The tough credit environment has slowed the volume of investment sales in seniors housing, but the pain is being spread unevenly. Lenders have embraced Class-A independent living and assisted living properties largely to the exclusion of Class-B and C assets, says Norm LeZotte, managing director of Cushman & Wakefield’s health care practice group.
But according to LeZotte, this flight to quality in seniors housing also spells opportunity for acquisitions among Class-B and C properties, especially for investors who don’t depend on debt — such as capital-laden players from as far a field as Australia or Germany.
LeZotte further predicts that macroeconomic forces largely beyond the realm of seniors housing will keep the market bifurcated for the foreseeable future. NREI recently spoke with LeZotte about who’s buying seniors housing and the specific types of properties in demand.
NREI: Has seniors housing investment volume slumped across the board?
LeZotte: No. For Class-B and C product, investment volume has slowed down immensely. There’s still investor appetite for those classes of assets, but there’s little capital for it in the marketplace. So, a lot of Class-B and C have either been taken off the table altogether, or are on hold until the financing can be structured properly.
Class-A product, on the other hand, is moving strongly. Stabilized independent and assisted living product in affluent markets is still trading at low cap rates. Cap rates for Class-A properties have held fairly steady in the last two years, despite everything else going on. Class-A assisted living has been ranging between 6.5% and 7.5%, while independent living between 6% and 7% for quite a while now.
Among the Class-B and C properties that do sell, there’s been a slight depression of prices. Cap rates are now up 50 to 100 basis points over 2007, when Class-B assisted living properties [were trading] at 8% to 8.5%, and independent living at 7.5% to 8%.
NREI: So are more players chasing Class-A product?
LeZotte: Yes. With Class-B and C properties stuck in the mire, investors who want to play in the seniors housing arena have to focus on Class-A properties, which is a factor in helping sustain low cap rates in that segment.
Perhaps more fundamentally is the prohibitive cost of ground-up development. If you try to build new product, you’re going to spend $250,000 to $300,000 per unit in most markets, and then you have lease-up risk and so on. Investors are now willing to spend a little more upfront for existing product because it’s ultimately cheaper than ground-up development.
NREI: In a seniors housing context, what makes a Class-A property?
LeZotte: Generally speaking, they are similar to Class-A apartment properties — well-maintained product built in the last 10 years in an affluent suburban or urban setting. But there are some additional considerations. A Class-A seniors housing property needs community dining rooms and other high-quality amenities, and it needs to be in a market that’s not merely affluent, but populated with a lot of affluent adult children — by which I mean people ages 45 to 65 whose parents are in need of personal-care services.
NREI: Does today’s market offer investment opportunities in Class-B and C properties?
LeZotte: There are clearly opportunities for buyers created by situations in which sellers need to, or want to, get out badly. If there’s a development opportunity along with a property — excess land, or potential to rehab, for example — that’s also a desirable kind of property, even among B or C assets. Investors who have equity to play will be able to take advantage of these opportunities.
NREI: Where are the equity players coming from?
LeZotte: There’s a lot of money coming in from Australia, Germany and East Asia. Investors from these places are joining forces with U.S. operating companies. So, the face on the deal might be domestic, but the equity behind it is foreign. Foreign investors are eager not only for seniors housing, but also medical office buildings, surgical centers and other kinds of health care properties.