2017 Seniors Housing Trends

As we have predicted for the past several years, we again expect another robust year for all areas of Senior Living properties in 2017. The sector performed adroitly through the Great Recession. Having done so, it has augmented the asset class standing among other commercial real estate sectors. Senior Living should remain in favor as the population continues to age, operators continue to seek opportunities to find efficiencies and as capital continues to remain readily available. While new development is on the fast track in many markets, it has yet to show any signs of over-supply except in select markets. Fundamentals are strong. Best in class properties have done exceedingly well producing excellent returns along with solid appreciation. All of this leads us to believe that continued strong demand in our sector will continue into 2017 and well beyond.

Cap Rates: Capitalization rates have remained stable. This is due in part to the limited availability of Class A product. With the likelihood of future interest rate increases on the horizon, we may occasionally see slight spikes in Cap Rates going forward. However, the near term outlook is for more of the same. (See Cap Rate 10-Year Trends on chart below).

Chart courtesy of HEALTHTRUST Seniors Housing & Healthcare Real Estate Advisory Services

Skilled Nursing: These facilities continue to show resiliency despite facing some considerable headwinds. Some factors contributing to this include Medicaid and Medicare reimbursement pressures, tight regulatory oversight, increasing patient acuity, labor challenges (not unique to just SNF’s), and rising competition from Home Health and other senior housing and care sub-sectors. Some owners of skilled nursing facilities, especially large Real Estate Investment Trusts (REITs) have been very public in their efforts to limit their exposure to the skilled nursing asset class. Chicago based VENTAS was one of the first to announce such a move. Yet in Wisconsin we have yet to notice any weakness in acquisition demand or in pricing. For most SNF’s that means a Cap Rate in the 12% to 13% range.

Assisted Living: With all the new construction going on, many of the newer facilities being built are financially out of reach for many seniors, as most cater to high-end residents (capturing higher rents). In fact, according to the 2015 Genworth Cost of Care Survey, the national median cost of assisted living (non-memory care) was approximately $3600 per month. Memory Care facilities often cost thousands more. Perhaps the most under-served are those middle market seniors who fall between the high-end market and the subsidized, affordable options controlled here in Wisconsin through Family Care. This is not an insignificant number as roughly 30% of households in that 85+ age group fall into this middle income segment. So with this challenge comes great opportunity to those trying to fill this niche.

Demand for existing properties continues to exceed supply, especially for Class A facilities. That along with increased regulations and reimbursement concerns have nudged many Mom & Pop owners to seriously consider an exit strategy and to take advantage of this historically low cost of capital. It’s hard to argue that now isn’t the best time to sell. Cap rates are excellent, capital is abundant and occupancies are high. We have seen a run-up of prices here in Wisconsin and elsewhere substantiating that. Don’t wait until some of these metrics begin to weaken. Don’t be a “market-timer.” They almost always procrastinate fearing that they might leave a little change on the table...........Those procrastinators rarely ever hit the bullseye.

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