Seniors Housing Business

AUG-SEP 2015

Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.

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78 Seniors Housing Business n August-September 2015 Site Selection Development Receive a FREE e-book when you subscribe to our blog. "7 Pitfalls to Avoid When Planning Senior Living Construction Projects" Dana Wollschlager (847) 628-8903 Feasibility overbuilding impacts a given submarket, we expect that older, less desirable product will bear the brunt of the more distributed demand. Stahler: We don't believe we are building fast enough to bal- ance supply and demand long term. While we are starting to see some overdevelopment in certain markets, we think this will only be an issue over the next three to fve years. The investor that is looking for a quick return on its capital will likely cause the great- est problems for development. Calculated, tempered, long-term investment into development will pay the highest dividends to the industry as a whole. The age wave we are beginning to see in our facilities will undoubt- edly demand a newer product, but oversaturation of new units, especially not well-thought-out units, is our greatest concern for the industry in the short term. Myers: There is little doubt that there will be some overbuild- ing in some markets because it's impossible to nail the exact number of units needed in the next three to fve years or how many units are actually planned. In many larger markets, there are projects that are currently only in the mind of an experienced seniors housing provider or home builder, or a deep-pocketed inves- tor with loads of liquidity and a burning desire to put up "the best assisted living or memory care facility in the market." Some of these folks will ignore the telltale signs of overbuilding and will build it anyway, bank- ing on beating out the competi- tion regardless of how stiff it is. It's these projects that we don't anticipate, that pop up in the future, that may very well cause excess supply. And, the trouble with seniors housing bubbles is that the recovery time can be long, much like recovering from a large oil spill. A food of new capital SHB: Seniors housing performed well during the Great Recession relative to other property types in terms of total returns, accord- ing to the National Council of Real Estate Investment Fidu- ciaries. From a historical per- spective, is there more capital coming into the sector now than in previous up cycles for seniors housing? Swartz: There is a much broader pool of capital today compared to previous up cycles, which were dominated by several larger public REITs. Today we have additional public compa- nies, private/unlisted REITs, large specialty seniors housing funds, private equity investors and signifcant interest among the various pension fund advisors who invest on behalf of separate account clients as well as through commingled funds. McMurtry: Absolutely. The last housing downturn from a long-term perspective was a real beneft to seniors housing. Performance in the sector during this time period caught the atten- tion of many institutional inves- tors and has led to a number of new institutional equity sources for senior living. I see this trend continuing. I used to say that the seniors housing asset class was about 10 years behind the multifamily asset class in terms of institutional acceptance. I now think that gap has narrowed signifcantly. Myers: The positive differ- ence in this cycle seems to be the amount of smart money. Inves- tors in seniors housing are some of the brightest, most highly educated investors who have liquidity, operating platforms and fnancing alternatives to enhance IRR, market knowledge, and so forth. We don't see buyers mak- ing acquisition decisions based on emotions, but rather based on facts. There will always be the cowboy investor who ignores the signs in a given market, and buys or builds something in spite of signals that the region is heading toward an oversupply. But, in general, investors in our space are quite savvy. Having said that, it is true that there are macroeconomic fac- tors that can hurt all businesses, including ours. The banking crisis that almost resulted in another economic depression in the late 2000s, and managed care reim- bursement for long-term care facilities, are examples of factors that may cause fnancial tsuna- mis for which no one can fully prepare. Ripples from around the world SHB: Do "wildcard" factors like the economic problems in Greece have any impact on the sector, or is this part of the industry some- how insulated from those out- side infuences? Swartz: There is minimal direct impact from such events. However, to the extent that such events drive other economic factors such as interest rates, the stock market and the hous- ing market, these factors could impact investor demand for seniors housing in various ways. For example, a more volatile stock market could result in increased capital fows to real estate, and seniors housing in particular. On the other hand, a depressed economy/housing market could negatively impact more lifestyle-driven facilities such as independent living. Stroiman: No, the seniors housing market has been pretty resilient during economic down- turns, and we're confdent it will continue to be resilient despite outside infuences. Clousing: At the end of the day, even though the demographics are continuing to move in our favor, our industry still needs a healthy equity market and hous- ing market for the consumers to afford the services provided. Greece is looking like it will not specifcally be a factor. However, we are concerned about the health of the pension funds that a sig- nifcant percentage of seniors rely on to pay for services, specifcally in the Rust Belt states. If there is a large state or city default on these pensions, it could create a diffcult fnancial environment for assets located in these markets. My larger concern is the impact of the overall debt load our country has taken on nation- ally and the continued unemploy- ment/underemployment rate and how that will affect the overall credit and fnancial markets in the long term. In the short term, we expect the status quo, but there could be some challenging times ahead if the economy does not begin to create more jobs and provide for a strong fnancial base to support an ever growing retired population. Gibson: Seniors housing is not fully insulated from outside fac- tors, but the impact can be some- what muted to the extent that demand is inelastic, as is the case for assisted living and memory care. The impact is felt to the degree that any event infuences interest rates or rattles the fnan- cial markets. Interest rates are very closely tied to capitalization rates, so any major changes there can have signifcant and immedi- ate repercussions on value. n

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