply growth in other areas of the country could begin to foster more development as demand strengthens and rents advance to record levels.
Investment in seniors housing assets will remain strong throughout 2016 as the segment provides buyers with favorable spreads compared with other traditional multifamily properties. The threat of higher interest rates is causing REITs to become more selective as their cost of capital increases. This has opened the door for increased activity from private investors, who are picking up the slack with millions to invest, and private equity funds that are placing billions into the segment. Overall, the price per unit is nearly triple the cyclical low achieved in 2010 and initial yields are holding steady in the mid-7 percent area. Cap rates for IL and AL centers have compressed and will hover in the low-6 to high-7 percent range, depending largely on asset quality and location. Properties with a value-add component are especially attractive to private buyers. Assets in need of repositioning will remain popular, as capital infusions allow owners to push rents and increase yield. Investors should be mindful of the construction pipeline, as development in some markets, such as parts of Texas and Florida, are concerning and could cause softening property operations in the months to come.