Private equity, both foreign and domestic, is dominating the investment outlook in senior housing.

As the availability of stabilized assets decreases, public REITs are forgoing the asset class, chasing cash flows while private equity continues to invest in senior housing with eyes on the exit game.

CBRE Vice Chairman Debt and Structured Finance, Senior Housing Aron Will said the lack of available construction capital has stifled the senior housing development pipeline after overbuilding in Texas forced a correction in the asset class and turned the game into one of acquisitions.

“From a development perspective, much of the supply has been choked off by the lending community, which is a terrific thing for fundamentals of the industry. A lot of folks that were developing seniors’ housing that were either developers or operators in other real estate asset classes who didn’t have experience in the space are no longer able to successfully access the debt markets,” Will said. “The market, generally speaking, the lending community, is now much more astute … they are very cognizant of saturation in certain markets and industry experience levels."

Now that the market is well into this phase of correction, public REITs appear to have had their fill of senior housing, having bought most of the available stabilized assets in any given market.

“The REITs have been much less active, and they’ve shied away from [senior housing] and what they have been acquiring has been not for the most part in Texas because it’s viewed by the equity analysts as a market that has a lot of supply,” Will said.

This leaves private equity firms to make the longer bets on mostly newer, value-add assets in lease-up in anticipation of making their margins in the exit, he said.

Will said that though competition within the market may make the first 18 months after an acquisition choppy, the outlook on a five to seven-year exit is looking good.

“I’m a huge believer in the industry, in the demographics and fundamentals of the space,” Will said.

According to him, what makes this market so promising is the penetration rate. People are quickly aging into senior housing, and demand for the product is, and will remain, strong. Texas is displaying great fundamentals as population growth and job growth soar, bringing with them demand for senior housing.

“The demographics are very good, equally if not more so than anywhere in the country for Texas so far as growth of the economies in the major markets. But there’s some product that needs to be worked through. But all these communities should be absorbed. It’s just going to take a little time,” Will said.

To hear more about trends in senior housing, join Bisnow for the Dallas Senior Living: Development, Investment & Innovation event Jan. 24.