In the past several years, the senior housing industry has welcomed new investors from other real estate product types. The sector has grown over time into one of the favored real estate investment classes for investors. In addition, with the demand for new assisted living, skilled nursing and other healthcare properties growing, lenders are working with developers and operators to supply new product to the space.
Watch for These Two Metric Changes in the Senior Housing Industry
Everyone in the senior housing space can expect interest rates and potentially capitalization rates to change in 2018.
Interests rates on debt from banks will rise, making debt more expensive. As interest rates rise by increments, cap rates may also rise. As a result, valuations on senior housing investments may also adjust.
Major players in the senior housing industry are anticipating these changes, but when and how fast has yet to be seen. Specific numbers also depend on market conditions. For buyers in the senior housing industry, this means higher payments on debt, but they may pay less for the asset overall. For sellers, they may not receive the same net proceeds next year as they would this year, JCH believes that the timing is excellent in 2018 to sell.
Buy Skilled Nursing Facilities or Sell Skilled Nursing Facilities
Large REITS continue to dominate real estate ownership in the skilled nursing sector of the senior housing industry. However, REIT’s have started to strategically divest of skilled assets. With too many large healthcare operators in the mix, sometimes the talent pool has fallen short which can cause operational issues to arise. As a result, these large REIT’s are cleaning up their portfolios and are deciding to sell skilled nursing facilities that are underperforming. They may also choose to reorganize assets or break them into smaller groups.
Following suit, midsize operators are gaining ground in skilled nursing. These regional operators have hit the sweet spot with just the right number of properties to manage in order to maximize proceeds and operational efficiency.
Lastly, mom- n-pop operators are facing a complete fade-out as they close shop and divest their assets to larger operators. Because they have little contract negotiating power and the resources to compete with larger players, the single asset operators may soon be completely out of the skilled sector of the senior housing industry.
New Products Open for Independent and Assisted Living Facilities
In 2017, there was a significant amount, if not record-breaking amount, of new construction. So much in fact, that many seasoned operators are concerned with over saturation of product. Time will tell how quickly new beds absorb into the marketplace and how it affects rental pricing and valuations. This year, and in 2019, operators will finally get their answer.
The bulk of new product will be in the independent, assisted living and memory care sectors. As the doors to new sites open, operators and investors will finally get to see just how well the market absorbs these new units, how fast and at what rates.
Soon after beds are filled, submarkets will emerge. Most likely categorized by metro areas, some regional products are bound to outperform others. It will become clear where demand is high and where supply exceeds needs.
The Senior Housing Industry Still Has Space for More
As larger and more powerful companies dominate the senior housing industry, smaller operators and investors are pushed out. However, there remains room for smart senior housing investments.
The demand for senior housing will exist as long as the elderly need care and a place to live. Currently in the senior housing industry, the costs for these services can be high. Not just anyone can afford high private pay assisted living rates, even though they need the care.
That leads to investment opportunities in affordable senior housing. This remains an untapped market that is sure to boom once the product itself is available.
Overall, 2018 is set to be a productive year for the senior housing industry. Historically, pricing is high, and debt is cheap. With plenty of equity and debt in the senior housing industry, operators are positioned to have robust pipelines for new product. 2018 is on track to be a high transaction volume year.
Make the Most of 2018 with the JCH Group
The JCH Group has helped operators of all skill levels navigate the senior housing industry. Our investments specialists are your best resource for making smart decisions with and for your facilities.
Whether you decide to sell or purchase skilled nursing facilities and/or assisted living facilities, we will find you the right buyer, seller, asset and price.
With the landscape of senior housing changing, let us be your guides. Speak to one of our investments specialists today and find the right move for your senior housing investments. Contact Nick Stahler at 714-746-1663 or Jim Hazzard at 714-463-1677.