The past year, 2019, has been a relatively simple year for the senior housing sectors. This does not imply that nothing at all happened in terms of transaction, trends and other highlight events. But on the whole, the year passed with no occurrence of any black swan events. Will 2020 enjoy this same serenity?
Overbuilding and surplus supply
in emerging markets was a problem grappling the industry in 2019. However, with
the start of new construction, market growths have slowed and glutted markets
are starting to recover again. Data from the NIC MAP Data Service reveals that
in the 4th quarter of 2018, around 29,000 senior housing units were
under construction. That number has since seen a gradual decline to approximately
63,000 in the third quarter of 2019.
There has also been a recent trend
and shift towards the construction of larger projects, usually in infill
locations. Most new constructions have an average of 110 units, and several
other projects providing continuum care. This average has since grown at a
steady rate, from the initial 24 units in 2015. Also, considering the size,
these projects would naturally take a while to finish, substantially slowing
the delivery pace of new units.
Markets have become increasingly
competitive, due to the introduction of new products. However, absorption has
also been on the rise, accounting for almost no change in housing occupancy in
2019, in spite of more completions. Regardless, resident retention and
marketing continue to be significant focus points for operators.
Wage inflation and staffing are
also major issues that operators are grappling with. Tight labor market, along
with new mandated minimum wages by local and state governments, means that
labor costs are on the rise. Unless revenue levels can somehow be increased
through other sources, this move can cause profit to drop.
Furthermore, since the recent
introduction of capital sources into the market, the importance of quality
operators in a senior housing investment cannot be overemphasized. This has
also compelled some capital sources to buy into operating companies. One
notable example is The Bridge Investment purchase of the Somerby Senior Living.
Agency vanguards – Freddie Mac,
Fannie Mae and HUD – all recorded an eventful year. However, Freddie and Fannie
had to restrict their activity haven reached their annual lending limits in the
fourth quarter of the year. Concerns about subsequent cap reduction in future
years were finally allayed when released 2020 caps were higher than that of
Interest rates have since
remained attractive, as insurance companies, banks and debt funds remain active
players and capital providers in the senior living sector and agencies.
The transaction market recorded
relative success in 2019, as buyer activity remained impressive across several
areas. Moreover, the institution capital, public REITs, foreign capital,
private equity and affiliated operators were all active.
Transactions were equally
distributed across various areas, from large portfolio to single-asset
transactions, including the Welltower’s sale of a Benchmark portfolio valued at
around $1.8 billion-dollar to a private equity group.
2020 will herald the year when
the first set of the Baby Boomer generation hit 74 – a year away from the
widely-predicted silver tsunami. However, the average entry age at senior
housing is also said to be on the rise and most industries have set their
sights on 2026 – when the first set of baby boomers turn 80 – as the year when
demand will markedly soar. Likewise, independent living and senior apartments
are very confident of younger dwellers, and many are being proved right,
causing a notable growth in those sectors.
In the absence of a major
financial market mishap, lending to the sector is expected to remain active,
with very favorable terms.
Large players and REITs will
possibly streamline their portfolios, and developers that have grown assets
throughout the years will see this as an excellent time to sell, while the
finance and transaction markets are strong. Similarly, operators that have
built impressive portfolios over the years may consider now as the right time
Overall, 2020 is
showing positive signs of being another successful year in terms of lending
activity and robust transactions, backed by a stable to improving operating
environment. Hopefully, the black swans remain dormant!