In the seniors housing sector, 2019 will be remembered for being a relatively quiet year. That is not to say that there were not some notable occurrences, interesting trends, and lots of transactions. But overall, the year was unmarked by any black swan events. Will the same hold true for 2020?
Overbuilding was a concern going into 2019 and excess supply continues to plague some markets. But new construction starts have slowed and most of the saturated markets are starting to see signs of recovery. According to the NIC MAP Data Service, there were nearly 69,000 seniors housing units under construction as of the 4th quarter of 2018, but that number declined to just over 63,000 as of the third quarter of 2019.
In other notable development trends, we are seeing a shift towards larger projects, often in infill locations. The average size of projects now under construction is 110 units, with more and more projects offering a continuum of care. This average has been steadily rising. It was 84 units at the start of 2015. These projects normally take longer to deliver as well, meaning that the pace of new unit deliveries should continue to moderate.
Markets have grown more competitive due to all the new product opening. Fortunately, absorption has been trending up as well, allowing the overall seniors housing occupancy to be essentially static in 2019, despite the high number of completions. Still, marketing and resident retention have become a significant focus of operators.
Staffing and wage inflation is also an issue that operators are confronting. The tight labor market, along with state and local government mandated minimum wage increases in some markets, are pushing labor costs higher. This can eat into profit margins unless higher revenue can be achieved or expense cuts in other areas can be made.
Capital sources who have entered the market in recent years have learned how critical the quality of the operator is in a seniors housing investment, and this has led to some capital sources buying into operating companies. The Bridge Investment Group acquisition of Somerby Senior Living is a good example of this.
The agency lenders—Fannie Mae, Freddie Mac and HUD—all had busy years, but Fannie and Freddie had to curtail activity in the fourth quarter due to annual lending caps being reached. There was concern that caps in future years might be lowered, but the finance sector breathed a sigh of relief when the 2020 caps were released at levels higher than 2019.
Interest rates remain very attractive, and banks, insurance companies and debt funds are all active providers of capital to the senior living sector in addition to the agencies.
The transaction market in 2019 was unique, in that buyer activity was robust across all buyer types. The public REITs, private equity, institutional capital, foreign capital, and operators all were active.
Transactions occurred across the spectrum, from single asset sales to large portfolio transactions such as Welltower’s $1.8 billion-dollar sale of its Benchmark portfolio to a private equity group.
In 2020, the first of the Baby Boom generation will turn 74, and we inch a year closer to the much-anticipated silver tsunami. But the average age at entry in seniors housing is also creeping up and many in the industry are now targeting 2026, the year the boomers start hitting 80, as the year that demand growth will begin to truly spike. Senior apartments and independent living are betting on attracting younger renters, and many are succeeding, leading to growth in these sectors.
Barring some significant event impacting the financial markets, lending to the sector should remain robust, with attractive terms available.
REITs and large operators are likely to continue to prune their portfolios, and developers who have developed assets over the past few years that are now at or reaching stabilization will likely seek to monetize, while the transaction and finance markets remain strong. Operators who have spent years building quality portfolios may also decide that the time is right to explore an exit.
All things considered, 2020 is looking to be another year of strong transaction and lending activity, with a stable to improving operating environment. Here’s hoping the black swans stay away!
Charles Bissell is a Managing Director with JLL Capital Markets.