Much like a roller coaster, the real estate business is cyclical. Data shows we’ve been on a steady incline since 2011 and now the market conditions are changing. We’ve been in the business long enough to know that we’ve reached the peak of this cycle. The inevitable is coming and the market will plateau. This inescapable shift is going to have a huge impact on our industry. In fact, we’re seeing the effects of this already.
We asked some experts in the industry and here are some of the biggest indicators for what’s coming:
Interest Rates are on the Rise
That’s right, rates went up earlier this year and they are expected to rise again. As interest rates go up, investments come to a screeching halt—the cost of debt and equity capital increases therefore the price buyers are willing to pay decreases.
"There is a generally a parallel relationship between Interest Rates and Cap Rates, in that the cheaper money is, the more a buyer can pay for a property,” says TJ Griffith, Partner and Executive Vice President at Oracle Healthcare Advisors. “But with the recent changes, we're seeing a shift in the market. It's going to be harder for buyers to get in the game. Sure, there will still be a lot of interest for those trophy assets, but this is really going to impact the market."
When you factor in the current spread between Cap Rates and Interest Rates, the outlook becomes even more dismal and there just isn’t room for anymore compression. Put simply, this will change how much buyers are willing and able to pay.
New Development Across the Nation
You’ve seen the signs popping up all over town, in just about every market new development is on the rise. Need proof? Occupancy for assisted living is currently at 87.6%, it’s lowest level since early 2010. This is concerning considering the amount of units currently under construction.
We asked Mark Boultman, Senior Director of Capital One to share some insight into the current new development climate. “From what I’ve seen, there is still demand in construction borrowing—with rates at 3.5% or less all-in, the climate remains attractive. As long as banks are lending in the space, developers will continue to build despite what appears to be overbuilding in some markets.”
He goes on to say, “As always the best operators in terms of levels of care and service will continue to thrive. They will be the ones to come out on top, even in markets where there is heavy competition.”
You have to ask yourself—if rates are competitive, would you choose the charming building that has history or the brand-new facility that just opened up down the block? If you’re being honest, the answer is a no-brainer. Consumers—especially the adult children who are the decision makers—are selecting the newer buildings with nicer amenities. Even the family-owned and operated older facilities with the best reputations will be impacted by new development.
What’s the Impact
The writing's on the wall: if you’re an independent owner with less than three assets and you’re looking to get out of the seniors housing business then the time is now. One thing is for sure, it takes three to nine months to sell a building when the conditions are right. Factor in all of the issues above and the deals become even more complex.
If you’re thinking about selling, don’t wait for the next cycle, capitalize on your investment today.
Know Your Value
If you’re curious to see how your facility ranks against our proprietary benchmarking data or you’re ready to see a market valuation, get in touch with us today! Armed with data you can make smarter business decisions that impact your bottom line.