Senior Housing Outlook: Critical Aspects, Impending Challenges

In the third article of our 2020 outlook series, Cambridge Realty Capital Founder Jeffrey Davis weighs in on U.S. senior living hotbeds and reveals his expectations for the sector.
Jeffrey Davis, Founder, Cambridge Realty Capital. Image courtesy of Cambridge Realty Capital
Jeffrey Davis, Founder, Cambridge Realty Capital. Image courtesy of Cambridge Realty Capital

In the 2019 fiscal year, the U.S. Department of Housing and Urban Development closed senior housing loans worth a total of $3.7 billion, above the $3.6 billion in the previous year. HUD’s Lean program maintained its position as an important source of debt capital for the senior housing industry. Benefits like low interest rates—typically between 3.5 and 5.5 percent—terms of up to 40 years and no personal recourse continue to attract senior living developers, owners and operators.

With the country’s cohort of seniors growing, Multi-Housing News reached out to Cambridge Realty Capital Founder Jeffrey Davis to discuss the challenges for the senior housing market in 2020. Established in 1983, the company is a debt and equity provider with more than $5.5 billion in closed senior housing transactions.

What is attracting developers to the senior living market?

Davis: In general, developers point to the basic demographics and Baby Boomers moving slowly into the age-appropriate market and rely on that data for their opportunity. It’s hard to argue with the case for senior housing, as there are lots of other product types that are out of favor or overbuilt—such as retail and, to a lesser extent, office—so a developer needs to find a home for his development skills and senior housing seems to fill the gap at this point in time.

Senior living developers, by and large, are a rare breed. Sometimes they have an expertise in senior housing, often they’re just developers who found an operator to run their building for them.


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Which U.S. markets do you consider to be best performing in terms of senior housing construction?

Davis: When I’m talking about the entire U.S. and 330 million people, I have to just generalize. The best performing markets in terms of senior living construction are those markets that have different barriers to entry, either imposed by the state or local governmental body or the location or by the state.

Certain markets that come to mind include Manhattan, West Los Angeles and Austin, Texas, as well as a variety of second tier/rural markets that have not seen a lot of growth, but have strong demographics etc. I would also add to the list other rural markets that though their population looks light, it has been a saving population—such as a farm community in Iowa/Nebraska and others.

Did the largest government shutdown so far affect senior housing operators?

Davis: The latest government shutdown did not seem to have much effect on senior housing developers. I’ve not heard of any buildings being shut down—specifically nursing homes—or HUD products going out of favor (just a pause). Unfortunately, the government shutdown is something we have to live with and to keep in mind moving forward as in our strained political landscape, this is a technique that politicians use to try to get their way or what they think their constituents might want.

Due to the aging Baby Boomer population, many senior living developers are expecting a greater need for all types of senior housing. How do you think demand for affordable senior housing communities will evolve?

Davis: Affordable senior living is primarily tax credit deals or some other type of product that has some type of government stimuli. Unfortunately, with government stimuli, you can’t expect any major skyrocketing development due to the controls that are already in play.

However, what I do expect to be a strong part of the continuum is standalone independent living communities. These communities, which offer both housing and meals but no health services etc., provide a niche in the spectrum of senior housing that appeals to many seniors who have downsized, retired, had their children move out of town or any of a variety of cases where they’re looking for less effort and work, socialization and more comforts of life.


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What types of capital structures are most of your clients accessing?

Davis: There is nothing esoteric regarding the capital structures for senior housing with our clients by and large. Typically, be it skilled nursing facilities or senior housing, these structures include some form of a first mortgage and some equity, and often some form of second mortgage or mezzanine financing.

With capital being aplenty and available, our clients do not seem to be strained by capital, but clearly by inflated pricing and overbuilding in some markets, and generally do not look for different structures including tax credit deals, pace financing or different forms of stimuli, which take a tremendous amount of time to finalize and exceptional costs getting confirmation.

Tell us about the potential challenges this niche could face as we come nearer to the peak of the Silver Tsunami. 

Davis: The retiring Baby Boomers are most likely the generation who has saved the least amount of money to address their needs in the future. Like quite a bit of the economy, there is the top 5 percent of savers and earners, and the rest of the people, which are 95 percent of the senior population.

With that in mind, except the fact that there have not been lots of savers and definitely a lot more people moving into the senior housing section, it’s easy to say that the biggest challenge is affordability, which does not seem to be happening under the current political structure. Affordability has always been an issue and hence, the skilled nursing facilities or Medicaid assisted living facilities have the potential to play a major role if they get their funding. The affordability issue and crisis will not be disappearing soon.

What would you advise senior housing operators who are thinking about obtaining a HUD loan in 2020?

Davis: Do not wait. It takes six months or more to get a HUD loan. You need to have a HUD lender who is both experienced and has a team available to help you pull together the large checklist that comes with a senior housing deal, as well as answer questions regarding the deal. Bottom line, your deal needs to be moving forward sometime over the next 90 to 120 days or it won’t happen in 2020.

What are your expectations for the senior housing market as we step into the new decade? 

Davis: There are always people who are looking to move in new directions in any field. In senior housing, this includes special dining options, rehabbed facilities, a variety of amenities, fancy chefs to prepare food, different names for different care and any of a variety of different ways to approach the market. At the end of the day, what is critical to senior housing is operators with a passion for caregiving, government employees who understand how difficult running a senior housing business is and can give operators some slack.

People turn to senior housing when their loved one has certain needs. The aging cycle creates certain needs and even though life expectancy is significantly longer today than it was 15 years ago, certain needs will ultimately take place.

On the big picture, senior housing needs affordability and ways for operators to operate their facilities within the constraints of their current environment. As much as this sounds simple, these basic tenants will be harder and harder to satisfy moving forward unless the government has a bigger commitment towards creating affordability and not changing the rules of the game so frequently, so that committed operators can do their job and take advantage of different inducements the government may have or HUD may have. This way, the population at large can feel comfortable when turning their loved ones over to caregivers, without needing to micromanage this process.