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A Sector Reset: Four Seniors Housing Trends To Watch

The 10th Annual Interface Seniors Housing Southeast conference drew a record-breaking attendance in Atlanta this past week. Hundreds of industry leaders gathered to discuss what it will take for market activity to resume in a sector still recovering from the COVID-19 pandemic and related economic fallout. Here are four key takeaways on the challenges and opportunities ahead.

Macro Issues Present a Balancing Act in Underwriting

Operators are currently waging a game of tug-of-war between rental rates and expenses. Nearly every panel touched on this topic, including the capital markets discussion moderated by NewPoint’s Christopher Honn. The good news is that the reliance on agency labor is dropping and rental increases – generally in the range of 7% to 10% over the past year for this cohort of attendees – continue to be absorbed by residents. More challenging is that these improvements have not proven enough to offset the dramatic rise in interest rates, insurance costs and other operational expenses. As a result, nearly every loan crossing a lender’s desk is debt service constrained.

Determining just how sustainable rent increases are will be a major focus in underwriting loans moving forward. For example, in-place residents (who saw inflation-driven bumps in social security over the past year) largely absorbed these rent increases. Future increases may be harder to swallow as inflation moderates, for both move-ins and existing residents. Underwriting future rent increases will be a case-by-case exercise that favors newer properties in high-barrier markets with limited new supply.  

Bridge Demand Remains Robust, HUD + Agencies Pursuing Strongest Loans

While most lenders have the capacity to lend, transaction activity remains slow due to refinancing rates  and a disconnect between buyers and sellers on property valuations. Acquisitions that get done often feature an assumable loan with a covetous rate – a case of a “liability becoming an asset.” Transaction volume is skewing towards refinancing bridge loans originated in 2020-2021. In most cases, these transactions have not seasoned into an Agency or HUD takeout, so the demand for new Bridge loans remains strong. As a result, lenders are focused on being as flexible and creative as possible to support such transactions. That’s not to say that permanent debt is not being placed.

HUD’s LEAN program remains a very viable option when timing allows. The HUD/FHA option offers the certainty of consistent underwriting standards – a loan either fits the HUD box or doesn’t.

Agency transactions, on the other hand, currently involve more of a blend of “art and science.” Fannie Mae is presently well favoring newer, larger properties for well-capitalized sponsors. Freddie Mac is focused on primary MSAs but will examine secondary markets, albeit more conservatively. In both cases, the composition of a quote changes from week to week and largely depends on the market and the sponsor. Doing their best to provide clarity in an uncertain environment, lenders are socializing loans with the Agencies earlier to get a sense of what underwriting terms and loan sizing might look like. Doing more due diligence upfront affords transparency that can avoid spending unnecessary time or money on a loan that isn’t going to work.

Development Focused on Amenities + Meeting Needs of Future Residents

Comparisons are being made to 2008, when developers wondered if another construction deal would ever get done. This, of course, was followed by 10 years of robust market activity. Market players are confident that the current pause will fall into line with the business’s cyclical nature. After all, the demographics favor future wait lists; the first Baby Boomers are turning 80 in 2025, and roughly 11,000 individuals are hitting retirement age each day.
Yet some developers are challenging the tongue-in-cheek mantra of “stay alive until ’25,” opting to pursue new strategies instead of sitting on the sidelines. The next generation of residents is looking for more – larger units, greater autonomy, and a variety of amenities, including outdoor spaces. These preferences favor large continuing care retirement communities (CCRCs), which offer different types of housing, activities and programming that enable residents to continue their paths toward high-quality longevity. 

While current fundamentals make the ground-up development of such communities cost-prohibitive in many markets, there is a renewed focus on using true repositioning to accomplish many of these same goals. Of the existing stock of seniors housing inventory, more than 60% was built before 2000. With residents’ demands changing at a rapid pace, even properties built in the late 1990s are approaching functional obsolescence. Developers are looking for these opportunities and executing near ground-up redevelopment to increase the size of units, overhaul the IT infrastructure, expand upon community amenities, and even create spaces that cater to the staff.

As Decision-Making Strategies Shift, So Does Marketing + Communication

As a younger set of adults are playing an ever-increasing role in finding and vetting communities for their parents, operators have turned to modern marketing strategies with a renewed focus on digital tools such as search engine optimization and AI-driven chatbots, in addition to the development of a mobile-first web experience. 

Expectations have also changed in terms of the level of daily involvement that families have in their elders’ care. From more frequent communication to placing cameras in units, the dynamics between caregivers and adult children have changed rapidly and dramatically. Staff are often challenged and feel that they are unable to meet family expectations when, in reality, the resident is happy. Operators should reinforce that they are dedicated to making their residents’ lives more interesting and engaging, and convey that the experience is like that of a young adult going to college – not something they are forced to do, but something they get to do for the social experience and accompanying benefits. 

Questions about seniors housing financing? Get in touch with the NewPoint experts.