The arrival of COVID-19 vaccines led to the grand re-opening of society resulting in a bullish economy that made it challenging to meet staffing demands in skilled nursing facilities.
During a recent roundtable, experts from Greystone, Cushman & Wakefield, Phoenix Senior Living, and Harrison Street discussed the current landscape of senior housing and where it is potentially going.
Navigating a Changed Economy
In the present environment, Harrison Street has continued to invest in specialty asset classes such as student housing, senior housing, medical offices, data centers, certain infrastructure, and self-storage. The common trend of these investments is that they are recession-resilient and demand-driven. “During economic shocks, our sectors—senior housing included—should perform well,” according to Elliot Pessis, Managing Director of Senior Housing & Asset Management for Harrison Street.
For Jesse Marinko, CEO of Phoenix Senior Living, he describes their senior housing operations as being “in the trenches … [but] Phoenix is really dedicated to understanding this new environment and we trudge through it.”
Alternatively, Greystone’s “core business is busier than ever” according to Christopher Clare, Managing Director, Healthcare Finance at Greystone, who has taken a more bullish approach to private payer needs-based assets like assisted living since they have the ability to raise rent to maintain their margins. Greystone also has been able to leverage an active balance sheet program with products like senior loans, preferred equity investments, and tax-exempt bonds.
Influence of Recent Interest Rate Increases on Senior Housing Valuations
Of course, recent rate increases have impacted valuations, but it is hardly one-size-fits-all. By historical standards, interest rates are still low. Pessis goes on to clarify he would “trade a short-term disruption with long-term good prognosis any day.”
Marinko focuses on how to improve an operation to add deal value but anticipates skepticism from prudent buyers on where those deals will come from in this tighter market. This dynamic has admittedly made it harder to facilitate deals that should be expected. With uncertain buyers or investors during periods of market distress, Fannie, Freddie, and HUD can be viewed as lenders of last resort.
Generally speaking, Clare has found that higher quality and lower acuity assets are seeing an increase in cap rates in the 25 to 50 basis point range. Lower-quality assets are presented as more sensitive in the 100-150 basis point range. In periods of distress, there is a rush on quality products that are seen as safe havens for investment activity despite rising interest or inflation.
As investors withhold from lower-quality assets there is mounting investment capital waiting for more low-risk opportunities found in high-quality assets. Investing in high-quality assets despite higher initial costs with lower returns is preferable to risking zero or negative returns on lower-quality assets. However, skilled nursing has generally been unaffected by the recent rise in rates.
Impact of Material and Labor Costs on Value and Buyer Appetite
Client demand for new construction loans has been down, due to the prolonged supply chain disruptions from COVID and Russian sanctions contributing to the high cost of building materials. However, the subcontractor sector has been softening making their labor more available and affordable. Additionally, the rising interest rates have made the American dollar more valuable so imported materials are also getting less expensive.
Even assisted living facilities are suffering from a staffing perspective so it is significantly impacting value despite high occupancy. This causes buyer insecurity as the ability to push those costs onto the consumer to maintain their margins comes into question, but this has not deterred long-term buyers who see labor cost as an opportunity to find deals that add value as wage increases subside.
2023 and Beyond
Clare predicts that the US will enter a mild recession in the first or second quarter of 2023. Historically, during a recession, the ten-year Treasury will come down, as there is a flight to quality, which Clare expects to see by Q3 or Q4. Looking back to the independent living sector during the great financial crisis when it underperformed - because it was viewed as more of a want than a need - has informed Clare’s future predictions. States have recently become more focused on behavioral health as a need and have increased Medicaid which is another opportunity for growth in the next 12-24 months.