As Cap Rates Compress, Senior Housing Remains a Seller's Market



May 12, 2015, Jason Oliva, Senior Housing News - Further cap rate compression appears to be in store for 2015, which bodes well for sellers of seniors housing properties. And despite higher pricing on assets, investor interest is still holding strong. Cap rates decreased modestly across nearly all property types in the second half of 2014, according to the most recent 2014 CBRE Senior Housing Investor Survey released Tuesday.

While Class A/B Assisted Living properties saw the greatest decrease (0.60%) compared to the first half of 2014, Class C Nursing properties were the only asset class to buck the trend, seeing a cap rate bump of 0.27% during the second half of the year.

Overall, based on the cap rate activity CBRE has seen thus far, the senior housing sector continues to be a seller's market, says Zach Bowyer, managing director with CBRE's Valuation and Advisory Services business and practice leader for the company's Healthcare & Seniors Housing Group.

"There is tons of capital coming from every direction that has to be deployed, not only in the senior housing space, but all other asset classes as well," Bowyer tells SHN. "That abundance of capital looking to be placed is also benefiting any sellers right now."

In compiling the senior housing cap rate data, CBRE surveyed transactional-only investors in the sector, with the professional mix of respondents primarily represented by real estate investment trusts (REITs) and institutional investors, at 26% and 25%, respectively.

Others surveyed included specialized brokers (20%), private capital health care investors (13%), and health care real estate developers (9%), among other respondents (7%). Of the total 280 potential participants the survey was sent to, the response rate was 31%.

When asked how participants were looking to change their exposure to senior housing, 61% said they plan to increase their exposure to the sector, while 24% intend to decrease and 15% expect little change.

The responses are substantially different from participants' views in the first half of 2014, when 100% of respondents said they planned to increase their exposure in senior housing. So why the change of heart after half of a year?

"I think it's pricing," says Bowyer. "People are starting to get concerned of the construction taking place. It also looks like an increase in interest rates is coming closer to fruition. Many might see this as an opportunity to exit with a really good return."

Rising interest rates was identified as the top concern for market participants who responded to CBRE's survey, at 33%. This was followed by increased construction activity, at 21%, while greater competition for acquisitions and capital placement accounted for 17%.

But even if potential buyers have grown more cautious in the last year, interest remains strong. And many sellers are not truly "exiting" the sector.

"A majority of folks we're speaking with who are sellers are turning right back around as buyers and investors looking to put money back into the space," Bowyer says.

A number of CBRE clients, who may have bought a portfolio with the initial strategy of holding onto it for 5-10 years are receiving unsolicited offers to sell from interested buyers—offers that exceed their return expectations, Bowyer notes.

"We're seeing a lot of that happening right now," he says. "Pretty much everyone is looking to reinvest that money back into the space."

CBRE expects cap rates will continue to compress over the next 12 months, a time during which Bowyer suggests it won't be unlikely for the industry to see some "landmark deals" in terms of cap rates and price per units announced over the next few months.

"It's a good tell of the times; where senior housing is becoming its own asset class and attracting a great deal of interest from investors who two or three years ago would not have been interested in the space," Bowyer said.