Financing seems to be again readily available to experienced operators where HUD (mostly skilled nursing) as well as Fannie Mae and Freddie Mac in the assisted and independent living markets are quite active. As to higher interest rates, they are still low by historical standards and have yet to exert much upward pressure on Cap rates.
The Skilled Nursing Facility market has been remarkably solid over the 20+ years that I have been selling facilities in the Upper Midwest. There have been a few pauses during recessions, credit crunches and with reimbursement changes over the years. But these were only temporary and strong demand for Nursing Homes continues. Most sales in Wisconsin will average in the vicinity of a 13% Cap Rate and has done so over the past 20+ years. Special circumstances can vary this somewhat but generally not dramatically. Newer (or recently remodeled), larger facilities with great locations and with an impressive quality mix can push the Cap Rate lower however. We also expect to see more Mom & Pop sellers next year as it is becoming more challenging to compete and the business has become more and more complicated. Everything from regulations, documentation, you name it…has gotten more complex.
The Assisted Living market, including CBRF’s and RCAC’s in Wisconsin, has been strong as well. Portfolios of multiple high-quality properties in the same or contiguous well-located markets have been demanding near record pricing. Real Estate Investment Trusts, or REIT’s for short, are driving this pricing and consolidation due to their inherent low cost of capital. As long as interest rates remain low, REIT’s will have plenty of cash to spend on these sizeable acquisitions. At times making other investors feel like they’re getting crowded out of the market except in the cases of one-offs and smaller facilities. These institutional investors have been outspending everyone of late. With interest rates increasing, we expect more regional and private buyers to become more of a factor in the acquisition market in 2014 and beyond.
As to developing trends, nursing homes continue to look for additional sources of revenue and are branching into other lines of business. Many are expanding into home health care services. In addition, some are looking into other services including hospice care, counseling and pharmacy units. Expect to see more specialty care units as well.
Other trends in the Senior Housing markets for 2014 (and often beyond):
1. Increased acuity in all settings
2. Managed Care Organizations driving care/results
3. More older facilities in the marketplace needing significant upgrades
4. Shorter hallways in new developments
5. Financing underwritten as much by evaluation of the management team as by the P & L
6. More consolidation, even in smaller markets