Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/443516
25 January | February | 2015 CCIM.com degree as better seniors housing data improves their knowledge of market fundamentals and transactions activity. This in turn has improved due diligence and under writing, t hereby potentially limiting some devel- opment activity that may appear excessive. Such a trend emerged in the multifamily sector to some degree, which is ahead of the seniors housing sector in its development cycle. What Could Go Wrong?? While the outlook for seniors housing investments looks generally promising, there are factors that could alter this expectation. Among these are rising interest rates, which will raise the cost of capital for bor- rowers as debt providers are forced to respond accordingly. Higher interest rates may also push up capitalization rates and potentially hurt investors' returns. T e economy is approaching its sixth year of expansion. At the same time, the Federal Reserve is gradually moving away from its accommodative monetary policies, as evidenced most recently by the end of its quantitative easing programs. And it's likely that the Fed's stance toward a zero interest rate policy will end sometime in 2015. As all of this occurs, there will be upward pressure on cap rates for all property types. If net operating income growth cannot of set this pressure, values may decrease. Property location may also inf uence return performance. In mar- kets where there are limited barriers to entry and few regulatory restrictions on growth through tough entitlement and zoning pro- cesses, or restriction on growth due to physical barriers, occupancy rates may slip as new units are fully integrated into the market. T ird, there may not be enough transaction opportunities for the robust buyer interest that exists today. Indeed, by some mea- sures, there is a limited amount of product being of ered to buyers today. And when properties and/or portfolios are brought out to the market, buyer interest is very strong and competition from interested investors may push prices out of reach for many poten- tial investors. Such a competitive landscape also raises the risk of overpriced property. Lastly, there is a risk that property-level NOI growth could slow if the macro economy slows for an extended period. External shocks to the national economy could surface from a further slowdown in Europe, China, or Japan, or further U.S. military involvement in wars. T e long-term risk of a spike in oil prices is presently less likely, given the recent drop in oil prices to below $80 per barrel. A Competitive Landscape Cap rates continue to compress for seniors housing properties. Strong investor interest and a compelling investment thesis have led to a very competitive landscape with many potential buyers being bid out of the market entirely. With the very strong likelihood of ris- ing interest rates in the next six to 12 months, there is considerable risk that today's record low cap rates may follow interest rates higher, at least to some degree. With its compelling investment thesis, how- ever, it's reasonable to argue that cap rates for seniors housing may be sticky and not follow interest rates higher in lock-step. To sustain values, operators will increasingly have to grow NOI and maintain margins through higher occupancies and rents. T is will be particularly important and challenging for those operators who may be af ected by higher minimum wage levels or higher elec- tricity prices, especially those situated in the Northeast. Large opera- tors who can create economies of scale may be better positioned to face these threats. However, now more than ever, quality settings, quality care resulting in quality outcomes for residents and value will be the real dif erentiators that distinguish the top performing properties in an increasingly competitive landscape. Beth Burnham Mace is chief economist for the National Investment Center for Seniors Housing and Care. Contact her at bmace@nic.org. Projected Supply, Demand, and Occupancy Rates for Assisted Living Source: NIC MAP ® Data Service 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Inventory growth (L) Absorption (L) Occupancy (R) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 –500 –1,000 93.0% 92.0% 91.0% 90.0% 89.0% 88.0% 87.0% 86.0% 85.0% 84.0% 83.0%