Leasing activity is slowly on the mend, but lenders are in a show-me state of mind.
Demand for seniors housing is on the rise, with assisted living and dementia care leading the way. Leasing activity at seniors housing facilities increased by an average of 1.5% over the past year, according to an exclusive NREI survey of, developers, lenders and other real estate professionals serving the industry [Figures 1 and 2].
The slight uptick in leasing activity — stimulated in part by an array of concessions including rent discounts and free services — is a clear sign of stabilization. But the degree to which this momentum will give borrowers more leverage in their dealings with lenders remains an open question.
When seeking to refinance loans, respondents to the 2009 Seniors Housing Study most often cite lower loan-to-values and higher debt-service coverage ratios as their biggest challenges [Figure 3].
Nearly half of respondents (47%) expect the availability of financing for seniors housing to increase by the second quarter of 2010. About half of respondents (49%) say that it will be the fourth quarter of 2010 or later before newincreases.
Construction financing remains extremely difficult to obtain as real estate fundamentals remain soft and the U.S. economy continues to shed jobs. That unhealthy combination may explain why nearly one in four respondents (39%) don't expect the amount of new construction to increase until 2011 or beyond.
“We have a window of about three to four years where effectively there will be very little new product coming on line,” says Granger Cobb, president and co-CEO of Emeritus Corp. The Seattle-based company (NYSE: ESC), which operates 309 communities in 36 states, is a provider of assisted living and Alzheimer's and related dementia care services.
“When it comes to anything that is unstabilized and you are looking to fill it up, or it's new construction, the comfort level of the capital markets on the risk side is not back at all to where it used to be,” explains Cobb.
Owners seeking to refinance properties that boast a 90% or greater occupancy rate and that generate healthy operating cash flows will find lenders highly receptive. “They still want you to put up more equity, and their underwriting on the valuation isn't as good as it used to be, but you can refinance,” says Cobb.
Same-store occupancy in the Emeritus portfolio rose 110 basis points to 88.2% in the third quarter compared with the third quarter of 2008. Same-store revenue rose 3.4% to $192.1 million.
Stability of cash flows at the property level is paramount today, says Kevin McMeen, president of real estate lending for-based MidCap Financial, a bridge lender specializing in the seniors housing and health care industries.
“We may find in the underwriting process that a property is stabilized on a 12-month basis, but that the most recent three or four months show a steady decline in performance. You really need to know what's going on from a month-to-month level of performance because it can change significantly in this environment,” emphasizes McMeen.
MidCap, which provides floating-rate loans two to four years in length, prefers to do business with owners and operators with which it has existing relationships. “Knowing how they perform in terms of managing assets, knowing how they perform in dealing with problem situations that arise is important,” says McMeen. “It's just easier to get comfortable from the standpoint of advancing credit, versus someone who is completely new and an unknown quantity to us.”
Identifying occupancy drivers
Two factors, the state of the U.S. economy and the housing market, have had the biggest impact on seniors housing occupancy rates during the past year, according to respondents [Figure 4]. On a scale of 1 to 6, with 6 representing an extraordinary effect and 1 no effect, the economy and the housing market each scored 4.5, followed by new and competing facilities (3.1), and the age of the property (2.8).
Home prices in many markets are down to levels last seen in 2003. The S&P/Case-Shiller 20-city home-price index reports large double-digit declines in many large metros between August 2008 and August 2009, the most recentavailable.
The problem is particularly acute in Las Vegas, where home prices are off nearly 30% year-over-year. Phoenix also has been hard hit with home price declines of 25%, while Detroit home prices are down 22%.
Such a dramatic drop in home prices has both a psychological and financial impact on seniors, often forcing them to delay their decision-making process. The inability or unwillingness of seniors to sell their homes in a depressed market could prevent them from moving into continuing care retirement communities, which typically require an entry fee that ranges from $150,000 to more than $1 million.
Still, many seniors in their 70s and 80s looking to make the transition into seniors housing have lived in their home for 25 or more years. In a lot of instances they have already paid off their mortgage, says David Schless, president of the American Seniors Housing Association based in Washington, D.C.
“The house is not worth what it was in 2007, but in most markets it's probably worth what it was in 2003,” says Schless. “Since you've had the house for 25 to 30 years, you're certainly not under water. You will still see a significant gain when you sell the house. This is more about a psychological adjustment.”
