Senior living deals have been fraught this year with near-term challenges, such as higher interest rates, instability of some regional banks and turbulent capital markets, according to a new report from professional services firm PricewaterhouseCoopers and the Urban Land Institute.
“The outflow of deposits from smaller regional banks, which have traditionally been a reliable source of funding for senior housing operators and developers, has exacerbated
the lack of available debt,” according to the report. “And, much like the multifamily sector that has Fannie Mae and Freddie Mac as critical debt providers, greater scrutiny from the government-sponsored entities (GSEs) toward borrowers has limited the availability of senior housing debt financing from those sources.”
Financing new construction of senior living properties is a critical near-term challenge, according to the authors. Additionally, borrowers looking to refinance loans on existing “are facing significant challenges because paydowns on principal are often needed and loan proceeds are often lower.”
The sector has approximately $10 billion to $14 billion of loans maturing in the coming two years; thus, the need for recapitalization financing is “significant and problematic,” according to the report.
Some opportunities for improvement are on the horizon for investors, however, the authors said.
“The good news is that market fundamentals for senior housing are on the mend and improving steadily,” they wrote.
According to NIC MAP Vision and the National Investment Center for Seniors Housing & Care, sustained supply-demand trends could drive senior living occupancy rates to return to pre-pandemic levels in 2024.
“The combination of rising occupancies and growing rates provides positive revenue growth and revenue per occupied room (RevPOR)/revenue per available room (RevPAR) unit
metrics, supporting improvement in net operating incomes (NOIs) and margins,” according to the PwC / Urban Land Institute report. “Thus, while the cost of servicing debt is rising, the ability to pay that added cost is partly being mitigated by stronger revenue growth, at least for many operators of senior housing.”
Although pricing for senior housing properties might start to come down in 2024, the authors noted that capitalization rates are likely to increase due to higher interest rates.
