At what age is a Senior Living Facility Obsolete?

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At a certain age, virtually any type property will become obsolete.  Thus, at what age is it for Senior Living and Skilled Nursing Facilities?   I believe it is more a matter of functionality than age.

In today’s competitive world, Assisted Living Communities that are older converted Skilled Nursing Facilities tend to have challenges in keeping stabilized occupancy.   Often times they have shared bathrooms, small one-room units and limited common areas.  With lower acuity residents, private bathrooms are a must when marketing a facility.   Larger units with multiple rooms that can function as an Independent or Assisted Living unit have great appeal to allow residents to age in a place as additional care becomes necessary.

Skilled Nursing Facilities that have 3 and 4 bed wards (rooms) are very difficult to fill and often times the total bed count needs to be reduced to allow for mostly private or 2 bed rooms.   Even if the facility is accepting mostly Medicaid residents, two residents per room tends to be the maximum that is acceptable.

Other facility challenges include long narrow hallways, low ceilings, lack of elevators, and poor lighting.  Depending on the structure, these challenges can be very difficult to rectify.   While it tends to be the older Skilled Nursing Facilities that were built in the 1960s and 1970s, some Assisted Living Communities built in the 1980s and 1990s can also have a functionally obsolete design and layout.

If lack of private bathrooms and small rooms are the challenge, sometimes a solution is to focus on higher acuity Assisted Living and/or Memory Care where residents have higher acuity needs and can use a bathroom or kitchen on their own.  Unfortunately, there are some communities that have too many design and layout issues to overcome and possibly the best solution is to build a new facility on the existing ground.

To discuss the age, functionality and sale ability of your Senior Living or Skilled Nursing Facility please contact Jason Punzel at 630-858-2501 x 233 or [email protected]  or Joy Goebbert at 630-858-2501 x 230 or [email protected].

The post At what age is a Senior Living Facility Obsolete? appeared first on Senior Living Investment Brokerage.

Is the Market at its Peak in Seniors Housing?

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For the first time in many years, we have started to hear buyers, lenders and operators start to question whether the market peaked.   Commercial real estate in general, and Seniors Housing specifically, both have seen increases in value since the trough of the market in 2009-2010.

Cap rate trends are a good way to follow the market.  Cap rates vary widely, but according to the latest report from Irving Levin & Associates, the average cap rate for the 12 months proceeding Oct 1, 2015 for Independent Living was 7.2%, Assisted Living was 7.8% and Skilled Nursing was 11.8%.   Overall, the cap rates were steady, or had dropped slightly from the end of 2014.

Cap rates, and thus real estate values, tend to correlate closely to interest rates.   This is not only because most buyers use some type of leverage on the properties, but even more so, interest rates are a base rate of return that all investors use to evaluate all types of investments.  We have seen many new investors start to invest in the Seniors Housing market over the past several years because the cap rates were higher than in other types of income producing real estate.  Many saw it as an opportunity to achieve better returns.

Couple this with short term interest rates near zero percent and the 10 year US Treasury around 2-2.3%,  and there is little room for rates to go lower.   Thus, there is little room for cap rates to go lower as far as being correlated with general interest rates.  Currently, it does not appear that the Federal Reserve will be dramatically increasing interest rates anytime soon, there is certainly a lot more room for interest rates to go up than down.

However, cap rates remain higher in Seniors Housing than many other types of real estate and income producing assets.   To the extent that investors continue to divert money from other investments into Seniors Housing.  Cap rates could still go lower, pushing prices higher.  Nonetheless, with the amount of new investors that have entered the industry in the past several years, it is doubtful that a significant amount more new investors will continue to enter this industry causing a further compression in cap rates.

If the net operating income of an asset goes up, or down, prices will likely also go up, or down, with cap rates staying the same.   Given relatively low inflation and a surge in new construction, it is doubtful that net operating income will increase dramatically in Seniors Housing over the next several years.

Overall, we believe the main driver for increased values going forward will be an increase in net operating income, not a further compression in cap rates.  While net operating income in Seniors Housing could continue to grow, it will probably be at a slower pace.  Cap rates have more room to go up than down.  Though given relatively low inflation and a slowdown in the global economy, it is doubtful that an increase in rates will happen at a fast pace anytime soon.  The combination of these factors will mostly likely lead to Seniors Housing prices staying relatively stable, but with a risk of a decrease if interest rates increase faster than expected.

If you believe now might be a good time to sell your Seniors Housing Community, please contact Jason Punzel at [email protected] or 630-858-2501 for an in depth analysis of what your community might be worth.

The post Is the Market at its Peak in Seniors Housing? appeared first on Senior Living Investment Brokerage.

How additional sources of funds are impacting the seniors housing market

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Over the past couple of years, we have seen capitalization rates (defined as Net Operating Income divided by Purchase Price) drop steadily to historically low levels, which in turn has led to purchase prices being driven upwards.

Now is the time to take advantage of this market and either exit the business through a sale entirely or divest of a few properties from your portfolio that do not fit with your current strategy.

Why is the market so strong right now?  More so than any other factor, the market has been impacted by the increased availability of capital (both debt and equity) and the low cost nature of said capital.  Interest rates are still at historically low levels, and while rates may creep up a bit, most analysts expect a measured increase.

During the Great Recession, transactions were mainly financed by three different methods: (1) all cash; (2) HUD financing; or (3) mostly public REIT financing.  Community banks were only lending to their best clients on the most conservative of terms, and there were not a great deal of smaller, private REITs or private equity firms willing to support the acquisition of seniors housing facilities.

Over the past couple of years, community banks have become more aggressive as they are sitting on a large reserve of cash that they need to deploy and there has been a growth in the private REIT space.  According to investment banking firm , Robert A. Stanger & Co., and reported by Seniors Housing Business, a handful of non-traded REITs devoted to seniors housing have amassed $6.4 billion in equity over the past few years.  The availability of these capital sources has had a huge impact on the seniors housing acquisition market in the form of increased pricing.

The most recent example of this was a $30M nursing home portfolio that Senior Living completed in Texas.  It was purchased by an independent, regional owner-operator and financed by a community bank out of Louisiana.  Until recently, that size of transaction would have been almost certainly REIT financed or purchased by a large, national owner-operator.

If you have any questions on the topic of this post or would like a confidential valuation of part or all of your seniors housing portfolio, please contact Matthew Alley at 630-858-2501 ext. 225 or [email protected].

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