Construction of seniors housing properties is up, but occupancy is flat and absorption was down at the end of the third quarter, according to industry experts.
A report released last week by the National Investment Center for Seniors Housing & Care (NIC) said the average occupancy rate for seniors housing properties was 89.9 percent, the same as in the second quarter. Annual absorption in the sector, which includes both independent and assisted living properties, dropped to 1.8 percent, the first quarter that the rate has been below 2 percent in four years.
Officials at NIC say that the mid-year volatility in the stock market and uncertainty about the direction of interest rates didn’t seem to affect the industry, and that new construction is a sign of future growth. The mild-weather months also tend to be a time of stability as families move their loved into seniors housing, said Beth Burnham Mace, chief economist for NIC.
Demand is not the problem—the seniors housing industry provided solid returns even during the recession. Rather, the sector is beset by REITs that need to continue to purchase property in order to grow. Brookdale Senior Living, now the largest owner and operator in the sector due to its acquisition of Emeritus Senior Living last year, now owns a reported 976 seniors housing properties. Ventas Inc. is close behind, with 785 sites, and Health Care REIT has a reported 611 properties. The REITs have been buying up portfolios and merging with each other for the past three years, and are now competing for the last remaining properties.
However, there’s now too much money chasing too few deals and not enough quality sites left, says Keith Kodrin, a senior director with lender Capital One. “There’s just so much aggression, a lot of competition, for assets that we’ve seen REITs paying a premium for projects that aren’t fully stabilized or require a turnaround. We do think there’s some overpaying going on,” Kodrin says.
According to a recent Capital One survey, 41 percent of seniors housing professionals eschewed buying new assets because of yields they considered too low, and expect new development to offer the greatest opportunity in 2016. However, many also said that they are worried about overbuilding by new, uneducated entrants into the market. NIC data shows construction as a share of existing inventory has risen to 4.9 percent, a new cyclical high.
Imran Javaid, a managing director at Capital One, says there is some concern about overbuilding because the need for the new space just isn’t here yet—an expected blowup of demand by the baby boomers for assisted or skilled nursing care facilities isn’t expected for another 10 years.
“You also need to be mindful, do a deeper broad analysis of whether a new property is needed. You can’t just do a simple market study and build because you like your location. We see this all the time,” Javaid says. “The people who have been in the industry to see these cycles understand this, but developers new to the space should partner with locals who understand that sub-market best.”
Kodrin says he was shocked by his firm’s survey results that showed 20 percent of professionals being concerned about the new influx of capital into the seniors housing sector.
“Unfortunately, you get that attitude of ‘my property find is great, it will do just fine’ without having the experience in this seniors space, these new entrants haven’t lived through the ups and downs of seniors care,” Kodrin said. “We need to focus as much as possible on education. If there are new investors that get hit with a hiccup, they get a problem, they may not come back to the space, and that’s not good for the long-term investing in the industry.”