Senior Housing’s Positive Trajectory
Supply, insurance and interest rate challenges remain, however, writes Russell Phillips of Regions Bank.
The state of senior housing and health-care real estate continues to improve, and the sector remains poised for positive performance and continued growth in the near term. While owner-operators have faced specific challenges—labor attraction and retention, insurance premium costs and availability and heightened interest rate impacts—the sector overall has continued down a path toward recovery after the debilitating blows brought on by the pandemic. Demonstrating that consistent improvement, senior housing occupancy has increased for 13 consecutive quarters.
Senior housing and health-care real estate research firm NIC MAP Vision reports a 0.7 percentage point increase in senior housing occupancy to 86.5 percent across 31 primary markets in the third quarter of 2024. Drilling down further, assisted living facilities experienced a 0.5 percentage point occupancy increase in Q3 2024, while independent living facilities experienced a 0.9 percentage point occupancy increase. While the independent living rate outpaced that of assisted living, at 87.95 percent compared to 85.1 percent, gains in occupancy across assisted living facilities have actually outperformed those for independent living in recent years.
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Still, occupancy gains vary by region and market, as certain markets have experienced a supply increase, not offset by demand, from new facilities completed over the past few years. The smallest gains were garnered by Riverside, Calif., and St. Louis, Mo., while the largest gains were achieved by Cincinnati and Phoenix.
The occupancy growth is attributed to the demand for units, which is currently outpacing new supply deliveries. Supply concerns are ever present as more of the baby boomer cohort passes the 80-year milestone. Today, construction starts are declining, as they did in 2021 during the pandemic, as well as during the Global Financial Crisis. Heightened construction costs as well as capital access barriers and costs are all contributing factors.
Despite existing capital challenges, owner-operators can source agency financing for existing senior living and health-care properties. FHA/HUD provides longer term or permanent, nonrecourse loan options to qualifying owner-operators of nursing homes, intermediate care facilities, board and care homes and assisted living communities via the HUD 232 per 223(f) loan program. To qualify, properties must be either completed or substantially rehabilitated for a minimum of three years prior to the firm commitment application. Fixed interest rates, no loan limits and amortization up to 40 years are signatures of the offerings. Rates are determined by the market conditions at the time of the rate lock. HUD’s loan review period spans about 60 days.
HUD also offers options for refinancing health-care properties. The FHA Section 223(a)(7) program is offered fully nonrecourse at a fixed rate determined by market conditions at the time of the rate lock. With HUD’s approval, the term may be extended up to 12 years beyond its remaining term, however, not longer than the original term. Like HUD’s other financing options, the review time typically runs about two months.
Owner-operators considering HUD options are encouraged to work directly through a HUD-approved lender that understands how best to navigate the agency’s unique application process. The good news is that, despite HUD’s lengthy application queue, longer-term financing is available, even as the greater commercial real estate finance arena continues to struggle amid the ongoing pessimism and weight of heightened interest rates and the resulting reduction in lending activity.
Russell Phillips is managing director for real estate capital markets at 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’.
