Are We Headed Toward the Next Down Cycle in Pricing?


Over the past few years, the senior housing industry has experienced some dramatic changes. Impressive financial performance and returns have attracted an influx of new players, prompting high transaction volume and a significant amount of new construction. Investors either plan to buy healthcare properties at staggering prices or choose to capitalize on the wealth of current values and list their senior housing for sale.

With such high price tags and new variables entering the senior housing business, many investors have questions regarding business and real estate valuations and whether or not we are headed toward a down cycle in pricing.

Signs of the Times for Senior Housing:
Interest Rates, Cap Rates and Stabilization

Though each deal for senior living investments comes with its own set of variables, there is one major external factor that affects the entire senior housing industry, interest rates.

We expect another federal interest rate hike later this April 2016. How much and how quickly this rate will affect the senior housing industry depends on the hike itself and the trajectory of the curve going forward.

A higher interest rate typically means when investors choose to buy senior housing facilities they will have to underwrite at higher cap rates to absorb the increase in the mortgage payment. While the individual well being of senior housing facilities is strong, increased interest rates may cause valuations to fluctuate.

There also has been a small disconnect between sellers and buyers in regards to capitalization rates. For example, sellers may calculate a cap rate of 7 percent while buyers expect 7.25 to 7.5 percent. Though it is not a large discrepancy, it does place additional stress in consummating deals.

More recently, appraisers have been playing a significant role in mediating pricing for lenders, pushing for more conservative cap rates. In many of these situations, even though the buyer and seller may agree upon an aggressive cap rate, appraisers may come in at a lower number.

In the past, senior housing facilities pushed for high prices with multiple bidders. This trend is fading; we are still seeing multiple bidder situations, but pricing is stabilizing in the senior housing industry.

General Forecast for the Next Cycle:
Senior Housing Pricing Correction

Because we are stabilizing on an up cycle, the worry is that a fall is inevitable. Fortunately, the anticipated down cycle will be nothing like the recession in 2009. At most, we think it will be a small pricing correction, compensating for the novice players who paid far too much for senior living property investments and could not keep up with payments, incomplete construction and other similar situations.

The JCH Consulting Group for Your Housing Investments

As the leading senior housing brokerage, we offer a multitude of services for your wealth management. Our specialists work to provide the most accurate and important information so that your senior housing investment is an intelligent and informed decision.

The JCH Consulting Group regularly closes high profile transactions by creating a unique and personalized approach to each deal. For your free business valuation or guidance on your senior living investment, contact our team at your convenience.

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