Changing Outlook on Homeownership Strengthens Demand for Seniors Housing; Crossover Capital Increases Pool of Buyers
Seniors housing demand invigorates as homeownership becomes less advantageous under the new tax code. Changes to the tax law beginning in 2018 could benefit the seniors housing market as the advantages of homeownership are reduced, prompting some senior residents to sell single-family homes and move into senior communities. Homeownership in the 75 and older age segment has fallen for four consecutive years after peaking at a high of 80 percent in 2012 and 2013, resting at 76.8 percent at the end of 2017. A healthy housing market and benefits from itemizing housing-related expenses, like mortgage interest payments, fall under new rules that could entice additional seniors to sell homes and use proceeds to live in smaller, age-restricted housing communities. Construction, especially in the assisted living space, has grown substantially over the past few years, but demand for seniors housing should strengthen, boosted by these changes and an aging population.
Solid demographics, favorable economic outlook attract new buyer pool. REITs, private capital groups and owner-operators are all active in the seniors housing sector, and the emergence of crossover capital is growing the buyer pool for available assets. Rising interest rates are compressing yield spreads across commercial real estate assets, but with initial returns in seniors housing historically 50 basis points to more than 200 basis points above other property classes, spreads will remain favorable amid a period of increased borrowing costs. More mainstream awareness of seniors housing is also contributing to a boost in buyer demand, and investors drawn to the business component of the industry will find unique value-add options to generate higher ROIs.
- REITs have been restructuring portfolios over the past couple of years and are seeking to redeploy funds this year, targeting robust cash flowing deals in familiar markets.
- Stabilized seniors housing properties in primary markets trade at a premium, with AL and IL facilities capturing first-year returns between 6 percent and 7 percent. Initial yields for skilled nursing assets are often above 10 percent.
- Private funds and equity funds are moving into the seniors housing sector, providing a source of financing options for turn-key assets and development deals.
2018 Seniors Housing Market Forecast
Independent Living (IL): Healthy demand keeps stabilized occupancy close to the fi ve-year average, dipping 20 basis points year over year to 91.3 percent. The minimal decline in occupancy does little to thwart rent growth, and the average rises 1.7 percent to $3,158 per month.
Assisted Living (AL): Inventory growth outweighs demand this year, contributing to a 50-basis-point drop in the stabilized occupancy rate to 88.1 percent. Rent growth will slow as a result, reaching $4,663 per month on a 1.5 percent annual gain.
Skilled Nursing (SN): Stabilized occupancy continues to decline in 2018, falling 80 basis points to 85.3 percent, a new low for the last decade. Rising healthcare costs continue to drive up the average daily rate, however, which reaches $318 per bed per day, an increase of 2.3 percent from last year.
Continuing Care Retirement Communities (CCRCs): Absorption remains healthy this year, and the segment will be the only to post an increase in occupancy as the stabilized rate rises 30 basis points to 91.5 percent. Rent growth remains strong, with the average advancing 3.2 percent to $3,322 per month in 2018