The real estate bust may have a silver lining. At least for the senior housing market in 2011, that is. According to the National Investment Center for the Seniors Housing and Care Industry (NIC), the senior housing market had $25 billion worth of transactions in 2011, with merger and acquisition activity reaching its highest level since the sector’s peak years of 2006 and 2007. The transactions were primarily conducted by real estate investment trusts (REITS), which were responsible for almost $20 billion of those deals.
While 2011 was the year of “mega-deals,” 2012 is anticipated to be the year of smaller, regional communities acquisitions, prognosticated by industry experts.
Rob Reis, San Francisco-based senior associate for senior living brokerage firm, Marcus & Millichap, says that buyers are seeking specific qualities in today’s senior housing market.
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Reis comments, “This is a great opportunity for those buyers waiting with cash ready to go, or who have a relationship with a REIT or access to FNMA financing. They can look at the property and see that occupancy is OK, but can be improved, and that margins can be increased to 35% or more.”
The past few years have been focused on dealings with distressed properties. But in 2011 distressed properties are not having too big an impact on the market, creating opportunities for higher quality acquisitions with sellers not desperate to make a sale.
“In the several years leading up to 2011 there were few high-quality assets coming to market,” Reis says. “That changed in 2011. Although there were some broken development projects, there were quite a few stabilized, well-maintained properties that traded hands. These communities had cap rates in the range of 7.5-8.5%.”
Most of the distressed property sales have been concentrated among several large portfolios and not dispersed. This in conjunction with banks reluctance to sell assets has created for more stability in the senior housing market.
While the housing market still doesn’t lend itself to easy transactions, volume projections are steady—and many of these transactions are smaller housing deals.
“Smaller deals have become more attractive,” Ben Firestone, a senior associate with Marcus & Millichap, says. “The seller of a small company is now in a better position. Now there’s an opportunity for regional and smaller players to capitalize.”
Institutional investors, including private equity firms and REITS, have been successful in recapitalizing large opportunities in the market, creating an awareness of opportunity. According to Firestone, the smaller deals are creating a new market. “”Now, given the institutions’ continued need to place capital in the marketplace, they are willing to seek out relatively smaller deals that would have been less attractive relative to an available mega-deal.”
And why is the senior housing market seeing improvement? Simple. While senior housing volumes are not expected to return to their previous boom (before the market turned), sales are expected to remain consistent because there is a demand for senior housing. The U.S. population has a record number of senior citizens as baby boomers are needing retirement and assisted living options. So the senior housing market may need strategic business insight to facilitate deals, but the demand is there.
“It might be taking an independent living community and licensing some units for assisted living, then taking assisted living and converting a portion of those units to memory care. I see that in all markets,” Reis says.
Today it’s all about being smart, respectful of quality care and understanding both the demand of senior housing in relation to a depressed real estate marketplace.