Across-the-Board Occupancy Gains in Seniors Housing Sector
For the first time in several years, all sectors of the seniors housing market are building positive momentum. Key factors supporting performance gains include a resurgent housing market, healthy employment growth and disciplined development. Fueled by low interest rates, home appreciation was primarily responsible for lifting occupancy at CCRCs during 2013, particularly in the fourth quarter. Seniors able to unlock home equity are more likely to sell in the current market, which helps overcome the high costs to move into an entrance-fee CCRC. In addition to the housing gains, a recovering job market is propelling demand for both IL units and CCRCs. At the end of 2013, the country had recouped approximately 7.7 million jobs from the 8.7 million cut during the recession. In fact, payrolls are anticipated to surpass pre-recession highs sometime around midyear, which is encouraging seniors on the cusp of downsizing to liquidate as their unemployed children find jobs and households “de-bundle.” Improvement in skilled nursing fundamentals, meanwhile, is driven by the removal of dilapidated stock at a faster pace than completions, though demand ticked up in the fourth quarter. Overall, a greater number of states are focusing on home care for skilled nursing patients, while shifting dementia care into AL facilities to manage costs.
Cap rate compression in other commercial real estate sectors is elevating interest in seniors housing from nontraditional investors. Multifamily buyers now realize that purchasing an IL facility and putting an operator with a proven history in place can generate healthy returns despite the elevated management fees. With average cap rates in the high-6 percent range for newer properties, the spread between market-rate multifamily and IL assets can be more than 100 basis points. The spillover demand from high-net-worth individuals has not trickled into the AL sector, however, due to the complicated nature of the business. Instead, these investors without experience are more apt to take lower returns and put funds into publicly traded REITs that specialize in these properties. Seasoned operators, meanwhile, can find opportunities with upside. Properties that need a capital expenditure are the most prevalent value-add deals on the market, and savvy buyers will target Class B/C AL facilities in Class A locations to reposition and add dementia care units.