September 17, 2018
According to the recently released CBRE U.S. Seniors Housing & Care Investor Survey, the appetite for senior housing acquisitions in the U.S. remains strong, with nearly two-thirds of investors planning to increase the size of their portfolios over the next 12 months.
The majority (64%) of seniors housing investors plan to increase their buying activity over the next year. One third of investors (31%) expect no change to their level of acquisitions. The percentage of investors who plan to increase [or maintain] their level of investment in senior housing is essentially unchanged from last year’s survey.
Investors are most interested in lifestyle-focused seniors housing. ‘Independent living’ (34%) was identified as the best opportunity for investment, followed by ‘assisted living’ (23%). The ‘active-adult’ segment (19%) is also attracting considerable interest-up from 13% last year. ‘Memory care’ properties continue to lose ground, with investors now seeing the least opportunity for this property type, likely due to the overbuilding of this property type in recent years.
“Seniors housing acquisitions momentum will continue in the second half of 2018 and will likely increase, especially if the sentiment reflected in the survey materializes. Despite the increased capital-market and operational headwinds, investor interest remains robust and a lack of available product to buy should keep pricing strong,” said Jeanette Rice, head of multifamily research, CBRE.
As worries about the availability and cost of labor mount nationally, investors see ‘increased property-level operating and development costs’ (36%) as their biggest concern for a consecutive year. Facing increased competition and rising cost of capital, property-level operations are essential to maintaining valuations. ‘Rising interest rates’ (32%), eclipsed ‘construction activity/oversupply’ (17%) as the next most important concern for investors.
“Seniors housing valuations will be challenged in the near term by the trifecta of new supply outpacing demand, rising operating/development costs, and rising interest rates. These challenges will be relatively short-lived as the sector prepares for the next wave. As market participants search for innovative ways to differentiate through innovative design trends, operations, services and technology, sound property-level operations remain critical to maintaining valuations,” said Zach Bowyer, senior managing director, Valuation & Advisory Services, CBRE.
Marketing time (offering to contract) remained unchanged for about half (51%) of investors; however, 39% indicated that the length of the marketing period has increased, indicating increased buyer and seller disconnect.
Capitalization rates rose in nearly all categories, reversing a trend from prior surveys. Greater increases came in Class B and C product, in memory care and in non-core assets. Cap rate pricing held up best for Class A, core and independent living. Most investors (55%) are confident that cap rates for seniors housing will hold firm over the next 12 months, down slightly from 63% in H2 2017. Respondents expecting an increase in cap rates rose to 39% from 32%. Only 6% of respondents expect that cap rates will decline.