But home ownership is an emotionally charged issue that can't be overstated, says Michael Berne, managing director in the New York office of Jones Lang LaSalle, who specializes in seniors housing.
Berne offers up the following scenario to make his point. Suppose a person bought a home 30 years ago for $75,000, and two years ago that home was worth $550,000. Due to the recession and housing bubble that burst, the home's value has plummeted to $300,000.
“Ninety-nine percent of homeowners are not going to say, ‘Gee whiz, my home was worth $75,000 and now it's worth $300,000. I made a three hundred percent profit on my investment,’” explains Berne. “What they're going to say is, ‘Two years ago it was worth $550,000, and I've lost nearly fifty percent of value. I'm not selling it for that amount of money, period.’”
The rise of memory care
The more needs-driven a housing segment is, the more insulated from recessionary forces it becomes. That may explain why more than one-third of respondents (34%) indicate that assisted living is experiencing the greatest demand [Figure 5].
The seniors housing segment achieving the second highest level of demand, say respondents, is dementia care (21%), followed by independent living (19%), continuing care retirement communities (11%) and nursing homes (9%).
Dementia care, also known as memory care, has historically been recognized as a subset of assisted living. “Usually dementia care is a wing of assisted living. Rarely is it a stand-alone community,” says Cobb of Emeritus.
Demographic forecasts call for the number of Americans age 80 and above to rise, according to Berne of Jones Lang LaSalle. “There also is increasing medical awareness of the dementia issue and identification of people even at the earliest stages of dementia. That combination is creating tremendous demand.”
Berne points to the Esplanade Manhattan, an assisted living facility located at 305 West End Ave. at 74th St., as an example of rising demand for dementia care. Two floors of the 21-story building have already been set aside for dementia care. “Because of the high number of people trying to get in, they are thinking about carving out a few more floors for that service,” he says.
High drama over health care
For the past several months, Americans have been embroiled in a contentious debate over the optimal approach to health care reform. At issue is the size, scope and cost of overhauling an industry that represents one-sixth of the U.S. economy. The impact of reform on the quality of care also is a big concern.
On Nov. 7, the House of Representatives passed H.R. 3962, the Affordable Health Care for America Act, by a vote of 220-215. The bill calls for approximately 36 million Americans to be added to the insurance rolls.
The measure would create an exchange that enables small businesses and the uninsured to buy coverage, including a government-run public option. The cost of the bill is estimated at $1.1 trillion over 10 years.
To help offset the cost, a 5.4% surtax would be placed on the top 0.3% wage earners. Critics say the bill is too costly, particularly in light of the fact that the federal budget deficit tripled to a record $1.4 trillion in the 2009 fiscal year.
The Senate is feverishly working to pass its own health care bill. President Barack Obama's goal is to sign comprehensive health reform into law by year's end. It's unclear whether the Senate bill will include a provision for long-term care insurance, which could dramatically expand the pool of seniors housing residents.
When asked how they expect proposed health care reforms to affect the seniors housing industry, respondents provided two pages of write-in comments that reflect a wide range of opinions.
“For the government to finance national health care, it will need to cut or reduce services in other areas,” wrote one respondent. “There is concern that one of the areas to be cut or reduced will be funding for seniors housing for those who have exhausted their finances. This will ultimately cripple smaller facilities with higher government funding and less private pay. This will move the market toward larger congregate care complexes to capitalize on economies of scale.”
The passage of health care reform is critical, wrote another respondent. “We believe that it must be passed to contain costs. Not passing reform is simply unthinkable. We also hope that the fear mongering will end and an educational national debate can resume.”
Another respondent wrote that “it is not rocket science. Anything that improves access to medical care for all will prolong many lives and lead to more seniors.”
Cobb, the executive with Emeritus, sees both pluses and minuses to health care reform. “The truth is that it may have very little impact on our business because we are primarily private pay.”
Survey Methodology and Objectives
Penton Research collected data for the 2009 Seniors Housing Study between Aug. 27 and Oct. 7. E-mail invitations to participate in an online survey were sent to print and e-newsletter subscribers of National Real Estate Investor. Links to the survey were also included in e-newsletter publications.
The purpose of the survey was threefold: (1) to examine current and projected trends in leasing activity and factors affecting occupancy rates; (2) to assess the financing climate for new construction; and (3) to gauge tenant demand among seniors housing segments. The survey yielded 106 completed responses.
If you have comments or questions, please contact NREI Editor Matt Valley at firstname.lastname@example.org.