Senior Housing Poses Opportunities for Investors

In spite of a sluggish national economy and skittish capital markets, the outlook is extremely bright for the senior housing industry.  While other asset sectors continue to suffer from a lack of liquidity, recent data suggest that high demand and a return of capital to the senior housing market will make for a rich deal making environment in the months ahead. 

According to several recent reports issued by NIC, senior housing has weathered the economic downturn better than other asset types and offers a higher rate of return to investors. As of Q4 2009, the senior housing sector generated a cumulative return of 2.7 times its mid 2003 value, compared to the entire CRE sector, which posted a cumulative gain of just 1.5 times its mid-2003 value, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). 

Occupancy rates have stabilized while rents continue to grow, albeit slowly.  Demand for senior housing will continue to rise substantially over the next few years, as the first wave of the 79 million members of the baby boomer generation have already passed the age of 60. The fact that Americans are living longer has created longer-term tenants and an increased need for facilities that accommodate the expanding needs of seniors. While demand flattened during the downturn, it has rebounded quickly and is growing at a faster rate than it was prior to the recession. 

Meanwhile, construction starts for senior housing properties have dwindled over the past 12 months, which means leasing at existing properties will increase as demand from consumers continues to rise. In fact, the NIC reports that new construction for senior housing is down 32% from the same time period last year, while demand is outpacing pre-recession growth rates.  Above average returns and the potential for significant growth are attracting a wide base of potential investors, including TICs, private equity groups, national banks and foreign investors.   

Of course, not every senior housing project can succeed in today’s economy.  Successful senior housing projects require a combination of strong balance sheets and extensive operating experience to be attractive to lenders. Debt capital is readily available for projects that can prove long term value with experienced owner/operators that have a track record of success.   

Savvy brokers are taking advantage of these market opportunities and are reaping the benefits.  For example, NAI Bluestone recently secured $14.3M in debt and equity financing for the development of the Arbors at Buck Run, an 85-unit assisted living and memory care facility located in Feasterville, PA.  The financing was secured on behalf of Capital Health Group, LLC, one of the nation’s premiere senior housing and healthcare private investment companies, and Orens Brothers, an experienced developer and construction management firm with a long track record of successful projects throughout Greater Philadelphia. Despite the fact that the project required re-development capital in today’s challenging construction financing market, NAI Bluestone was able to identify the right debt and equity capital providers who shared its conviction that the sponsorship, project and its market represented a terrific risk/reward opportunity.  Our ability to secure debt and equity re-development capital in today’s market proves that capital is available for strong projects, but it requires strong relationships with lenders, experience and a track record of success. 

Looking ahead at 2011, we are going to see more and more activity in the senior housing sector.  Brokers with strong lending relationships and experienced development partners will be poised to take advantage of this growing market, which will continue to outperform other asset types in the upcoming year. 

-Matthew McManus

Matthew McManus is Chairman of Philadelphia-based NAI Bluestone Real Estate Capital, LLC.