Over the past several years in the senior housing space, investors and operators have consistently seen all time high valuations for all product types within senior housing,
Now more than ever before, those looking to buy skilled nursing facilities or buy assisted living facilities are investing enormous amounts of capital to close transactions. These transactions with larger price tags are leaving current operators and veteran players perplexed and asking, why is this happening and what does that mean for the future of senior housing?
To institutional investors, senior housing has often been considered a foreign asset class. Recent trends have begun to prove otherwise, moving Senior Housing closer and closer to a core asset class. Because of this, we have recently seen unfettered investment in the space from outside capital sources. This influx of inexperienced investing in the space has driven pricing to new heights and generated tremendous deal flow for the industry.
Senior housing is an operation intensive business resulting in higher volatility and perceived increased risk versus other core asset classes. This is why capitalization rates are typically higher than those of other lower perceived risk assets classes. These higher returns attract the attention of investors accustomed to other products types such as multifamily housing and office. The other side to this story, and perhaps the part no one wants to hear, is that the speed in which this new capital entered the market place is the same speed it may leave when the first few hiccups occur. Brookdale’s recent earnings report may be on the leading edge of this.
Changes in the Future
With the growing popularity of senior housing business and abundance of outside equity, qualified investors are searching to buy healthcare properties in record numbers. To meet this demand, operators and property holders are encouraged to list their assisted living and skilled nursing properties for sale.
This raises some concern for us. If buyers and investors enter paying higher prices and expecting lower returns, cap rates are compressed, while prices skyrocket. This decreases the margins and coverages in these deals and severely restricts the margin of error, creating a far more fragile deal going forward.
When their investments do not provide the type of payoff expected, operators and investors may not be willing to reinvest, pulling out of the senior housing space and potentially creating a bubble.
The good news is that even if outside equity withdraws in the future and senior housing takes a hit, the fundamentals of the marketplace are always improving. Even if assets are over-priced, losses eventually compensate themselves through the cyclical nature of our marketplace.
The JCH Group, Your Guide in Senior Housing
As one of the most active and successful senior living brokerages, The JCH Group has successfully navigated through the passing trends in senior housing and continues to design and close high quality deals whether you have a congregate care facility for sale or are looking to buy nursing homes. As your choice senior housing brokerage, we are available for whatever you may need to ensure the best deal possible for your needs and goals.
For your complimentary business valuation, contact us today at your convenience.