5 Things You Need To Know About Senior Housing In 2016
Senior housing was the only sector of commercial real estate to experience positive rent growth during the recession, fueled in large part by Baby Boomers' demand. But with large minimum wage hikes coming in California and New York, should investors be concerned about surging labor costs? What about expanding operator networks?
To get some clarity (and an insider’s take) on the biggest trends in the market, we spoke with Hunt Mortgage Group director James Neil (pictured), a 30-year banking veteran who heads up the firm’s healthcare origination team.
Hunt is focused on expanding its presence in senior housing lending after entering the market in September 2015, when it provided an $8.9M bridge loan to refinance the Autumn Leaves of Rockwall.
The Cost Of Labor
James isn’t alarmed by the minimum wage hikes in California and New York. Although he acknowledges the cost of labor has always been the No. 1 expense and, thus, challenge for nursing homes, he doesn’t think the minimum wage hikes will be a large increase to the industry as a whole, since the bulk of the labor cost in healthcare is already above the minimum wage.
“Eighteen months ago, the oil rich regions were very hard to staff and expensive,” he said. “This region survived, and look at them now.”
James says in California he’s looking at an assisted living medical care facility that has surprisingly modest labor expenses and one of the highest operating margins he’s ever seen. The state is densely populated and he says it can sustain the increase that will affect a relatively minor portion of its labor pool.
Operators: Is Bigger Better?
“I’ve seen good and bad at all sizes,” he says. “Some would say that the big boys don’t have their eye on the ball as much as the mom-and-pops, while others would say that the smaller operators don’t have the systems or technology to provide the best care.”
Neither theory, he says, is correct across the board. Management and personnel, not size, are the biggest issues and factors to consider in a property’s success.
He says there are efficiencies to managing a geographic region. If run correctly, a midsized to larger operation can produce better efficiencies and thus better margins.
The Baby Boomer Boom
America’s getting older: the population aged 65 and over is expected to double by 2050 and Baby Boomers are entering the senior housing market in greater numbers. Seniors have never been healthier, and the trend will only strengthen as medicine and awareness of healthy living habits improve. But while this has been keeping the market afloat and growing for years, is there a danger of overestimating the increasing demand?
“We’re keeping an eye on those subsectors that are potentially getting oversupplied in certain markets,” James says. “Overall, however, I’ll tell you that everyone I know in our niche is very bullish on senior housing for the foreseeable future.”
These days, James and his team are closely looking at market demand for assisted living and memory care, which are mostly privately paid. But with the demand for nursing beds anticipated to increase 50% more from 2020 to 2030 than it did from 2010 to 2020, operators will be scrambling to fill the need.
“The real question,” he asks, “is how will this be funded?”
Finding The Right Financials And Funding
Regarding the biggest lender, James points to a recent report by Fannie Mae, who’s Multifamily Mortgage Business provides financing options for various senior properties, including independent living, assisted living, Alzheimer’s/dementia care or any combination of these categories. Much like other properties, this financing program is offered to “existing, stabilized, purpose-built” senior housing properties with experienced sponsors and operators by equally experienced lenders approved by Fannie Mae itself. In 2015 alone, Fannie Mae lenders doled out $2.7B in financing, an 80% increase from $1.5B in 2014.
The US Department of Housing and Urban Development (HUD) was also a big player, with $420M going to Section 202 Supportive Housing for the Elderly program in 2015. Due to a decrease in refinancing prior HUD loans to lower rates, HUD’s Senior Living “LEAN” program experienced a sharp decline in volume in fiscal year 2015. Regardless, James says, the program is still funding new construction, acquisitions and refinancing at a historical pace.
“The outcome of a HUD LEAN financing is phenomenal,” he tells Bisnow, “and is a much improved process than it was five or 10 years ago.”
Regardless of the lender, James since Hunt is particularly interested in looking at any transaction with good owners and operators, whether it be a refinance, acquisition or a new build in the right market.
Tech Advances: Upgrading Without Downsizing
Nursing homes are increasingly relying on wireless networks to improve the care residents receive, and healthcare providers are implementing electronic medical records in facilities, which the staff can access with smart devices. James believes this growing technological integration isn’t affecting the size and cost of developments.
“Again, that’s more staffing ratio and market driven,” he tells Bisnow.
But by improving the facilities’ ability to track residents’ health and respond to emergencies without boosting costs, advances in technology appear to be all upside for senior living developers.
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