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 2019.
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 to leave. 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!