Economic Downturn is Affecting Seniors Housing Loan Volume, Cap Rates; But Fundamentals are Still Strong

By Anuradha Kher, Online News EditorAnnapolis, Md.–The credit crisis is now beginning to show its impact on the seniors housing industry—the last bastion of commercial real estate. The sector has recorded lower transaction volumes and rising capitalization rates during the last quarter of 2008, according to data tracked by the National Investment Center for the Seniors Housing Care Industry (NIC). Every quarter, NIC collects financial- and performance data from leading senior living lenders, owners and operators, and appraisal professionals. The result is the NIC Key Financial Indicators (KFIs). During the fourth quarter, about $1 billion in loan volume was placed in the seniors housing and care industry. Although this was a slight increase from the third quarter, loan volume is below the $1.54 billion quarterly average of the last three years. “Due to a slowdown in the economy and the frozen credit markets, there is a slowdown in the number of transactions,” Robert G. Kramer, president of the National Investment Center for the Seniors Housing & Care Industry (NIC), tells MHN. “But the industry’s fundamentals are in good shape. For example occupancy rates have stabilized at a healthy number and because of lack of financing there will be hardly any new properties coming online from 2010 to 2012. This means there will be a further upward pressure on occupancy.”Mean occupancy rates were down slightly from the third to the fourth quarters of 2008 for independent living from 89 percent to 88.5 percent. However, occupancy rates for assisted living, skilled nursing and continuing care retirement communities (CCRCs) held steady. The loan data collected by NIC represent the quarterly lending activity of a same store sample of major national lenders (non-REITs) that make permanent and short-term debt investments in seniors housing and care. This includes data provided by Fannie Mae, Freddie Mac, and several of the larger commercial credit companies and banks. “The only transactions that are happening are the ones with agency financing. But a looming 10 percent portfolio reduction mandate aimed at the GSEs could be very disruptive to the seniors housing industry. The NIC KFIs showed that overall loan performance for the seniors housing and care industry is still quite good, with just a minor drop of 40 basis points from last year in the percentage of performing loans. However, the fourth quarter 2008 data did show a foreclosure for the first time in five years, which took place in the assisted living category. Restructurings also went up year over year, as did the number of delinquencies.“Going forward, we will see more instances of over-leveraged companies facing tough times, but this is to do with their individual financial problems not with the fundamentals of the industry,” says Kramer.  “We will also see occupancy improving as a result of strong fundamentals. But certainly the industry is not immune to any further jolts to the economy.”Another piece of good news for the seniors housing industry is that deterioration in loan performance during the fourth quarter is still well below the 10-15 percent levels of non-performing loans that the industry experienced during the last downturn 6-7 years ago. Lawrence J. Horan, Ph.D., financial research and analysis director for NIC, says, “Back then, specifically in the fourth quarter of 2001, the amount of performing loans hit a low of 83.2 percent, whereas it was 98.5 percent during this previous quarter.” Meanwhile, capitalization rates have been inching up. The fourth quarter 2008 NIC KFIs showed that year-over-year cap rates for independent living were up 140 basis points from 7.3 percent to 8.7 percent, while those for assisted living were up 20 basis points from 9.1 percent to 9.3 percent. During the same period, nursing home capitalization rates were up 110 basis points from 12 percent to 13.1 percent and CCRC (Continuing Care Retirement Communities) capitalization rates were up 120 basis points from 7.8 percent to 9 percent. The CCRCs are also the worst affected within seniors housing. “This is because traditionally people sell their homes to pay the fees at these communities. With home values down a great deal, people are waiting it out, especially because demand for these communities is not as need-based as that of assisted living,” Kramer explains.