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CRE Finance World, Winter 2013

Certainty in the Face of Change: Why the Shifting Seniors Housing and Healthcare Market Will Remain a Strong Investment “There’s no question that Either way, it’s expected that REITs. Because of the tremendous consolidation in the industry healthcare real estate is the growing demands will lead and investor money pouring into the public REITs — especially growing — today three of to increasing development in on the seniors housing side — it’s expected that more and more the 10 largest REITs are the seniors housing sector. healthcare properties will come under REIT ownership in the coming focused on healthcare. According to NIC, occupancy years. While these consolidations are often driven by benefits such Of those sectors related rates have been steadily as better economies of scale and financing options, many may to the industry, seniors increasing since 2009, with also be driven by a considerable need for capital for much-needed housing in particular the seniors’ population still renovations and improvements. For example, it is well-documented is booming.” far from its expected peak. that facilities such as SNFs need substantial updates in order to To date, new construction serve the seniors population in the coming years while meeting the in seniors housing has standards set by the new healthcare law. shown some growth, but has remained somewhat tempered due to difficulties that developers face in securing construction financing. Strong Investment are Here to Stay Instead of building brand-new developments from the ground up, the While not completely recession-proof, the healthcare and seniors focus for construction in the industry appears to be more on renovating housing segments have shown themselves to be recession- existing communities to shift or expand the types of services offered. resistant. While retail and commercial office spaces have struggled For example, several firms in the past years have been working on somewhat due to economic challenges and shifts in technology licensing properties that were previously independent living only, and communication, healthcare real estate has pushed forward. expanding to offer assisted living and memory care services. For According to the Healthcare Financial Management Association other properties, serving today’s seniors population may mean (HFMA), Healthcare REITs have outpaced capital raised by real remodeling apartments to provide retirees with the more spacious estate investment trusts in other property classifications, such as floor plans and layouts that they have become accustomed to having. industrial, office and apartment according to the data. Through July 31, 2012, Healthcare REITs produced current average dividend Healthcare and Seniors Housing in the Short-Term yields of 4.6% versus 3.5% for industrial investments, and 3.3% While in the long-term there may be significant shifts in seniors for office investments. In 2012 so far, Healthcare REITs have housing and care, in the short-term the trends are much as they have raised 20% of all real estate investment trust capital even though been in previous years. It’s likely that financing and development they represent only 13% of the total market value. All of which has will be focused on markets traditionally known for seniors housing: taken place without the population and demand boom expected in Texas, Phoenix, the Carolinas, Atlanta and South Florida. In addition the coming years. to those markets, it’s also expected that those states with favorable income tax rates for retirees will see increased demand from private With such a strong outlook on fundamentals, it’s expected that pay customers, whose retirement income is often significantly these sectors will continue to produce strong returns for investors impacted by such laws. for years to come, despite the uncertainties that may surround the industry. Regardless of cost-cutting and regulatory changes, there We could also see more consolidation deals like Health Care is simply too great a need for this sector to grow for the demand REIT’s acquisition of Sunrise Senior Living earlier this year, as not to be met. an increasing percentage of healthcare properties are owned by “Seismic ratings will likely affect rents and cap rates before the end of the 10-year projected holding period, used to make many commercial property purchase and loan decisions.” A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 47


CRE Finance World, Winter 2013
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