As the Federal Reserve prepares to raise the interest rate another 75 basis points at a meeting next week, senior housing borrowers are looking to secure loan terms, Jessica Johnson, manager of Healthcare Banking for BOK Financial told the McKnight’s Business Daily.
“It behooves anyone to lock in [a loan rate] sooner rather than later, especially if it’s something that is going to impact you in the next three to five years,” Johnson said. “Higher interest rates just make the underwriting tighter the higher the interest rate goes. What we’re seeing on our side is a flurry of activity with operators and borrowers scrambling to get loans closed as quickly as possible.”
The general thought among bankers and economists is that rates will continue to rise. Johnson said that it is possible that the Fed could hike rates by 3% by the end of the year.
“That can make a meaningful impact on the financial success of a project,” she said.
Johnson predicted that the volume of senior housing projects and acquisitions will slow down through the end of the year, then normalize somewhat in 2023, as buyers and sellers look for a “happy medium” in terms of pricing.
“At some point, I believe that cap rates will rise, and I think that prices will come down to help counteract some of the impact of rising interest rates,” the banker said.
The rising cost of construction materials and construction labor has made it more difficult for financing new starts.
“Once upon a time, we could provide 75% loan to cost with the provider putting in 25% equity. We’re now having to curtail that back and look at 60% to 65% of cost because otherwise, the projects just don’t make sense, because they don’t make money,” Johnson said.
Most current construction activity is from providers and developers that can put more equity into projects and “weather longer periods of time that it is going to take for those projects to get completed and to stabilize occupancy numbers,” she added. “They take a lot longer than they did a few years ago.”
In Johnson’s opinion, the United States is heading into a recession but is not quite there yet. She projected no longer than a six-month window before that happens, speculating that the economy may cross over into a recession in the fourth quarter of 2022 or possibly the first quarter of 2023.
“There still a lot of liquidity out there that’s delaying that turn into a recession,” Johnson said.
