Senior Housing Turns a Corner—Thanks to the Banks
What's driving the boost in liquidity?
What a difference a year makes! Senior housing in the U.S. is currently enjoying a period of robust recovery, leading to financing opportunities for owners and investors alike.
Improved operating fundamentals have unlocked significant capital, with banks leading the charge in providing competitive options. Here’s a look at what’s driving positive momentum for the sector and making both debt and equity more accessible and prevalent than they were in 2024.
To start, occupancy rates have increased generally across senior housing and skilled nursing facilities. Equally as important: supply for new developments has also stalled–a trend that’s expected to continue. The current imbalance in supply vs. demand affords senior housing operators considerable pricing power, giving them the opportunity to optimize revenue streams. Skilled nursing operators also benefit from consistent support from state budgets, though vigilance is required for some quality payment add-ons.
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The impact of bank financing
Another notable development is the robust return of traditional banks. With the period of balance sheet restructuring effectively over, banks are aggressively issuing term sheets, offering highly competitive quotes to facilitate senior housing deals. Their enthusiasm for senior and skilled nursing assets extends across the spectrum, including Class A primary market assets as well as Class B products in secondary and tertiary markets. Regional banks are particularly keen on the former, while local banks and credit unions are bidding on the latter.The renewed appetite from traditional lenders is creating an increasingly competitive environment that ultimately benefits owners and operators. Debt funds are finding that they must either increase their proceeds or offer more flexible terms on deals with lower in-place debt service coverage, particularly those requiring a value-add component before stabilization.
For senior and skilled nursing borrowers seeking to expand their portfolios through acquisition, the immediate focus is on optimizing the structure and execution of acquisitions. To do so, borrowers typically seek out floating-rate debt during the asset’s stabilization period, and move to fixed rate, permanent debt financing after the property stabilizes. This is especially true if their exit strategy does not involve an immediate sale.
Of course, regardless of what the end game is, in the current environment, borrowers must analyze all financial angles to ensure that equity contributions and secured debt align with their overarching strategic objectives.
Longer-term outlook
Our outlook for the senior housing market going forward is more nuanced. We are bullish on the senior housing rental market because of inherent demand and operational flexibility. Indeed, demand is picking up across the entire acuity spectrum—from independent living to assisted living, memory care and skilled nursing facilities.
Similarly, we expect acquisitions to remain robust, especially for newer or relatively new properties—which can be available at prices per unit well below their replacement cost, offering attractive entry points for investors. The skilled nursing facility acquisition market also continues to be strong, albeit with state-specific variations due to concerns over Medicaid.
We are decidedly more bearish on entry-fee continuing care retirement communities and new development projects. The primary impediment to new construction continues to be stubbornly high construction costs. In fact, for new development to become truly viable again, we believe these costs need to decrease by a substantial 25 percent. Current tariffs, particularly on inputs like Canadian softwood lumber, exacerbate this issue by driving up hard costs.
Though the market will likely respond eventually by sourcing more products domestically, recreating supply chains takes time. Unless there is counteracting deregulation that reduces the scope of construction components or requirements, we expect construction costs will continue their upward trajectory.
After navigating through more difficult economic cycles, owner/operators and investors in senior housing and skilled nursing assets should generally find themselves well-positioned for near-term growth. Certainly, challenges such as new development costs still exist, but strong demand, a healthy acquisition market for existing assets, and a revived interest from banks and other lenders bode well for the sector.
Chris Clare and David Young are managing directors at Greystone, where they are part of the health care finance team.
