Long-term care fundamentals continued to grow stronger in the first half of the year, and 56% of investors in the sector expect to see little to no change in capitalization rates over the next 12 months, according to a new report from Cushman & Wakefield.
The commercial real estate company surveyed more than 90 senior living and care market leaders. Debt market liquidity was the top concern of 51% of the respondents, followed by worries about the current interest rate environment.
Senior housing and care transaction volume ticked upward by almost 65% in the second quarter, totaling $1.43 billion, according to the firm. Almost half (49%) of the participants said they are targeting core-plus investment strategies, and 34% of all respondents said they are focused on opportunistic or distressed investment strategies.
“Basis point spreads between the going-in capitalization rate and the terminal capitalization rate have compressed, indicating that market participants are expecting to see improvement in the current interest rate climate over a five-year holding period,” according to Cushman & Wakefield. “The Federal Open Market Committee’s (FOMC) move to lower the federal funds rate by 50 bps, while signaling additional cuts ahead, should help destress near-term valuations and bring dry powder off the sidelines as buyer and seller expectations slowly come together.”
Construction labor shortages and costs continue to challenge the sector, the report noted. Although costs have started to stabilize, they remain above pre-pandemic levels, according to the authors.
“A pullback in starts should keep prices falling, but it remains to be seen if they return to normalized levels,” Cushman & Wakefield said.
The amount of committed, but unallocated capital, also known as dry powder, remains readily available, according to the industry leaders.
“With capital to be deployed and banks’ willingness to work with their stronger borrowers, coupled with continuously improving property level operations, valuation trends are likely to tick upward, as concerns of additional valuation decreases due to a distressed debt market subside,” according to the report.
