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Senior Housing Investment Gains Momentum

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The prospect of higher interest rates isn’t dimming the enthusiasm of investors in seniors housing and care real estate. CBRE Group Inc.’s latest US Seniors Housing & Care Investor Survey finds that nearly 60% of respondents plan to increase the size of their portfolios this year, compared to 47% with a similar outlook 12 months ago.

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CBRE is a large, Los Angeles-based commercial real estate services firm.

CBRE expects valuations in the sector to remain stable in this year, “with a strong long-term outlook,” Rice says. “The industry’s fundamentals suggest the necessity for more capacity over the long-term, with short-term oversupply in select markets becoming more likely as a result of the recent record-setting construction levels.”

In commercial real estate, the capitalization rate, or cap rate, is a key indicator. The cap rate is the ratio of net operating income to property asset value. It’s the way people in commercial real estate refer to return on assets.

The percentage of investors anticipating a rise in cap rates increased to 44%, from 33% a year ago, with only 4% expecting to see a decrease. More than half of the respondents, or 52%, said they expect to see stability in cap rates over the next year.

The survey results for Class A nursing care properties appear to reflect investor uncertainty about health care legislation and investors’ concerns about the surge in prices for nursing care properties in recent years, according to a CBRE analyst.

Respondents were more interested in investing in independent living and age-restricted properties, and less interested in memory care properties. The decline in interest in memory care facilities is likely due to overbuilding in this segment of the market.

Investors see new construction activity as the top threat to senior housing asset performance, but the percentage worried about rising interest rates increased to 22% this year, from 11% a year ago.

Zach Bowyer, CBRE’s managing director, Valuation & Advisory Services, says in a comment on the results that cap rates may increase more slowly.

If so, investors’ focus may shift from development and acquisitions to portfolio and operating platform optimization, Bowyer says.

“Sound property-level operations, capital inflows from foreign investors, and moderated development trends will be critical to maintaining short-term valuations,” Bowyer says.

— Check out Investing in Change: What Advisors Need to Know About Thematic Investing on ThinkAdvisor.


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