As lenders and investors anxiously await that elusive first rate cut, Berkadia Seniors Housing & Healthcare continues to procure meaningful debt solutions for our clients. After a tumultuous 2023, there are certainly more palatable financing options in today’s market compared to just one year ago. Activity is increasing across the landscape in terms of refinances, acquisitions, and new construction.
Traditional senior housing and active adult properties are receiving more attention from lenders. Some banks have reentered the market but still require higher than typical DSCR and debt yield lookbacks to qualify for financing. Debt Fund/Private Credit spreads continue to compress, and the onerous loan structure requirements seen across 2023 and early 2024 have relaxed a bit. Freddie Mac, Fannie Mae, and HUD continue to provide the most attractive long-term fixed rate permanent loan options in the sector. Life Companies are also willing to entertain strong-performing assets in both the senior housing and active adult sectors, offering attractive five-year fixed rate paper.
While cap rates on acquisitions haven’t quite compressed, improved fundamentals across the senior housing sector have spurred increased acquisition activity by 23 percent from last year. Many investors understand that attractive opportunities do exist in the present and see value in selective acquisitions. The main drivers include an attractive price per unit, a solid basis in strong markets and improved debt options for semi-stabilized or stabilized assets. Lenders currently have a bias towards high-quality acquisitions given that fresh equity is coming into the property, and perhaps a fresh operator.
Traditional refinances are certainly more scrutinized in today’s market, with many lenders requiring additional equity in, or at a minimum, self-funded reserves and/or closing costs. This can prove challenging as investors have continuously poured capital into communities over the past several years to appease lending partners and obtain short-term extensions. The music has essentially stopped as it relates to the seemingly never-ending loan extensions, and more borrowers now requiring new loans and lending partners/relationships.
New construction pipelines are ramping up in anticipation of future relief in the capital markets. This holds true for both traditional senior housing and active adult developers alike, given the pending demographic wave. Many chased value-add opportunities last year. However, a lack of attractive financing options ultimately pivoted developers back to their construction pipelines. Securing equity remains the largest roadblock today for most developers. Many private equity firms, who were developers’ primary partners throughout last cycle, are still very much in asset management mode, continuing to address challenged assets and liquidity/fundraising issues. Strategic acquisitions still make more sense from a returns perspective when compared to new construction opportunities. There are many compelling reasons why development should be a top priority in senior living as future demand continues to build. Recently, at the NIC Map Vision Data Conference, the following statistics were presented:
- Based on the number of units under construction over the history of NIC data tracking, the market would need twice the max number of units delivered historically through 2030 to maintain 90 percent occupancy.
- The senior housing sector will require $1 trillion in investment by 2041. The current pace is a quarter of that ($275 billion needed by 2030). 609,000 new units are needed by 2030.
- This number sounds staggering, however, it assumes a reasonable cost of $450,000 per unit.
- Senior housing has remained the best-performing CRE asset class over the past 10+ years. It also outperformed every asset class through the Great Recession.
- Growth in the 80+ age cohort is greater than current inventory growth (on a percent of inventory basis). The inverse was true during the 2010s construction boom.
- To maintain 90 percent occupancy after 2026, developers must develop at twice the max pace (3.5x the normal pace) seen during the 2010s construction boom.
- Forty-five percent of inventory is greater than 25 years old. Newer buildings have more pricing power.
- Nationwide average occupancy is expected to reach 90 percent by 2026, resulting in an eight to fourteen percent increase in occupied units by 2026.
- The post-pandemic reabsorption period has passed. Absorption is now a direct result of new demand being generated by aging populations.
- The 75+ population incomes have increased 35 percent since 2013 while rents have increased by 7.5 percent over the same period.
- Assisted living demand doubled independent living demand between 2019 – 2023 highlighting the demand for needs-based housing.
- The total number of units under construction has declined for four consecutive years.
- For every ten new units added through 2026, 23 are expected to be absorbed.
Acknowledging it has been a challenging stretch for our sector with more unexpected challenges certainly coming, it is important to remember that our ultimate charge as an industry is to serve the aging and elderly population of our country in a meaningful and thoughtful way. It is imperative that we work together (equity providers, developers, operators, debt providers) to ensure we provide desirable assets and top-quality care to both current and future residents. The future is very bright for our industry, and Berkadia is proud to be at the forefront of the next chapter of the senior housing industry.
– Managing Director Austin Sacco, Berkadia Seniors Housing & Healthcare