After feeling the massive impact during the coronavirus pandemic – and with some overbuilding before 2020 – growth activity in the seniors housing sector is starting to pick up again.
Senior housing developers are putting in a lot of hard work before they dig their foundations. They need to prove to themselves—and their construction lenders—that the demand for senior citizens’ housing is likely to be sustainable enough to fill the units they build… and ultimately support the rent increases that build. and help offset rising labor costs.
James Graber, managing director of Evaluation and Advisory, says, “We have seen developers conduct multiple market studies, usually two or three per project, rather than relying on a single report for a ‘go’ or ‘no-go’ decision. Services and Leader of Seniors Housing and Healthcare Practice for CBRE.
Many senior housing properties have struggled to rent out units in recent years. The senior citizen housing development pipeline was running side-by-side due to demographic trends generating more than enough demand. Then the coronavirus pandemic—with the dire toll it took on elderly Americans—wreaked havoc with the region. According to the National Investment Center for Seniors Housing and Care (NIC MAP), just 81 per cent of the units were occupied in the fourth quarter of 2021, amid a slowdown in mortality and move-in. This is down from a high of 88.6 percent in the fourth quarter of 2017.
“Developers are more sensitive to market dynamics, and less willing to ‘push’ a project showing limited viability,” says CBRE’s Graber.
Developers are also testing markets for workforce availability. Many senior housing properties now struggle to hire enough staff, and often have to hire expensive temporary staff from agencies. “Costs and increased operating expenses will have an impact on your final stable yield and IRR, so it’s important to be as accurate as possible,” says Austin Sacco, co-head of national senior housing for CBRE.
Developers begin construction on new senior projects
Despite these concerns, leasing activity is picking up and developers have started building again.
“Construction resumed in primary markets in 2020 after a significant pandemic-related slowdown,” says Brian Chandler, managing director and co-head of Seniors Housing Practice at JLL.
According to NIC MAP, developers began construction of a total of 8,204-bed properties, where most of the beds will be independent occupants in 2021, down from 6,000 in 2020. They also began construction of properties totaling 9,648 beds, where most of the beds would be assisted living, up from close to 7,000 a year ago.
This is a huge amount of new construction. According to JLL, the new units under construction accounted for 4.8 per cent of the existing inventory in the primary and secondary markets at the end of 2021. But this is still much lower than the number of units under construction at the last peak at the end of 2019, which was 7 per cent of the existing inventory.
Lenders provide financing for new construction
Despite these concerns, most developers can find financing to start construction. Says Sacco of CBRE, “There is still a lot of liquidity in this sector and is the home of most of the transactions.
Experts say that bank lenders’ interest rates are still relatively low—often floating between 250 and 350 basis points over the secured overnight financing rate.
“The interest rate environment has been volatile as a result of ongoing geopolitical issues,” says Sacco. “From a broader perspective, today you’re looking at a range between the high 2 to the mid 3.”
Most developers will have to accept more risk by taking Sahara loans that come with repayment guarantee. The most common structure for new construction is a loan that covers 65 percent of the cost of construction with a nominal guarantee of 15 to 30 percent which usually burns out completely as the property starts earning income and some The performance bottlenecks are reached, Sacco says.
“Unless you have an established track record that reflects successful on-time and on-budget projects, non-shelter construction funding is hard to come by,” says Sacco. Typically, non-shelter loans cover between 55 percent and 57 percent of the cost of construction, says Sacco.
Private equity debt funds are also keen to finance the construction. Their loans cover 65 to 70 percent of the cost of construction. “The catch with debt funds is that the debt typically requires $50 million or more to be transacted,” says Sacco.
