Seniors Housing Negatively Impacted by Recession

By Anuradha Kher, Online News EditorAnnapolis, Md.–The economic and financial crises may be starting to affect the performance, a well as capitalization rates, of seniors housing, according to research by the National Investment Center for the Seniors Housing & Care Industry (NIC).“Depending on the type of seniors housing, there is a 2 to 4 percent decline in occupancy rates,” Lawrence (Larry) J. Horan, Ph.D., financial research and analysis director for NIC, tells MHN. “We have been tracking this market since 1999 and the previous recession saw close to 6 percent declines in occupancy rates. Of course that time around, over supply was a big issue. “Loan volume placed in the industry has been in a downward trend since the first quarter of 2007, when it reached $2.28 billion. The amount placed in the third quarter of 2008 was $1.01 billion compared to $1.55 billion in the second quarter. The loan data collected by NIC represent the quarterly lending activity 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 area that we will be closely monitoring in future quarters is loan performance,” says Robert G. Kramer, president of NIC. “Although loan performance held up well during the third quarter, it did fall below 99 percent for the first time since 2005.” Loan performance decreased to 98.9 percent, down from 99.5 percent –which was an all-time high–in the second quarter.However, Horan notes that loan performance is a lagging indicator and needs to be tracked in the coming months.”We’ll need to see how this unfolds,” says Kramer. “Since there is likely a good amount of debt that needs to be refinanced over the next few years and considering the current turmoil in the credit markets, refinancing will be a challenge in the short term. As such, we may see some deterioration in loan performance during the next 18 months.”Also during the third quarter of 2008, NIC’s KFI data showed that mean occupancy rates were flat to slightly higher when compared to the previous quarter. Independent living (at 89 percent) and skilled nursing (at 84 percent) remained the same. Assisted living (at 88.5 percent) and continuing care retirement communities (CCRCs, at 89.5 percent) increased their occupancy levels by half a percentage point. Constructions starts for independent living units were 2,400 in the fourth quarter in 2007 and fell to just 175 in the third quarter of 2008, according to NIC. For assisted living the number fell from 1,200 to 160 during the same period.Average capitalization rates have been higher in 2008 than in 2007. The mean capitalization rate for independent living hit a low of 7.3 percent in 2007 and rose to 8.7 percent in the third quarter of 2008. The spread for the sector in the third quarter of 2008 ranged from a low of 6.5 percent to a high of 13 percent. Assisted living’s low was 8.5 percent in 2007 and in the third quarter of 2008 it was 9.2 percent. The mean capitalization rate for skilled nursing hit a low of 12.0 percent in 2007 and was at 12.75 percent in the third quarter of 2008. The reported number of transactions for the third quarter of 2008 dropped by almost 50 percent from the second quarter.