With large minimum wage hikes coming in California and New York, should investors be concerned about surging labor costs? What about expanding operator networks? To get an insider’s perspective, Hunt Mortgage Group Director, James Neil, offers his 30-years of banking experience. Here are the top 5 senior housing market trends for 2016.
- 1. THE BOOM IN BABY BOOMERS
The senior housing market was the only sector of commercial real estate to experience positive rent growth during the recession. This is due in large part by Baby Boomers’ demand as the population of Americans aged 65 and over is expected to double by 2050. Baby Boomers are entering the senior housing market in greater numbers due to advances in medicine and healthy lifestyle living improvements. But while this has been keeping the market thriving for years, is there a danger of overestimating the increasing demand?
“We’re keeping an eye on those subsectors that are potentially getting oversupplied in certain markets, but overall, senior housing has a foreseeable future,” explained Neil.
These days, there is market demand for assisted living and memory care, which are mostly privately paid. The demand for nursing beds is also anticipated to increase by 50% from 2020 to 2030.
- 2. FINDING THE RIGHT FINANCIALS AND FUNDING
The biggest lender, Fannie Mae, provides financing options for senior properties, independent living, assisted living, Alzheimer’s/dementia care, or any combination of these categories with their Multifamily Mortgage Business. This financing program is offered to “existing, stabilized, purpose-built” senior housing properties with experienced sponsors and operators by equally experienced lenders Fannie Mae approves.
In 2015 alone, Fannie Mae lenders lent $2.7B in financing, an 80% increase from $1.5B in 2014. The US Department of Housing and Urban Development (HUD) was also a big player, with $420M going to Section 202 Supportive Housing for the Elderly program in 2015. Due to a decrease in refinancing prior HUD loans to lower rates, HUD’s Senior Living “LEAN” program experienced a sharp decline in volume in fiscal year 2015.
Regardless, Neil states, the program is still funding new construction, acquisitions and refinancing. The outcome of a HUD LEAN financing is phenomenal, and is a much improved process than it was five or 10 years ago”, says Neil. Regardless of the lender, Neil is particularly interested in looking at a transaction with good owners and operators, whether it is a refinance, acquisition or a new build in the right market.
- 3. THE COST OF LABOR
The recent minimum wage hikes in California and New York do pose a challenge for nursing homes; however, the minimum wage hikes will be a large increase to the industry as a whole, since the bulk of the labor cost in healthcare is already above the minimum wage. “Eighteen months ago, the oil rich regions were very hard to staff and expensive,” he said. “This region survived, and look at them now.”
California has an assisted living medical care facility that has surprisingly modest labor expenses and one of the highest operating margins Neil has seen. The state is densely populated and can sustain the increase that will affect a minor portion of its labor pool.
- 4. OPERATORS: IS BIGGER BETTER?
Management and personnel, not size, are the biggest issues and factors to consider in a property’s success. “The big boys don’t have their eye on the ball as much as the mom- and-pops, while others would say that the smaller operators don’t have the systems or technology to provide the best care.” Neither theory is correct across the board. A midsized to larger operation can produce better efficiencies and thus better margins if run correctly.
- 5. TECH ADVANCES
Nursing homes are increasingly relying on wireless networks to improve the care residents receive. Healthcare providers are implementing electronic medical records in facilities, which the staff can access with smart devices. This growing technological integration isn’t affecting the size and cost of developments.
As Neil explains its more of a staffing ratio and market drive. By improving the facilities’ ability to track residents’ health and respond to emergencies without boosting costs, advances in technology appear to be a growing success for senior living developers.