LOS ANGELES—REITs are pulling back from the senior housing investment market, leaving a great opportunity for private investors and private equity firms, according to a seniors housing research report from Marcus & Millichap. The report shows that the private sector is creating momentum in the market across the four major product types: independent living, assisted living, skilled nursing and continuing care retirement communities. As a result, the firm has a very bight outlook for the niche market this year.
“The public REITs have unfortunately been the victims of price reductions in their stocks, and as a result, some of the dividends are well under 10% of the purchase price now; so, they really couldn’t do deals, at least not the deals that they could do prior to the reduction in stock price,” Mark Myers, executive director of Marcus & Millichap, tells GlobeSt.com. “If the dividend is at 11% or 12%, the cost of equity for the REITs to do a deal is quite high. As a result, we have been selling properties to a lot more private individuals and private equity funds. We still have some REIT activity and we are still selling properties to some REITs, but by and large, they have to focus on accretive deals and the accretion is more difficult to achieve now that the dividends are a higher percentage than the purchase price.”
Demand from the private sector isn’t new. Myers says that this investment groups have always looked for senior housing opportunities, but have historically been unable to compete with the REITs. While dividend prices have locked out the REITs, the favorable spreads compared with other multifamily asset classes will fuel demand through 2016. “There has typically been a 100 basis point spread for senior housing above similar kinds of comparable multifamily, and for nursing homes, there is a huge spread,” adds Myers.
According to the report, occupancy rates for independent living facilities and continuing care retirement communities are up 10 and 30 basis points, respectively, while assisted living and skilled nursing facilities both saw 20 basis point declines in occupancy. With occupancy rates fairly stable, development in the market has also remained in check, with fewer than 100,000 units under construction nationwide, and no construction in some markets. “I think that we are okay with supply. There will be a few pockets that will suffer from oversupply, and that tends to happen when multiple developers are building senior housing in a single market,” says Myers. “That doesn’t happen to often unless money is flowing too freely, which it is not. If the underwriting terms are tight and developers are putting money into the project, you aren’t going to see overbuilding.”
All of these factors—development, investor interest and stable occupancies—are adding up to a positive year for the sector, and possible increased penetration. “We have a very bight outlook on the market for all product types. On one level, our industry is need driven versus want driven,” says Myers. “It is certainly not a point of purchase kind of thing. It is a more serious decision than that. Because the penetration rate is so low at 12%, as opposed to the penetration rate for multifamily, if we can deliver, as an industry, the right product, we can create a woodworking effect and drive up that penetration rate and have more than 12% of the people going into seniors housing.”