The Federal Reserve’s decision to increase its benchmark interest rate for the first time since 2008 will have positive and negative effects on the seniors housing sector, Beth Mace, chief economist and director of capital markets outreach for the National Investment Center for Seniors Housing and Care, told McKnight’s Senior Living.
The plan to raise the benchmark interest rate 0.25% signals optimism, Janet Yellen, chairwoman of the Board of Governors of the Federal Reserve System, said during a Dec. 16 press conference. “It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardship of millions of Americans,” she added. Additionally, Yellen said, the change reflects confidence on the part of the Fed’s Federal Open Market Committee that the economy will continue to grow stronger.
Higher interest rates mean a higher cost of capital in general, however, which in turn will affect seniors housing development, refinancing and acquisitions, Mace said. “This is a 25 basis point increase, so it’s not a huge change, but it is a change,” she said.
The hike also could affect real estate valuations, Mace said. “Cap rates often move in tandem with interest rates, and higher cap rates are often associated with lower valuations unless you can grow your net operating income to offset that increase in interest rates,” she said.
Real estate investment trusts, which are required to pay out 90% of taxable income in dividends, also might be less able to finance expansion from operating income, Mace said. “Often, they have to issue equity and debt for expansion and growth, and so as a result of their dependency on issuing debt, it might cause them to be a little more sensitive to changes in interest rates,” she said.
The news is not all bad, however.
“People will be earning a little bit more interest on their investments, so if you were of the generation that you were putting money in a savings account or in a CD, you’re better off today than you may have been,” Mace said. “It’s not very much, but it’s some.”
The Fed’s optimism about the strength of the economy also could sustain demand for seniors housing, Mace said. “If the economy is strong, if people have jobs, if income is growing and confidence levels are high, that often supports demand for seniors housing,” she said, “and it could help in lead generation or conversion rates and, ultimately, move-in rates and absorption levels.”
Don’t look for the effects immediately, Mace said. “What we’re going to see … is a gradual policy shift of higher interest rates as we go into 2016,” she predicted. “And in time, the Federal Reserve will start to normalize interest rates to some degree, and that will, again, be good in the sense that the economy is getting back on track.”