How Senior Housing Is Rising Above the Fray

Russell Phillips

Senior housing fundamentals continue to steadily improve post COVID-19, though the sector does face some challenges. Like all real estate asset classes today, senior facilities are impacted by heightened inflation and interest rates, as well as the availability of financing executions. However, topping the list of challenges is rising operator expenses.

The overall resilience of senior housing is presented in second quarter numbers. NIC Map Vision 2Q23 Market Fundamentals data indicates improvements to occupancy, rent growth and inventory. At large, occupancy for the sector during the second quarter was 83.7 percent, up 60 basis points from the previous quarter. More specifically, average occupancy grew 30 basis points to 85.4 percent for independent living communities, jumped 80 basis points to 82 percent for assisted living facilities, and increased 60 basis points to 81.9 percent for nursing care homes.

Rent growth occurred across independent living (5.2 percent), assisted living (6.4 percent) and nursing care (4.3 percent) facilities alike in the second quarter. Inventory increased slightly in the independent living (1.3 percent) and assisted living (1.2 percent) categories but declined slightly in nursing care facilities (-1 percent).

The viability of debt options for senior housing is being directly influenced by record-level inflation and the 10 interest rate hikes that have occurred since March 2022 to address it. The Federal Reserve’s latest rate increase on May 3^rd brought the fed funds rate to a target range of 5 percent to 5.25 percent, notably the highest it has been since August 2007. However, with inflation still stubborn, policymakers have since indicated rates might be increased further to 5.6 percent by year’s end. Of course, the price of debt for senior housing has increased alongside rising interest rates over the past year.

The lenders active in the sector today are thus unsurprisingly focused on the credit quality of their sponsors. Deep market experience and a track record of success will be an advantage for those seeking loans, as will well-managed and maintained properties. Loan parameters for acuity, or the level of care provided within senior properties, are also shifting and may impact the ability to finance, depending on the debt source and program sought.

Public financing alternatives

Despite many lenders significantly decreasing their loan activity, HUD remains a reliable source of fixed-rate financing, specifically for properties that have been completed or rehabilitated three years (or more) prior to the Firm Commitment application date. Though HUD programs are known for their stringent underwriting guidelines, the rigidity of those guidelines do not intensify during economic shifts or downturns. HUD rates today fall in the high 5 percent range plus MIP (mortgage insurance premium); MIP is 1 percent at closing and between 0.45 percent-0.65 percent annually.

Despite HUD financing, other sources of debt are harder to come by, at least for the time being as the industry waits out what will hopefully be a short-term downturn. That said, finance availability is not the biggest challenge for operators. According to the NIC’s May Executive Survey Insights, rising operator expenses remain the biggest concern among small, medium and large senior housing and skilled nursing operators across the country. Property and professional liability insurance are key contributors. Between 86 percent and 95 percent of operators across all care segments participating in NIC’s recent survey—including independent and assisted living, memory care and nursing care—reported their property insurance increased from the year prior. Participants also noted prevalent increases in their professional liability insurance.

While operator expenses, insurance costs and interest rates are undoubtedly impacting senior housing, the sector’s visible rebound after the pandemic’s marked impacts on it is promising. Strong base fundamentals are holding senior housing steady.

Russell Phillips is managing director of Real Estate Capital Markets for Regions Bank, a nationwide senior housing, multifamily and commercial real estate lender. 

This information is general education or marketing in nature and is not intended to be accounting, legal, tax, investment or financial advice. Although Regions believes this information to be accurate as of the date written, it cannot ensure that it will remain up to date. Statements of individuals are their own—not Regions’.