Other Market Niches…

By Keat Foong, Executive EditorTo what extent are other multifamily niche markets—namely senior and military housing—potential investment alternatives at this time of the business cycle? The challenges faced by senior housing could be even greater than for conventional apartments. But Robert G. Kramer, president of the National Investment Conference, argues that by early- to mid-2010, when the last of senior housing in the pipeline is delivered, there will be no new supply for at least two years. “There is a great opportunity here. There is virtually no new supply at the same time we expect demand to increase because of demographics and the fact that our product is needs-driven,” he says. Military housing development can be another avenue for investors in tough times. But it’s not clear that a lot is happening in the sector at present. Jeff Franzen, executive vice president-MidAtlantic at Lincoln Property Co., says that much of the activity may be in the “eighth inning.”Seniors Housing: The Writing is on the Wall? The challenges faced by the specialized sector of senior housing could be even greater than for conventional apartments. This recession may mean tougher times for senior housing, as seniors see their life savings evaporate in the stock market. They may move in with their adult children temporarily, or even use the money that would go into their retirement home to help with other emergency needs.  In the fourth quarter of 2008, occupancy rates for independent living was 90.2 percent, 210 basis points lower than the same period a year ago, according to National Investment Conference (NIC). For assisted living, the occupancy rate similarly fell, by 130 basis points (though higher on a quarter-to-quarter basis) to 89.4 percent in the fourth quarter, from the same period a year ago.  Cap rates tracked by NIC have increased by about 50 to 150 basis points in general in the past months, indicates Robert G. Kramer, president of NIC. Depending on the level of stabilization and other property characteristics, cap rates are currently about 8.5 to 9 percent for independent living and 9-plus percent for assisted living and continuing care retirement communities. On the other hand, even though occupancy levels are lower, absorption rates are actually up and revenue growth is still positive for seniors housing, Kramer notes. Economic growth is 4.7 percent for independent living and 5.2 percent for assisted living (with economic concessions, the numbers are 120 to 200 basis points lower, but still positive). And note that there are some pretty strong acquisition and construction prospects for senior housing if a longer time frame beyond the next two years or so is taken into consideration, Kramer suggests. Although there is a 3 to 4 percent annual growth in the 85-plus-year-old population currently, new construction has come to a virtual standstill, he says. (Construction opportunities in the sector, as for commercial real estate in general, has pretty much ground to a halt due to the lack of financing.)  Kramer notes that many companies have laid off their entire development arms. He forecasts that by the early- to mid-2010, when the last of senior housing in the pipeline is delivered, there will be no new supply for at least two years. “There is a great opportunity here. There is virtually no new supply at the same time we expect demand to increase because of demographics and the fact that our product is needs-driven.”   Although Kramer says there will be great acquisition opportunities in the sector, he says that developers need people on their team who are experienced in the sector and that a strong and experienced management team is critical.  Military Housing: In the Eighth Inning?  Military housing development can be one avenue for investors and developers in tough times, but it is not clear whether a lot is happening in the sector at present. Jeff Franzen, executive vice president—MidAtlantic at Lincoln Property Co., says that much of the activity may be in the “eighth inning.” There are new bids “here and there but nowhere near the value or frequency” that used to be the case, he says.     The Military Housing Privatization Initiative (MHIP) in 1996 was authorized by Congress in 1996 under the National Defense Authorization Act. The initiative enables partnerships between the government and private developers and managers to develop or manage housing for the military. The MHPI was extended twice, before the 2005 National Defense and Authorization Act made it permanent.     As of December 2008, the Department of Defense has entered into transactions for 93 privatization projects totaling over 183,000 units. Franzen says much of this housing is traditional single-family and townhomes, but also includes multifamily. Under the FY 2003 Defense Authorization Act, the Navy was provided unaccompanied personnel housing authority to execute three pilot projects. One area to look into could be bachelor housing, which the various branches of the military are subjecting to trial runs, says Franzen. “It is not certain whether this will or won’t become bigger. At the moment, the jury is still out,” he says.     Each branch of the military—the army, the navy and the air force—has its own privatization program. Developers can check the website www.acq.osd.mil/housing for further information.     If they can be procured, military contracts are a way to stay afloat during down times. “It’s been a huge benefit to Lincoln, no question. We are really blessed to be associated with the military at a time like this,” says Franzen. Lincoln has developed about 30,000 units in the past eight years under the military privitization program. It also manages the same amount. There are still additional phases to be built out, says Franzen.