By Channing Hamilton
ATLANTA — Investment markets have been tumultuous over the past year, with high interest rates and inflation impacting the flow of debt and equity across the commercial real estate industry. Last year, many investors and brokers chose to weather the storm and try to make it to 2025, when it was estimated that interest rates would begin to moderate.
Recently, however, conditions seem to be improving in the seniors housing sector, where many investors are leaving behind the “survive till 2025” strategy that defined 2023.
Editor’s note: InterFace Conference Group, a division of France Media Inc., produces networking and educational conferences for commercial real estate executives. To sign up for email announcements about specific events, visit www.interfaceconferencegroup.com/subscribe.
“The relative positioning of seniors housing compared with other real estate asset classes has improved dramatically since last year,” said Blake Peeper, senior managing director of Bridge Investment Group, which is based in Salt Lake City.
Peeper attributed his optimism in the seniors housing sector to a variety of factors. “Supply and demand dynamics are in our favor,” he explained. “There’s been a lot of confidence in future net operating income (NOI) growth, and the bid-ask spread has really narrowed. All of that is driving renewed energy in the sector, which is leading to some competition in transactions.”
Peeper’s remarks came during the “Investment Market Update” panel at InterFace Seniors Southeast, which was held at Westin Buckhead Atlanta on Wednesday, Aug. 28. Jay Jordan, co-head of national seniors housing investment sales at Continuum Advisors, an investment sales firm based in Tampa, moderated the panel.
Investors Focus on Rebuilding Pipeline
Investors in the seniors housing sector are cautiously optimistic, with market conditions showing signs of improving as the third quarter of 2024 progressed. Panelists noted an increase in market activity, with more pricing data available to inform transactions.
“The year 2023 was about rebuilding the pipeline and making sure we had the right partnerships or laying the foundation for the right partnerships,” said Kevin Pascoe, chief investment officer of National Health Investors (NYSE: NHI), a Murfreesboro, Tennessee-based REIT focused on seniors housing and medical investments. “However, 2024 has been more about executing those projects and deals. The market has turned in our favor.”
Kelly Sheehy, senior managing director at Artemis Real Estate Partners, an investment manager based in Chevy Chase, Maryland, agreed with Pascoe. “We’re seeing a tremendous uptick in activity in the market,” he noted. “There’s a lot more deals out there. We’re still waiting on many transactions to close, but we’re starting to see pricing, which is critical. That will help us transact more.”
“From an operating perspective, there has been a talk of optimism,” Sheehy continued. “We’re certainly seeing that in our portfolio. Across the board, rents are up while expenses and labor have stabilized. So we’ve seen some real improvements in NOIs and margins over the past 12 months. That will help feed into more market activity.”
Managing Director Matt Pyzyk of Green Courte Partners expressed that many transactions in 2023 were likely from highly motivated sellers, including those forced to act by impending debt maturities or other sources of distress. He notes that this trend has changed over the past quarter.
“We’re seeing more transactions occur that are just market transactions, and the property fundamentals are helping support those values,” Pyzyk explained. “A lot of groups that have tried to time their entry into the seniors housing sector over the last decade or so are becoming more active. And we’re seeing more funds and capital inflows to the sector, which helps create competition and support values.”
Banks Re-Enter Market
The panel also stated that, while the amount of overall capital available for deployment remains low, there is cause for optimism on the debt side of the market. Speakers stated that many financial institutions have become more active over the last quarter, with regional banks offering good debt terms and reasonable underwriting standards.
“It’s easier to price now than it was a year ago,” said Brooks Blackmon, executive managing director of seniors housing and care at BluePrint Healthcare Real Estate, a brokerage based in Chicago. “Even if we’re being more conservative than we would be normally, there’s more cushion than there was. There’s more room for error now. That’s partly because the industry is expecting to start to seeing interest rates slide down, soon.”
At its mid-September meeting, the Federal Reserve cut short-term interest rates to a target range of 4.75 to 5 percent. This was the first cut to the federal funds rate — the interest rate that U.S. banks charge each other to lend funds overnight — since March 2020.
Prior to the cut, the federal funds rate had held steady at 5.25 to 5.5 percent since July 2023 — the highest that rates had been since 2001.
“The market has been volatile for the past five months. Our hope — and in some cases, what we’re betting on — is that [10-Year] treasuries continue to fall and some of the volatility subsides,” Blackmon concluded. “It probably won’t happen next year — maybe another 18 months, but we’ll start to see pricing closer to pre-interest rate hikes.”