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Investor appetite for seniors housing continues to grow in 2017

by Jody Barhanovich

Investor appetite for seniors housing and care real estate continues to grow, with the majority of investors who specialize in the sector planning to increase the size of their portfolios in 2017, according to CBRE’s U.S. Seniors Housing & Care Investor Survey report.

“Investor interest in the seniors housing sector is clearly rising,” said Jeanette Rice, head of multifamily research, Americas, CBRE.

Despite investors’ expectations for rising interest rates, nearly 60 percent of respondents expect to increase the size of their portfolios in 2017 compared with 47 percent a year ago, according to the report.

Compared with prior survey results, the change in expectations for capitalization rates was negligible, indicating the possibility for more pricing stability. The number of investors anticipating a rise in cap rates increased to 44 percent from 33 percent a year ago, with only 4 percent expecting to see a decrease. More than half (52 percent) of investors expect capitalization rates to remain stable over the next year, according to the report.

A noticeable shift was apparent in the compression of cap rates for investment class C assets, which CBRE attributes to increased interest from investors for value-added opportunities in a yield-constrained market. The largest increase was reported for investment class A nursing care at +24 basis points from a year ago, which is likely attributable to the uncertainty regarding healthcare legislation or investors’ concern over the surging pricing for nursing care properties in recent years, according to the report.

Independent living eclipsed assisted living as the biggest opportunity for investment, increasing to 40 percent of respondents from 31 percent a year ago. Similarly, age-restricted properties also gained interest as participants begin to direct their attention toward the more lifestyle-focused spectrum of seniors housing. Memory care properties continued to lose ground, with investors now seeing the least opportunity for this property type, likely due to the overbuilding of this segment in recent years.

Increased construction activity remained the top concern for investors (38 percent) that could negatively impact the seniors housing and care market over the next 12 months, followed by rising interest rates (22 percent) and property-level operation (21 percent). Rising interest rates showed the biggest increase from 11 percent a year ago.

“Favorable investment yields, the need-driven component of demand, and the aging population storyline will continue to drive investment into the sector in 2017 and entrench its attractiveness to investors,” said Rice. CBRE expects valuations to remain stable in 2017 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,” said Rice.

“As the sector goes through a period of ‘institutionalization,’ the corresponding operational results will continue to evolve with greater efficiencies and innovative design trends, which will be welcomed by investors and developers in the face of increasing supply,” said Zach Bowyer, managing director, Valuation & Advisory Services, CBRE.

The seniors housing investment market is expected to move into a more rational transaction period as capitalization rates slowly increase, suggested Bowyer. A shift in investors’ focus from development and acquisitions to portfolio and operating platform optimization is also likely, according to Bowyer.

“Sound property-level operations, capital inflows from foreign investors and moderated development trends will be critical to maintaining short-term valuations,” said Bowyer.

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