May 1, 2019
CARLSBAD, CA–Senior housing investment and construction in the U.S. slowed in the first part of 2019, but investors are confident in the long-term outlook for this sector, according to a Senior Housing Snapshot report by Real Capital Markets (RCM). Following several years of robust sales and construction activity, the senior housing market is redefining itself, adjusting to shifts in investor activity and a focus by many investors on a long-term horizon.
RCM’s national report incorporates the sentiments of investors across the country, national statistics on investment activity from Real Capital Analytics (RCA) as well as construction and occupancy statistics from the National Investment Council for Seniors Housing & Care (NIC).
U.S. Investment sales in this sector totaled $2.8 billion in the first two months of 2019, down from $3.0 billion in the same time period in 2018. This follows $15.2 billion in sales for all of 2018. According to U.S. investors, developers and real estate brokers surveyed and interviewed for the report, 66 percent believe that activity levels in 2019 will be comparable to the total sales for 2018.
“Perspective is an important attribute for all commercial real estate investors, including those focused on the senior housing sector,” said Tina Lichens, Chief Operating Officer, RCM. “The sector as we know it today is vastly different from five years ago and rapidly changing. There remains considerable demand and capital in the market, yet investors need to look at the long-term as the market redefines its new normal.”
Highlights of the RCM Senior Housing Snapshot, with supporting data from RCA and NIC, include:
- The investor profile has shifted—Private investors, followed by institutional investors, are now leading the charge as REITs have pulled back significantly.
- Construction is down—The delivery of newly constructed senior housing units declined by 14.8 percent from 2017 to 2018, according to NIC; experts consider this a needed slowdown, as demand catches up to the strong supply cycle.
- Strong operating partners a must—Over 61 percent of investors agree that a strong operating partner is key, given the industry concerns regarding a shortage of skilled labor, cost management and shrinking profits.
- Outlook still strong—experts remain bullish on the sector, but note that investors should look at the long-term, as an oversupply of new construction is absorbed in many markets.
Activity levels over the last five years have increased one year, declined the next. In 2015, activity was $22.1 billion – the highest in the last five years according to RCA. In 2018 activity was $15.2 billion, 31 percent lower than 2015. The market remains strong, however, for the best assets. Stabilized, high-performing assets continue to see competition for buyers and often see higher pricing.
Since 2015 there has been a significant shift in the buyer profile, with private buyers, followed by institutional investors, replacing REITs as the most prolific buyers. Since 2014, private investment in the sector has ranged from $5.4 billion to $6.9 billion annually, according to RCA. For the last three years private investors were the largest investor group. The greatest falloff, per RCA, has been from publicly-listed REITs. In 2014 and 2015, REITS accounted for as much as 55 percent of annual activity. That level has been cut virtually in half, to just over 25 percent. Foreign investment activity also has fallen off dramatically, according to RCA.
Construction is softening, following several strong years of development. According to NIC, senior housing construction in 31 primary markets across the US is slowing. Fourth quarter 2018 data showed a decline in the delivery of units totaling approximately 6,500 units—or 14.8 percent—from the same period in 2017. Survey participants note that demand, and consistent growth in demand, will be a fundamental building block of strong, long-term performance for the sector.
The report also looked at critical factors and concerns in the sector. More than 61 percent of investors believe partnering with a strong operating firm is the most critical factor impacting property profitability. As with other sectors, senior housing investors surveyed are equally as concerned about a lack of quality assets available for sale as they are with unrealistic seller pricing expectations, as demonstrated by the growing disparity between bid and ask prices.
“Investor concerns reflect the tremendous level of activity that has taken place in the U.S. over the last decade, and the bidding up of prices that resulted,” said Steve Shanahan, Executive Managing Director, Real Capital Markets. “With so much product changing hands, and so much demand, investors are concerned about the quality of product that remains and whether sellers have an inflated impression of what properties can command.”