The senior housing industry has experienced tremendous growth within the past few years. Strong investment returns have attracted serious new players. With construction debt available in the marketplace, plenty of new construction is also under way. Now, as 2016 comes to a close, deals are wrapping up, providing a clearer picture of what 2017 will look like.
Here are a few changes to expect.
Interest Rates Will Rise
Those planning to buy healthcare properties should know that interest rates are expected to rise. Though it is uncertain just how quickly interest rates will increase, and by how much, owners and operators should anticipate a chain of changes as a result.
Debt will inevitably become more expensive. Higher interest rates mean that the same amount of debt will cost more. Investors preparing to buy nursing homes may also struggle to make deals pencil at current capitalization rates. Higher interest rates will most likely affect the coverage ratios implemented by lenders. Increased interest rates will also affect existing variable rate loans and their monthly debt service.
Overall, operators may see some softening in pricing when they decide to sell. Though no dramatic shift is expected, there will be growing pressure for those in the senior housing industry to slightly lower expectations when it comes to valuations.
Expenses Will Increase
Several factors will contribute to higher expenses. Due to minimum wage increases across the country, labor costs overall will become more expensive. We anticipate that insurance will also increase, as it has for the past two years. As a result, this affects the bottom line for operators and profit margins may shrink.
The main concern for new and prospective operators is, if, and how they can pass the increase in expenses on to residents/patients. With the private pay model, it may be doable, depending on the market you are in. Current operators have been testing and implementing new strategies where residents absorb a portion of the costs without compromising quality service.
However, the rise in labor costs will likely have a greater impact on facilities operating under the reimbursement model. This includes Medicaid and Medicare models that do not have the ability to pass increased expense cost to the patient. Rate increases for these models are expected to be lower than the increase in expenses.
New Construction Will Open
Last year, players in the senior housing industry were enthusiastic about the amount of new construction taking place. Expect those facilities to come online in 2017 and 2018.
New skilled nursing facilities and assisted living facilities will be good for the senior housing industry as a whole. These high quality assets are sure to support the demand expected from the booming senior housing business.
Those in the senior housing business expect a better idea of what these changes will look like as 2017 progresses. 2016 has closed with multiple large transactions in the pipeline. Healthy first and second quarters are expected in terms of transaction volume.
This also provides solid market parameters for valuations. With plenty of buyers for senior housing for sale, there will be enough data and metrics to measure the affect these changes have on the 2017 market.
Consult the Investments Specialists at the JCH Group
The investments specialists at the JCH Group are available to help make 2017 a complete success. From free business valuations to refinancing, we are available with key resources to strengthen your portfolio of assets.
To find your senior living investment in the senior housing business, contact one of our investments specialists today! Nick Stahler 714-463-1663 or Jim Hazzard 714-463-1677