Property Types Seniors Housing
Jan 1, 2008
By: Mel Gamzon
The seniors housing sector's financial indexes are rock solid and its occupancy rates high, but investors would do well to proceed with caution while they await lenders' return.
By Mel Gamzon
On Aug. 9, the U.S. capital markets shifted drastically downward. Like other property investors, those focused on seniors housing faced more-limited access to equity and debt.
For those of us who have been involved in seniors housing real estate transactions during the past few years, this day of reality was inevitable. With cap rates dipping to unheard-of levels and capital driving an acquisition binge, the trickle-down impact of the global capital markets on our emerging sector was expected, but no one knew when it would occur.
For months prior to that date, astute observers had predicted that the confluence of economic, geopolitical and overall U.S. housing concerns would somehow hit us at a time when the industry was in full swing and looking favorable to lenders and investors. To those in the midst of real estate and financing transactions, the past six months had been a challenging period as the availability of capital evaporated.
Now, at least for the near term, most large-ticket portfolio transactions are on hold. While there is ample equity for high-caliber seniors housing transactions, the amount of debt needed to close a multibillion-dollar acquisition will be difficult to procure.
The question remains, though, whether the sector's previous reasons for exuberance will stay in the past or if this is a relatively brief period when the industry—with its compelling future demographics—should pause and contemplate a more vigilant approach to new investments.
The logical response would be to proceed cautiously but with optimistic guidance. Generally, the seniors housing business is performing well, though the single-family-housing situation will make lease-up for some projects more challenging than expected, according to David Schless, president of the American Seniors Housing Association. He noted that overall lease-up levels have been reasonable and that the sector has more operational strength than ever.
Specifically, occupancy rates for stabilized assets have averaged 94.4 percent, according to the State of Seniors Housing 2007 report, a project of the American Seniors Housing Association, the National Investment Center for the Seniors Housing and Care Industry and the American Association of Homes and Services for the Aging. This level of resident acceptance will, I hope, continue as owners and operators focus on customer satisfaction, aggressive marketing campaigns and bottom-line performance.
Furthermore, the industry's financial indexes are, by all reasonable measures, rock solid, with profit margins having improved dramatically during the past two years. And while liquidity on the debt side has slowed to a trickle, lenders are slowly venturing back as the Federal Reserve stabilizes the capital environment and as currency spreads continue to favor foreign investment in this sector.
It also helps that the days of the acquisition auction process in seniors housing are substantially over, at least for the coming year. Private equity firms, seniors housing operators and REITs have backed away from responding to aggressive selling tactics. The ground has been prepared for a more level playing field between participants in transactions. The end result is that this "cooling off" period of financial dysfunction will not have damaged the industry's long-term investment prospects.
Thus, if the Federal Reserve acts responsibly to stabilize the capital markets, the resulting increased liquidity will combine with the infusion of international capital to create a more subdued acquisition environment and to moderate valuations with modestly higher cap rates. That means we will likely see an uptick in real estate transactions come the second quarter of 2008.
The focus will remain on a higher standard of due diligence and transactions that in the short term are, without creating undue risks, accretive to investors. Significant barrier-to-entry ventures will take precedence in new development, and stabilized acquisitions that have value-added benefits for new owners or operators will take center stage. A limited number of turnaround opportunities outside the auction game will also exist.
All that said, the need for sophisticated market research is and will be paramount amid scarce capital, unstable or uncertain pricing, noncompetitive debt markets and lenders that are uncertain or outright unwilling to take syndication risks. Growing consumer demand for different types of seniors housing properties is also driving a need for transparency from sophisticated real estate investors, according to NIC president Bob Kramer. Recognizing that reliable market and operational data is essential for industry growth, the NIC has developed the NIC MAP Data and Analysis Service, a unique quarterly aid that tracks industry revenue, occupancy levels and supply and construction data in the United States' top 100 metropolitan statistical areas.
Armed with the appropriate research and the backing of reliable capital sources, seniors housing investors will certainly herald the year ahead as the beginning of a new generation of acquisitions and select development in prime markets. While all asset classes have been paralyzed by the recent capital markets meltdown, the pricing of seniors housing assets has now moderated to a point where it makes good sense to dig deeper into the potentials.
Simply stated, the number of construction projects, which is limited considering advancing demographics, can only translate into opportunities for the nimble real estate entrepreneur. This period of prudence and patience will reward those who take the next steps in considering this platform.
Reach Mel Gamzon, president of Senior Housing Investment Advisors Inc., at mgamzon@snrhousing.com or www.snrhousing.com.
