Get Ready For A Price Surge in Senior Housing

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BOSTON–The senior housing sector has its challenges: like many asset classes it is sensitive to rising interest rates and it comes with a unique set of operational challenges. Yet investor interest in the sector is very strong — strong enough that CBRE is predicting new highs for transaction pricing in certain categories within this sector for the second half of the year.

Namely, according to the company’s US Seniors housing & Care Investors Survey and Trends Report prepared in part by Senior Managing Director Zach Bowyer, pricing will reach $800,000 or more per unit for Class A+ assets. CBRE acknowledges that while some markets are softening, “record-breaking prices are expected in others during the second half of 2018.”

The average price per unit for seniors housing increased by 8.1% in Q2 year over year to $189,000–the second highest level ever reported.

The sector’s cap rates illustrate the strong demand for these top notch assets. Spreads are reflecting greater interest in Class A and less distinction between Class B and C assets, CBRE said. Meanwhile, spreads between Class A and B have increased while spreads between Class B and C decreased with a few exceptions.

Strong Returns That Outpace Other Assets

One factor behind CBRE’s bullish prediction about senior housing pricing is the strong returns that senior housing assets are delivering to investors already.

The NCREIF Property Index showed an annual return of 11.6% for senior housing in Q2 2018, down from 12.8% in Q1, but well above the 7.2% return for all major property sectors combined. Except for industrial, senior housing is significantly outperforming the rest of the industry, CBRE said.

NCREIF reported a one-year capital appreciation return of 5.9% for senior housing and an income return of 5.5% as of Q2. By contrast, while income returns for multifamily remain favorable at 4.3%, the appreciation return was much lower at 2.1%. A final argument in senior housing’s favor: the negative property returns experienced in the last recession for all commercial real estate were much more muted for senior housing.

Ultimately, CBRE says, an influx of new capital, favorable long-term market fundamentals and an increased market understanding by investors will continue to have a favorable impact on the senior housing and care sector.

These factors will keep cap rate increases minimal and investment volumes at favorable levels, it concluded.

Dragged Down By Skilled Nursing

And yet it is indisputable that transactions are slowing in the industry. The National Investment Center for the Seniors Housing & Care Industry (NIC) reported investment volume in the sector of $2.1 billion for Q2 of this year, down 6.3% from Q2 2017. The trailing four-quarter investment volume of $14.1 billion was down 1% from Q1 and down 6.1% from Q2 2017.

In fact, Q2 2018 investment total was the lowest transaction volume reported by NIC since Q2 2013, CBRE noted.

The decline, not surprisingly to those active in the space, has been attributed to the nursing case segment, which dropped a whopping 44.5% year over year. By contrast the investment total in the second quarter of this year was up 27% year over year for just independent living and assisted living.

In short, when you take out skilled nursing from the mix of asset classes that make up senior housing, investments in this category significantly outpaced all core asset classes on a quarterly and trailing four-quarter basis.