By: Robert LeClaire – Principal, LeClaire Commercial, LLC
Provided the federal government actions, with regards to the impending fiscal cliff does not cause the economy to fall back into a double-dip recession, the outlook for the senior housing market will remain strong going into 2013. Newer properties in good locations will continue to be in demand. Senior Housing continues to be a more stable asset class than other traditional forms of commercial real estate, especially in terms of operational fundamentals. In fact Senior Housing is widely recognized as the only real estate class that did not experience declining rents during the recent recession. Its occupancy has performed in step with other commercial real estate, dipping slightly in the 2007-2010 term. It has slowly improved since then and is showing material recovery from its cyclical high in 2006.
The Affordable Care Act will definitely impact Senior Housing going forward. As many as 15,000,000 more American citizens will qualify for Medicaid in 2014, accelerating the fiscal difficulties of an already over-tapped system. This does not bode well for the solvency of the Medicaid program. Without significant changes it will go bankrupt.
Despite reimbursement challenges, Skilled Nursing Facilities continue to hold their own. While not many are changing hands due in part to all the uncertainty, they typically trade in Cap Rates near 13%. This has been remarkably stable over the years. In states other than Wisconsin, we have seen some Nursing Homes trade for significantly higher than here. However, these are newly built properties in major markets, and in very good Medicare and managed care markets. Most operators here continue to be challenged by reduced Medicaid reimbursements.
We expect that consolidation will continue to occur as it becomes increasingly difficult for the Moms & Pops to compete without the economies of scale that larger operators possess. Occupancies should be fairly steady here.
Assisted Living occupancies continue to inch up as do rents here in Wisconsin. Costs are rising for most kinds of senior care, according to MetLife’s Mature Market Institute study. The average rent at Assisted Living Facilities nationally shot up 17% to $3,486 per month over the past five years according to the study. Their report indicates that the average cost of an Assisted Living Facility in Wisconsin is slightly lower at $3,329 per month. Comparing contiguous states, only Michigan and Illinois average rates are higher. Both Minnesota and Iowa have average costs below $3,000 per month. With regards to investment trends, average Cap Rates for assisted living are often in the 9-10% range. Premiums are being paid for facilities catering to dementia care with elevated revenue streams, newer properties, and those portfolios with economies of scale. Older properties often trade in the double digit range.
All in all, we are in an industry that is recession resistant but not recession-proof. Macro trends helping us include the over 85 age bracket, which is the fastest growing of all age categories. This will continue to spur modest growth trends in both assisted living and skilled nursing facilities which in turn will continue to attract outside capital. We expect seller-financed transactions to continue to be very popular in 2013 and beyond due to the fact that sellers can typically ask for more in these transactions because they are assuming more risk. We are bullish for next year’s prospects as relates to all types of Senior Housing.