The seniors housing sector has weathered the current recession relatively well, emerging as one of the more recession-resistant areas in the multifamily industry. Given the expected influx of Baby Boomer-driven demand, seniors housing has demographics on its side. And it has a good balance between supply and demand. In the fourth quarter of 2009, only 2,300 seniors housing units were produced nationally, compared to around 20,000 units that were delivered in the first quarter of 2008, according to seniors housing market research firm National Investment Center.
But there is one sector within seniors housing that has been more significantly impacted by the recession. The independent living niche, where occupancies nationally are in the high-80 percent range, has been struggling. Since independent living hinges on the for-sale housing market—seniors often must first sell their house before they move—it has suffered as a result of the single-family sector’s woes.
And investors are taking note, targeting independent living properties as the most efficiently priced sector of the multifamily industry. “One of the opportunities that is pretty interesting right now is independent living,” says Loren Balsam, managing director of Washington, D.C.-based Perseus Realty Partners, a private equity investment management firm. “There are a lot of independent living facilities that are just stuck, and those will re-price, and there will be opportunistic returns in this space.”
In the past two years, two large seniors housing owners, Sunwest Management and Erickson Communities, have filed for bankruptcy and are selling off parts of their businesses. In addition, Sunrise Senior Living, heavily burdened by debt, is also in the midst of a corporate restructuring that is requiring it to sell off many of its properties. The problems these companies faced were more the result of rapid expansion and poor financial engineering rather than industry fundamentals.
“They’re selectively paring down the portfolios, and the lenders are very involved. The volume is not very big though,” says Mel Gamzon, principal of Fort Lauderdale, Fla.-based Senior Housing Investment Advisers. “But there are absolutely acquisition opportunities elsewhere out there—our business volume is about 70 percent ahead of where we were last year.”
Still, Gamzon notes that deep discounts are very few and far between, as competition heats up and cap rates begin to compress. “We are seeing a significant increase in owners looking to transact,” Gamzon says. “There is limited product in the marketplace, so they’re commanding stronger values than they were six months ago. Cap rates have been coming down over the past six months by at least 50 basis points.”
Gamzon has seen substantial interest from equity providers, particularly foreign firms, in the last six months. In fact, Gamzon’s firm is negotiating with several global financial institutions to help them place equity in seniors housing opportunities. “International equity is aggressively looking at this space,” he says. But, as in the larger multifamily sector, debt availability outside of agency lenders and local or regional banks remains generally constrained, he says.
Just as in the conventional multifamily space, the large seniors housing REITs—such as Senior Housing Properties Trust, Nationwide Health Properties, Healthcare Property Investors, and Ventas—have spent the past few years solidifying their balance sheets to be able to strike quickly on opportunities.
And conventional multifamily investors are also growing enamored for several reasons. Independent living is the most straightforward sector of the seniors housing industry, since it has a limited health care component. Conventional multifamily operators can strike joint ventures or strategic alliances with service providers, thereby avoiding having to become licensed healthcare providers themselves.
And given the sector’s constrained supply and booming demographics, it provides owners with an opportunity to diversify. “It’s a good defensive investment strategy—it’s more of a need-based product,” Gamzon says. “And relative to all other real estate sectors, we’ve been reasonably recession-proof.”