A few years ago, my wife listed and sold an assisted living facility through her real estate company. Around the same time, I helped finance construction of a new Alzheimer’s facility. It was these two projects where I learned about senior housing. Senior housing demand will continue in the future and is fueled because of several reasons. Some of these factors are: an attractive spread between borrowing rates and capitalization rates, resurgence of the housing market, improvement of the stock market, and strong tenant demand as more people retire and need these services. There is an increase in funds from both institution buyers and non-traded REITs that has increased prices for top quality stabilized senior housing.
In 2013, a sharp increase in home prices on a national scale fueled by low interest rates and boosted confidence, significantly reduced the number of homeowners that owe more on their mortgage than their house is worth. Zillow reports this dropped 6% on the year over year numbers to 25.4%. This change represents over two million homeowners who have escaped negative equity, which has provided reason for seniors to sell and relocate into independent living facilities.
Both independent living and continuing care retirement facilities both expect increased occupancy this year. Assisted living will also show an increase, though a wave of construction in some areas of the country, such as the Southeast and Texas, will cause the national vacancy to decrease only slightly. It is expected that a greater number of listings will hit the market in the coming months, thus lifting transaction velocity. Strong gains in rents have occurred since the second quarter of 2012. Owners interested in divesting should be able to show a good recent operating history and list their property for a higher price.
Investor demand for assisted living properties, which make up for nearly ½ of the seniors in the housing market, is greater than the present number of available properties for sale. Currently, assisted living and dementia care properties have cap rates that dip into the low 8% range on a national basis. This is partially due to demographic trends. Currently, 40% of the US population over the age of 85 has Alzheimer’s or related diseases. This age group is expected to expand by 4% by 2017. At these projected growth rates, 90,000 more seniors will be living with dementia in 2017, thus increasing the demand for these facilities.
Development in assisted living is robust, especially for units with a dementia care unit. There was a 2.3% increase in units over the past year alone as 6,800 units came on line. Another 14,700 units are under construction which may put some temporary pressure on occupancy. By the end of 2013, national occupancy rates are at 90% for assisted living, 89.8% for independent living, and 87.8% for skilled nursing units. During the first half of 2013 demand for these units rose another 0.7%.
New facilities coming on line coupled with strong demand has allowed operators to increase asking rents by 2.3% over the past year. Buyers, who are seeing these favorable lease rates, are increasing their presence in the assisted living market by 72% during the 12 month period ending second quarter 2013. The national average of asking rents stood at $4,180/month at the end of last year.
New independent living units inventory growth reached 3,900 units for the TTM ending June 30, 2013. This was an increase of 0.8%. An additional 78 properties with 8,500 units are under construction in the nation’s 100 largest metros. Developers have also increased the average number of units for a property by 32% in anticipation of the new demand. Asking rents climbed 2.5% to 42,810/month.
Skilled nursing inventory dropped 0.3% in 2013. In the middle of 2013, only 81 properties were under construction, down 24% from the prior year. Occupancy fell to a new cyclical low and the bed count of the new facilities is 10% lower than the new units that were completed in 2012. Rents averaged $273/day for skilled nursing facilities.
Overall the median prices per unit in assisted living averaged $163,000 per unit in 2013. Independent living’s median sales price was $139,200 per unit and skilled nursing traded at $63,000 per bed in 2013. Cap rates for independent living ranged from 6 - 9.25% with the median in the 8% range. Assisted living caps traded between 7-10% with the mid to upper 8% range as median. Skilled nursing sold for 10-15% cap rates with the median slightly below 12%.
All in all, as these properties tend to grow just with the sheer force of demographics of the aging baby boomers, we will see more of them and higher returns for operators in the long haul.