Senior Housing’s Role in a Health-Care Real Estate Portfolio
Ted Flagg of JLL on the benefits of blending this property type into a strategy with medical office and life science.
Health-care real estate investment is primarily comprised of seniors housing, medical office and life science buildings. While they are all related due to their affiliation with the health-care industry, investment strategies for each subcategory can be quite different.
Medical office, for example, is typically associated with long-term leases that provide predictable, resilient and steady cash flows, creating a bond-like investment profile. Senior housing cash flows are more volatile with labor creating pressure on the downside and, on the upside, reduction in COVID restrictions causing a two-year revenue catch-up and 10 percent to 15 percent NOI growth projected.
Crossover investors, those investing across seniors, medical office and life science, provide a viewpoint on the relative risk-reward profile of each sub-sector at a given moment. For example, Welltower was a large buyer of seniors housing in 2021 due to the deep discount to replacement cost coupled with strong NOI growth profile of seniors coming out of COVID restrictions. Meantime, in 2021, Welltower was reserved on medical office acquisitions because new private equity entrants driven by record-low debt cost were crowding the auction tent. Fast forward to today, pricing for medical office is more sensitive to rising interest rates than seniors housing. Crossover investors, like Welltower, with efficient balance sheets are focusing on shifting risk-reward profiles while lesser-capitalized buyers are increasingly sidelined.
In terms of seniors housing, with the 75+ population growing at an increasing rate and the amount of new construction down significantly, it is expected that occupancy rates will continue to improve throughout the remainder of 2022 and beyond, further bolstering investor interest in the segment. Strong fundamentals and the amount of uninvested capital targeting commercial real estate, coupled with strong U.S. macro fundamentals, are driving pricing in today’s market. These factors should serve as countervailing forces against upward pressure on cap rates due to inflation and/or rising benchmark yields.
As we progress into the last quarter of 2022 and into the next year, rising debt costs and inflation will continue to affect investors’ strategies. Today, there are now two types of health-care investors: those who pursue resilient income while others seek out stronger growth potential. The complementary aspects of growth and resilient cash flows continue to make a diversified health-care real estate portfolio outperform.
Ted Flagg is JLL senior managing director, Healthcare Group leader.