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NIC Investment Guide
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Gain mission critical insight into the seniors housing and care industry. This must-have resource
is essential for anyone involved in, or looking to enter, the industry.
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Frequently Asked Questions
Capital Market Trends for the Seniors Housing & Care Property Market:
What are the trends for property development costs?
What are the trends for lending and loan performance?
What are the trends for property sales transactions and cap rates?
What are the trends for property investment returns?
What are the trends for property development costs?
Property development costs for senior housing tend to follow similar trends of other major real estate classes. Seniors
housing development costs are most similar to multifamily residential and 3-star hotels, ranging from $80 to $245 per-square
foot, depending on location.
There is a wide range in construction cost between different types of seniors housing and care properties based on the target
market, the amount of common area space, quality of the build out, and different building code requirements.
In general, development costs have fallen since 2007 because of an overall decrease in demand caused by the recession, falling
commodity prices, and the difficulty in securing new construction loans. The Commerce Department’s new homebuilding cost
index has decreased for the third year in a row, falling 3.6% in 2009. Furthermore, steel and lumber commodity prices have
both risen in 2010, but are still well below their peaks of 2008 and 2005, respectively. Despite the recent pressure of
rising commodity prices, construction cost indexes have remained low as many subcontractors have lowered bids to win new
business.
What are the trends for lending and loan performance?
Consistent with the contraction in the credit markets, underwriting standards in general have become more conservative for
senior housing properties. GSE underwriting standards are still competitive based on LTV requirements of up to 75% to 80%
and minimum debt service coverage ratios from 1.3 to 1.4 times on stabilized projects. However, many loans are now underwritten
to their value constraint, a trend not seen in the recent past. Rates on 10-year maturities for these loans range from 6.25%-6.5%.
HUD financing has recently increased due to the FHA LEAN Program and continues to be a long-term, nonrecourse low-cost fixed
rate financing option. However, lower quality assets or weaker markets have seen a reduction in the maximum leverage allowed.
For many in the senior housing market, HUD financing was the only viable option for construction loans in 2009.
Commercial bank financing has historically been the largest source of construction financing in this industry. However,
as of mid 2010, the CMBS market remains effectively shut and large scale syndicated financing remains difficult except for
credit lines extended to solid credit investors.
Tax-Exempt financing (bonds) have been constrained by fewer banks providing letters of credit, a doubling or tripling of
LOC fees, and a lack of bond insurance. The cost of tax-exempt debt has increased considerably over its pre-credit crisis
level, and refinancing existing debt on stabilized properties has been easier than obtaining financing for new construction.
Loan performance reached a cyclical high in 2Q08, with only 0.2% of loans classified as non-performing.
This rate has climbed to approximately 2% as of June 30, 2010.
What are the trends for property sales transactions and cap rates?
Property sales transactions have significantly declined since the 2007 peak as a result of the financial crisis. Stricter
underwriting standards and a decline in investor confidence have led to difficulty in financing transactions other than
those for stabilized and performing assets. As a result, many healthcare REITs have built up a cash reserve, which they
have used recently towards investment opportunities and which could be used for additional investment opportunities in the
future.
Of the three seniors housing property types, assisted living and independent living properties generally have lower
cap rates due to an increased amount of revenue related to real estate as opposed to services. Nursing care properties generally
have higher cap rates at approximately 13% because a significant amount of their revenue comes from government reimbursement
from Medicare and Medicaid. This income stream is viewed as slower growing and more at risk to budgetary pressures compared
with private pay revenue.
What are the trends for property investment returns?
Seniors housing and care properties is the only real estate asset class that managed to increase rent growth during 2009.
Senior housing has experienced a unique resiliency in the commercial real estate market as a result of its dual components
of real estate and need-driven services. The NCREIF Property Index (NPI) had a cumulative total investment return of 57%
from 2Q03 through 2Q10, while the senior housing properties within NCREIF’s database (which are not included in the NPI)
experienced a cumulative total investment return of 176% during the same time period. In comparison, apartments in the NPI
cumulatively returned 46% between 2Q03 and 2Q10.
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