A Warning to Senior Housing Owners

ORLANDO— These extremely low cap rates may be working well in the current interest rate environment, but that won't necessarily be the case when interest rates start climbing. As interest rates go up, cap rates will increase. Some seniors housing facility owners could end up underwater on their mortgages.

So says Ken Carriero, national director of Colliers International's National Seniors Housing Group in Clearwater, FL. GlobeSt.com caught up with Carriero to drill down into how facility operates should prepare for the days ahead and more in part two of this exclusive interview. You can still read part one: Why America's Senior Housing Is Booming.

GlobeSt.com: How can facility operators prepare for changes that may decrease seniors housing market values?

Carriero: Facility owners are going to have to increase their EBITDA—earnings before interest, taxes, depreciation and amortization—by either increasing rents or reducing expenses.

Seniors housing rental rates have already been on the rise throughout the United States. From 2012 through 2015, rents at assisted living facilities increased an average of 5%. Over the same time frame, rents at independent living facilities increased by 4.3%, at skilled nursing facilities by 3.1% and at memory care facilities by 3 percent, according to REIS, a commercial real estate research firm.

Instead of simply continuing to increase rental rates, facility owners may also want to look for ways to reduce operating costs. This may mean eliminating certain services and amenities, or charging extra for them. Neither solution will go over well with residents and their families, so these changes must be made strategically and in steady increments.

GlobeSt.com: What is your prediction for the seniors housing market going forward?

Carriero: The seniors housing market performed extremely well in 2015 and I predict 2016 will be as strong, if not stronger. Eventually, the market will reach a peak and begin to decline, but I don't think we'll see much change until there is a drastic increase in interest rates. Despite cap rate compression, the market is still extremely profitable for investors.

ORLANDO— These extremely low cap rates may be working well in the current interest rate environment, but that won't necessarily be the case when interest rates start climbing. As interest rates go up, cap rates will increase. Some seniors housing facility owners could end up underwater on their mortgages.

So says Ken Carriero, national director of Colliers International's National Seniors Housing Group in Clearwater, FL. GlobeSt.com caught up with Carriero to drill down into how facility operates should prepare for the days ahead and more in part two of this exclusive interview. You can still read part one: Why America's Senior Housing Is Booming.

GlobeSt.com: How can facility operators prepare for changes that may decrease seniors housing market values?

Carriero: Facility owners are going to have to increase their EBITDA—earnings before interest, taxes, depreciation and amortization—by either increasing rents or reducing expenses.

Seniors housing rental rates have already been on the rise throughout the United States. From 2012 through 2015, rents at assisted living facilities increased an average of 5%. Over the same time frame, rents at independent living facilities increased by 4.3%, at skilled nursing facilities by 3.1% and at memory care facilities by 3 percent, according to REIS, a commercial real estate research firm.

Instead of simply continuing to increase rental rates, facility owners may also want to look for ways to reduce operating costs. This may mean eliminating certain services and amenities, or charging extra for them. Neither solution will go over well with residents and their families, so these changes must be made strategically and in steady increments.

GlobeSt.com: What is your prediction for the seniors housing market going forward?

Carriero: The seniors housing market performed extremely well in 2015 and I predict 2016 will be as strong, if not stronger. Eventually, the market will reach a peak and begin to decline, but I don't think we'll see much change until there is a drastic increase in interest rates. Despite cap rate compression, the market is still extremely profitable for investors.