Half of long-term care investors see debt market liquidity as their top concern over the next 12 months, according to Cushman & Wakefield’s recent survey of more than 90 industry leaders. Sixty-eight percent of the respondents also said they expect to see a continued increase in capitalization rates in that time frame.
According to the survey, “Northeast markets are expected to show the strongest near-term performance. Markets in the Southwest and Southeast are expected to experience downward pressure on occupancy and rent growth in the near term as new supply is introduced.”
Market participants indicated that they are targeting the more needs-driven senior living and care segments. For instance, one third of the respondents said they are actively targeting assisted living properties.
According to Cushman & Wakefield, long-term care investment activity “stalled” in the first half of the year to about $3.2 billion. That’s a 51% year-over-year decline and a 71% decline from the second half of 2022.
Transaction volume in senior living in the second quarter was $400 million. According to the experts, this was the lowest reported volume since the global financial crisis of 2007 and 2008, “highlighting the market dislocation between the strengthening market fundamentals for the sector and the challenging debt markets.”
Skilled nursing did somewhat better than the senior living sector, with transaction volume of $1.5 billion in the first half of the year, marking a year-over-year decline of 17%.
“The senior housing sector, in general, is at a very interesting and somewhat unique stage in this whole cycle that commercial real estate is going through,” said Zach Bowyer, senior managing director at Cushman & Wakefield and one of the authors of the report, as reported by the Commercial Observers. “It’s probably one of the strongest performers from a property management standpoint: occupied units are at an all-time high; rent growth, while slipping compared to multifamily, still continues to strengthen in most markets …but construction financing is impossible, and new starts are at an all-time low.”
Senior living and care occupancy has ticked upward for 10 consecutive months, Cushman & Wakefield noted.
The survey showed that rental rates have reached an all-time high of almost 6%.
“Much of the surging rent growth has been driven by supply constraints. Absorption — measured in sales or leasing levels — has outpaced inventory increases for nine straight quarters as the number of senior housing units occupied across the US hit an all-time high in the third quarter of 2023,” the Commercial Observer reported. “Construction starts in the sector have hit their lowest point since the 2008 global financial crisis.”
The slowdown in construction starts is a good thing, representing a “silver lining” for owners, according to Cushman & Wakfield.
“Despite an increase in development appetite and a robust need for additional supply in most major markets, the lack of liquidity and cost of debt has restricted construction starts to the lowest level in over a decade,” according to the company. “This decline in construction starts will only magnify supply shortages as our population continues to age.”
