Bill Pettit, president and CEO of Merrill Gardens, a Seattle-based company with 56 senior housing communities in 10 states, thought his market was pretty well “in balance” before the recent recession. Unlike other sectors of real estate (such as the bloated condo market in cities like Miami, Las Vegas, or Phoenix), “industry-wide occupancies were actually very high and there wasn't a big pipeline of development,” Pettit says. “The development had been moderate over the last five years relative to expansion."

But the collapse of other markets, namely single-family, has wreaked havoc on the seniors market over the past few years. That has slowed transactions, except for the bigger players.

Broken Chain

In a normal world for a seniors housing operator, residents move in when they're still in the active adult stage. Then, they transition to assisted living. But with seniors all over the country seeing the value of their homes collapse, those dominos never started falling. Three years after the financial collapse, the recovery is still in the early stages.

“On the independent-living side, sales and move-in are still down from previous levels,” says Jon DeLuca , president and CEO of Chicago-based Senior Lifestyle Corp. , a company with 50 seniors communities in 13 states. “A lot of it has to do with the housing market. [The inability of ] seniors to sell their houses has hampered the move-in rate quite a bit. It's a very tough market on the independent- living side."

Pettit has seen the same thing. “The dual punches of concern about their homes' value followed by severe financial volatility and significant reductions in discretionary cash flow as fixed-income yields dropped ”¦ has blocked the seniors market,” he says. Pettit estimates that, instead of coming in three years before they need assisted living services, seniors are now arriving just a year before they need such services.

“Those seniors who came from 2007 to 2008 who would have come as independent seniors are now coming through the doors because they're starting to have needs,” he says. “They're coming as a frailer population."

Pettit says he saw no drop-off in assisted living demand, but DeLuca claims that, in some cases, seniors are skipping independent- living facilities altogether or staying at home and getting home health care services. “We're having to go to the street to get the assisted living person,” DeLuca says. “With their income not rising and their kids suffering in the marketplace, they've stayed at home."

Pettit wonders if in the post-recession withdrawal these seniors will stay paralyzed with fear and just stay at home. “The open question remains about what happens in 2011, 2012, and 2013 as far as senior demand and how quickly they will develop a comfort level to decide to sell [their current homes] and move on,” he says.

Once independent-living residents return, the industry will have some tailwinds at its back. Right now, however, the sales supply is generally limited to senior apartments that have resisted lease-up and busted condos. “Supply and demand continue to be out of balance,” says Mel Gamzon , senior managing director of Senior Housing Investment Advisors , a consulting firm based in Fort Lauderdale, Fla. “There's been limited new construction relative to market scale and demographics going forward. There aren't that many distressed assets and portfolios."

Slow Thaw

Until the future plans of independent seniors materialize, the transaction market will suffer. “In seniors housing, if you have an independent asset with uncertainty regarding how quickly individual seniors will return to the market, you see fewer bidders," Pettit says.

Ironically, another factor discouraging potential sellers is the perceived upside in the seniors market. “With the industry average occupancy in the high 80 percent range, I think most of the smart money is looking at the pent-up demand and recognizing that if they choose to sell, they may be missing a value that may reinflate over the next year or so,” he says. “Unless they're facing loan maturities, there's not a lot of initiative to put cash flow–producing senior assets into the market right now."

That, along with a lack of distress, has made it frustrating for potential buyers. “From a single deal perspective, it's hard to find a deal. So you have to do the one-off, niche deals,” DeLuca says. “If you look at the big portfolio deals, you start competing with the REITs."

That doesn't mean Pettit isn't seeing transactions, but it's certainly not at the pace of some of the other real estate segments, like multifamily. In a lot of ways, it's like the apartment was in 2009: Everyone was scared to move, and buyers and sellers had vastly different ideas of what value was.

“I think the bid ask price is starting to shrink a little bit,” DeLuca says. “For a while, the values were very high. Now, with cap rates decompressing, they've lost some values they think they still have. It takes awhile to reconcile that they don't have that value anymore."

So far, that's meant that the big buyers have been the REITs or foreign money. For instance, Gamzon says he's seen a Canadian institutional investor and a trading company from the Far East (together with a U.S. operator) recently take over $200 million in assets at “aggressive” pricing.

“This is giving us a great deal of comfort in our business outlook for the coming year,” he says. “We're seeing an optimistic start to 2011, which our firm anticipates will accelerate as the year progresses."

Up until this point, any sales acceleration had come from the REITs, which had the balance sheet to take large deals. “The transaction side has been very tough in the last couple of years [for smaller operators],” DeLuca says. “The only people who have been transacting are the REITs, because the cost of capital is so low on the REIT side. No one can compete with them."

Gamzon says three major players did well in excess of $7 billion worth of deals in the 90 days before this issue went to press. “They're very aggressive buyers today. VENTAS [based in Chicago], Health Care REIT [based in Toledo, Ohio], and HCP [based in Long Beach, Calif.] are doing a massive amount of large portfolio work."