By: Mel Gamzon
The seniors housing sector's financial indexes are rock solid and its occupancy rates high, but investors would do well to proceed with caution while they await lenders' return.
By Mel Gamzon
On Aug. 9, the U.S. capital markets shifted drastically downward. Like other property investors, those focused on seniors housing faced more-limited access to equity and debt.
For those of us who have been involved in seniors housing real estate transactions during the past few years, this day of reality was inevitable. With cap rates dipping to unheard-of levels and capital driving an acquisition binge, the trickle-down impact of the global capital markets on our emerging sector was expected, but no one knew when it would occur.
For months prior to that date, astute observers had predicted that the confluence of economic, geopolitical and overall U.S. housing concerns would somehow hit us at a time when the industry was in full swing and looking favorable to lenders and investors. To those in the midst of real estate and financing transactions, the past six months had been a challenging period as the availability of capital evaporated.
Now, at least for the near term, most large-ticket portfolio transactions are on hold. While there is ample equity for high-caliber seniors housing transactions, the amount of debt needed to close a multibillion-dollar acquisition will be difficult to procure.
The question remains, though, whether the sector's previous reasons for exuberance will stay in the past or if this is a relatively brief period when the industry—with its compelling future demographics—should pause and contemplate a more vigilant approach to new investments.
The logical response would be to proceed cautiously but with optimistic guidance. Generally, the seniors housing business is performing well, though the single-family-housing situation will make lease-up for some projects more challenging than expected, according to David Schless, president of the American Seniors Housing Association. He noted that overall lease-up levels have been reasonable and that the sector has more operational strength than ever.
Specifically, occupancy rates for stabilized assets have averaged 94.4 percent, according to the State of Seniors Housing 2007 report, a project of the American Seniors Housing Association, the National Investment Center for the Seniors Housing and Care Industry and the American Association of Homes and Services for the Aging. This level of resident acceptance will, I hope, continue as owners and operators focus on customer satisfaction, aggressive marketing campaigns and bottom-line performance.
Furthermore, the industry's financial indexes are, by all reasonable measures, rock solid, with profit margins having improved dramatically during the past two years. And while liquidity on the debt side has slowed to a trickle, lenders are slowly venturing back as the Federal Reserve stabilizes the capital environment and as currency spreads continue to favor foreign investment in this sector.
It also helps that the days of the acquisition auction process in seniors housing are substantially over, at least for the coming year. Private equity firms, seniors housing operators and REITs have backed away from responding to aggressive selling tactics. The ground has been prepared for a more level playing field between participants in transactions. The end result is that this "cooling off" period of financial dysfunction will not have damaged the industry's long-term investment prospects.
Thus, if the Federal Reserve acts responsibly to stabilize the capital markets, the resulting increased liquidity will combine with the infusion of international capital to create a more subdued acquisition environment and to moderate valuations with modestly higher cap rates. That means we will likely see an uptick in real estate transactions come the second quarter of 2008.
The focus will remain on a higher standard of due diligence and transactions that in the short term are, without creating undue risks, accretive to investors. Significant barrier-to-entry ventures will take precedence in new development, and stabilized acquisitions that have value-added benefits for new owners or operators will take center stage. A limited number of turnaround opportunities outside the auction game will also exist.
All that said, the need for sophisticated market research is and will be paramount amid scarce capital, unstable or uncertain pricing, noncompetitive debt markets and lenders that are uncertain or outright unwilling to take syndication risks. Growing consumer demand for different types of seniors housing properties is also driving a need for transparency from sophisticated real estate investors, according to NIC president Bob Kramer. Recognizing that reliable market and operational data is essential for industry growth, the NIC has developed the NIC MAP Data and Analysis Service, a unique quarterly aid that tracks industry revenue, occupancy levels and supply and construction data in the United States' top 100 metropolitan statistical areas.
Armed with the appropriate research and the backing of reliable capital sources, seniors housing investors will certainly herald the year ahead as the beginning of a new generation of acquisitions and select development in prime markets. While all asset classes have been paralyzed by the recent capital markets meltdown, the pricing of seniors housing assets has now moderated to a point where it makes good sense to dig deeper into the potentials.
Simply stated, the number of construction projects, which is limited considering advancing demographics, can only translate into opportunities for the nimble real estate entrepreneur. This period of prudence and patience will reward those who take the next steps in considering this platform.
Reach Mel Gamzon, president of Senior Housing Investment Advisors Inc., at mgamzon@snrhousing.com or www.snrhousing.com.
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