Seniors Housing Returns Outpace NPI
Returns Strong. Third-quarter return performance data for the NCREIF-reported seniors housing properties was strong. Total returns equaled 4.20%, composed of a 2.80% capital return and a 1.39% income return. On a one-year basis, total returns were an impressive 16.32%, overshadowing NPI’s strong results (13.48%) as well as those for apartments (12.02%). Income returns for seniors housing are consistently strong, reflecting steady and reliable NOI growth in the sector, while strong capital flows and avid investor interest support capital returns for the sector. On a 10-year basis, total returns for seniors housing exceeded both the NPI and apartments by roughly 550 basis points. These performance measurements reflect the returns of seven managers, who reported $3.2 billion of seniors housing performance data on stabilized properties to NCREIF in the third quarter.
Transactions Slowing. Seniors housing transaction volumes slowed in the third quarter to $1.9 billion, as fewer large deals took place. On a rolling four-quarter basis, volumes equaled $12.7 billion. A slowdown was also evident in some of the other property types, perhaps reflecting turmoil in the public markets in late August. Time will tell transaction volumes will accelerate once again and surpass levels achieved earlier in the year.
Occupancy Improves. Occupancy rates for seniors housing increased by 20 basis points in the third quarter to
89.9%. This was a welcome improvement from the 60-basispoint decline seen between late 2014 and June 2015. But
the improvement in the summer months was less than would have been expected given the normal summertime
bounce, when loved ones often move their parents into seniors housing.
Since the second quarter of 2014, occupancy has averaged 90.0%, with a range of 60 basis points from its recent low point to its recent high point. It may be that occupancy rates are nearing equilibrium, with some moderate volatility expected as demand responds to new development activity. Notably, an equilibrium occupancy rate of 90.0% is 150 basis points below the high-water mark reached in the 2006/2007 period prior to the recession. But this lower rate takes into account an overall larger stock of inventory and a shorter length of stay due to a generally higher acuity resident population and greater churn rate.
Supply Increases. There were roughly 44,000 units of seniors housing under construction as of the third quarter
in the nation’s largest 99 metropolitan areas, equivalent to 5.2% of existing stock. This was the most units under
construction since NIC began tracking the data in 2008 and also represented the largest share. Development activity is greater for assisted living than independent living and not all markets are experiencing the same degree of activity.
Indeed, 34 metropolitan areas represent nearly 80% of all construction activity. Nashville had the highest rate of
construction at 24% of its inventory, while Chicago had the most number of units under construction (nearly 3,000).
Prospects Ahead. Looking ahead and using actual starts data through the third quarter, it is likely that construction
activity will remain relatively robust for the next 12 to 24 months. Time will again tell if there is a natural check and balance that will limit this development cycle from overheating. Developers tend to be an optimistic lot and often think that they have the best product offering in the best market and will manage to thwart any competitive threats. Such thinking could easily create excess supply, and result in falling occupancy rates, rents and values.
That said, there is greater transparency in the seniors housing sector today. Information about market fundamentals and capital market conditions from sources such as NIC, as well as active REIT participation in the sector and Wall Street analyst coverage, allows lenders and borrowers to better understand current conditions and may provide a more disciplined capital market.
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