While senior housing continues to post strong returns and outperform other asset classes, the sector still couldn’t shake a few investor jitters. Senior housing posted total returns at 16.1 percent, 17 percent, and 15.3 percent over one-, three- and five-year periods, respectively, according to the recently released CBRE Seniors Housing & Care Investor Survey. Those totals are more than any other asset class for each period. However, there was a significant decrease in investor interest in the property type for the first half of 2016, following a broader pattern of CRE investor jitters.
The average occupancy rate for independent living and assisted living properties in the second quarter of 2016 dropped to 89.7 percent, as new inventory outpaced absorption of units, according to a quarterly report from the National Investment Center for Seniors Housing & Care (NIC). The occupancy rate represents a decrease of 30 basis points from the prior quarter, and brings average occupancy back down to where it was a year ago. Despite the lower occupancy rate the second quarter, annual asking rents for independent living and assisted living continued to grow, increasing 3.2 percent. It’s the highest rate since the second quarter of 2008, NIC reports.
Steady returns brought to investors by seniors housing in recent years sparked a lot of new supply, however, some markets are now at risk of oversaturation by the fourth quarter of this year as demand stalls, experts say. Though seniors housing occupancy on a national level increased slightly in the first quarter to 90.1 percent, new development is also at an all-time high, at 5.8 percent of existing supply, according to the National Investment Center for Seniors Housing & Care. The number of units under construction has increased from 22,975 in December 2012 to almost 50,000 at the start of this year, according to NIC data. The increase is driven by the sector’s steady returns, according to a recent CBRE report. Over a one-year period, seniors housing properties have been delivering average returns of 16.3 percent; over a five-year period—14.8 percent; and over a 10-year period—13.3 percent.
Relatively high investment returns and generally improving market fundamentals has driven investor interest in the seniors housing sector. Transaction volumes are at record high levels, pricing is close to a cyclical peak, and auctions are active and often fully priced, according to the National Real Estate Investor. Developers from other property types are actively building seniors housing assets and more capital providers continue to enter the market. In addition to several other factors, today’s low interest rate environment has fueled activity as the cost of capital for both acquisition and development is historically low. While all of these trends are seemingly positive, industry experts wonder if they are sustainable and if the sector is headed toward a bubble. This is particularly the case for pricing, and is a question for other commercial real estate assets as well.
By Le Anne Thomas, Managing Consultant, Los Angeles
By James Sutton, Managing Consultant, Dallas
& Bill O’Quinn, Senior Managing Consultant, Dallas
The County Board of Equalization in St. Louis, Missouri has authorized St. Louis County Assessor Jake Zimmerman to re-examine all tax-exempt properties across the county. Whether Zimmerman, or any other authority, has the power to revoke exemptions is still unclear, and this is the first time the county will review a tax exemption after it has been granted. While Zimmerman conducts the "periodic reviews," his primary focus includes upscale nonprofit senior living complexes in Kirkwood, Webster Groves and other communities.
Due to lack of confidence in the future performance of traditional commercial real estate property types, many investors are beginning to set aside capital for alternative assets. According to the National Real Estate Investor, such assets, including student housing, seniors housing and medical office buildings, among others, have broad demographic trends supporting their success, proved immune to the recession and offer higher yields than comparable properties in other sectors.
Despite the overwhelming demand for senior housing space, development continues to lack, and is commonly blamed on tight financing. However, according to the National Real Estate Investor, the lack of bank support may be a myth, experts say, as established firms are more likely just building carefully and focusing on need-based uses rather than market-rate properties. As it stands, construction starts for senior housing represent 1.4% of inventory, one-third less than the level right before the recession.