by Joseph Knapp
This unprecedented time presents an opportunity for seniors housing transaction advisors to better understand and interpret the unique conditions that impact the sale of a seniors housing community at this time. What made this economic downturn so difficult to forecast was the lack of credible information in the twilight hours of the spread and an understanding of the virus itself. After seeing the initial reaction and response from the seniors housing industry we can see the value and longevity of the seniors housing space. Today we have seen changes in operations, valuation, and the brokerage continuum. We believe that these challenges will make us more effective in our service delivery going forward.
The fundamentals of the business, due to the demand for seniors housing care, have been steady and rising over the past few years. This demand has not diminished because the demographic has not changed. In addition, the curtailment of new development gives a temporary easing of pressure on existing communities in many markets.
The highest impact on seniors housing businesses are the additional operational costs to maintain a protective environment for staff and residents. This directly lowers the operating margin which directly affects the YE financials for 2020. NOI is the main driving force of value for class A and B assets. Buyers feel this reduction in NOI could alter the valuation for the year. From a selling standpoint we would not discount value due to a lapse in NOI for a quarter due to the pandemic. In addition, seasonal shifts in occupancy are ordinary and a rare event such as this pandemic will eventually be offset by future returns and demand. This all depends how long this event will last.
If the pandemic wanes by summertime operators may be able to ease costs and pad overtime with the new inventory of prospective employees. A possible influx of new residents due to pent up demand may occur due to easing of tensions over time.
As our group works with clients that are currently in the marketing, negotiation, or escrow phase we are positioned to best inform each client on how to effectively navigate these waters of uncertainty.
Deals that are in the marketing phase are in the most volatile position of the brokerage continuum. Onsite visits from prospective investors are on hold and virtual tours are effective but not as impactful. Value add opportunities are difficult to gain excitement considering the challenge of containing the virus. Once things calm down we believe that value add opportunities will gain traction in the market place.
Class A and class B assets are still trading and have understandably required longer due diligence timeframes. These assets in escrow have still been closing in states that still allow cooperation with third-parties, banks, and title companies.