One of the main excuses for a lack of new seniors housing development, even in the face of massive impending need in the next decade, is tight financing–the theory that lenders don’t want to fork over cash for properties that may not fill up in a sector not as understood as other commercial properties.
However, the lack of bank support may be a myth, experts say, as established firms are more likely just building carefully and focusing on need-based uses rather than market-rate properties.
According to fourth quarter data from NIC, construction starts for seniors housing is at about 1.4 percent of inventory, which is about one-third of the level the industry saw right before the recession. Much of the drop is from independent living, which took a hit from seniors not able to leave their homes, but even need-based housing is down by a third.
David Hegarty, president and COO of Newton, Mass.-based Seniors Housing Properties Trust Management, says he believes that lenders are being very choosy about which projects they are financing. “At some point, as the CMBS market becomes more fluid, banks will be able to offload the debt and they may be able to go out more on a risk curve,” Hegarty said during the trust’s presentation at the Citi Global Property CEO conference on March 6. “I think the developers are all waiting on the sidelines with a plan for development all over the country, so I can envision certain markets being overdeveloped in about five years.”
Other experts in seniors housing lending, however, say that it’s more likely that the pipeline will be built gradually, with the most needed housing of assisted living and memory care being snapped up quickly as it is opened. For example, Chicago-based Harrison Street Real Estate Capital recently partnered with Garden City, N.Y.-based Engel Berman Group to acquire seven former Bristal seniors housing properties for $380 million in New York, and the venture plans to build 1,000 more units together.
“With the aging population and increased life expectancy we believe there is going to be a need for assisted and memory care properties,” says Chris Merrill, CEO of Harrison Street. “We see the opportunity in these smaller assets with private pay and based on a rental, not a buy-in, model. We think skilled nursing will have challenges given the reliance on public pay. Also market rate and independent can be more tied to swings in the economy.”
Merrill, like a few other established seniors housing lenders, says that contrary to media reports, financing is only difficult for those firms that do not have a track record or operating history in the business. “We have found readily available construction and permanent financing from numerous banks, insurance companies and agencies such as Fannie/Freddie/HUD,” he says.
His thoughts are echoed by Dan Hermann, head of Ziegler’s investment banking practice. Hermann says experienced operators are gaining financing fine, but are concentrating instead on refinancing and modernizing of current properties. “The guys who own five to 10 communities are refinancing, they now have the lowest cost to capital they’ve ever had,” he says. “The affordable markets are open and capital is available. You’re just hearing more about small, one-off companies who are having debt trouble with individual CCRC’s going into default. The reality is that a large number of CCRC’s are doing just fine.”
He points to companies such as Smith Senior Living, which has expanded its units from 82 to 150 at Smith Crossing in Orland Park, Ill., and Skokie, Ill.-based Covenant Retirement, which is modernizing Illinois properties in Northbrook and Batavia. Ziegler has also been active, with the investment bank closing $29.8 million in bonds for the Eastside Retirement Association for Emerald Heights, a Redmond, Wash. complex that includes 290 units of independent living, 56 assisted living units (including 16 memory care) and 61 skilled-nursing beds.
The company also closed $71.2 million in bonds for American Baptist Homes of the West, which is using the money for the redevelopment of the Terraces of Los Altos in Los Altos, Calif. The CCRC has 73 independent living units, 14 assisted living apartments and 65 skilled-nursing beds. “There’s been $2.2 billion of nonprofit lending, including 30 bank transactions for $700 million,” Hermann says. “It’s true that there’s not been much new development activity, but the money’s being invested in current housing.”
He acknowledges that lending has its purse strings open for construction, but companies are more focused on following demographic trends and figuring out where best to build. The REITs are working to partner with operators to focus on the next wave of acquisitions and development, he says. “As the occupancy levels rise from 89 percent to 92 percent and higher, I think you’ll see companies ready to grow,” Hermann says.
Brent Holman-Gomez, a senior vice president at Cambridge Realty Capital Cos., says it’s likely going to remain a 30-percent investment rule for new construction for some time, though he agrees that REITs will likely become more aggressive in construction with their development partners. His firm has continued to loan for seniors housing projects, such as the recent closing of a $14.4 million FHA-insured HUD loan to refinance Pleasant Lake Villa, a 239-bed skilled care and assisted living nursing home in Parma, Ohio.
“I think the huge wave of boomers moving into seniors housing is really quite a ways off,” Holman-Gomez says. “The time when operators looked to build when they saw the age-focused plan coming together is likely way in the past. Until they get to the point of needing the housing, people are not as likely to move, and the operators, not the lenders, are the cause of less development because of this fact.”