Investor Appetite for Seniors Housing Grows

Investor appetite for seniors housing continues to grow and most investors who specialize in the sector plan to increase their portfolios, reported CBRE, Los Angeles.

The CBRE U.S. Seniors Housing & Care Investor Survey said nearly 60 percent of respondents expect to increase the size of their portfolios compared to 47 percent a year ago–despite investors’ expectations for rising interest rates.

“Investor interest in the seniors housing sector is clearly rising,” said CBRE Head of Multifamily Research Jeanette Rice. “Favorable investment yields, the need-driven component of demand and the aging population storyline will continue to drive investment into the sector and entrench its attractiveness to investors.”

Compared with prior survey results, the change in expectations for capitalization rates was “negligible,” indicating the possibility for more pricing stability, CBRE said. The fraction of investors who anticipate cap rate increases increased to 44 percent from 33 percent a year ago, with only 4 percent expecting to see cap rates decrease. More than half–52 percent–of investors expect capitalization rates will remain stable over the next year.

Rice said she expects valuations to remain stable with a strong long-term outlook. “The industry’s fundamentals suggest the necessity for more capacity over the long-term, with short-term oversupply in select markets becoming more likely as a result of the recent record-setting construction levels,” she said.

The report noted a “noticeable” drop in Class C asset cap rates. CBRE attributed the compression to increased investor interest from in value-add opportunities in a yield-constrained market. Cap rates for Class A nursing care rose 24 basis points year-over-year, likely due to uncertainty regarding federal healthcare legislation or investor concern over “surging” pricing for nursing care properties in recent years, CBRE said.

Increased construction activity remained the top worry for investors concerned that would negatively impact the seniors housing and care market over the next 12 months, followed by rising interest rates and property-level operations. The threat of rising interest rates showed the biggest increase from 11 percent a year ago.

Zach Bowyer, Managing Director of Valuation & Advisory Services with CBRE, said the seniors housing investment market will likely move into a more “rational” transaction period as capitalization rates slowly increase. “A shift in investors’ focus from development and acquisitions to portfolio and operating platform optimization is also likely,” he said. “Sound property-level operations, capital inflows from foreign investors and moderated development trends will be critical to maintaining short-term valuations.