Senior Housing in an Aging World
Novel Dynamics in Senior Housing Investment: 2023 Market Analysis
The senior housing sector is undergoing significant changes in 2023, marked by divergent trends across different property types and quality levels. The most striking development is the 34 basis point decrease in Skilled Nursing cap rates, contrasting with increases in other segments. This divergence suggests investors are reassessing risk-return relationships across the senior housing spectrum.
Active Adult communities, despite remaining the most attractive investment opportunity, saw a 21 basis point increase in cap rates, with Class A properties experiencing a more pronounced 57 basis point rise. This upward pressure on cap rates likely reflects the impact of higher interest rates on premium assets, which typically trade at lower cap rates and are thus more sensitive to interest rate movements.
The market is showing an interesting compression in the spread between asset classes. The gap between Class A and Class C properties narrowed by 47 basis points year-over-year, with the most dramatic compression occurring in the Skilled Nursing sector, where the spread decreased by 101 basis points. This compression suggests investors are finding relative value in lower-quality assets, possibly due to their higher initial yields providing better debt service coverage in a higher interest rate environment.
Looking forward, investor sentiment has shifted significantly regarding cap rate expectations. Nearly 50% of respondents anticipate cap rate increases in 2023, almost double the 27% who held this view in the previous year. This shift appears primarily driven by higher borrowing costs and a more constrained lending environment.
Rent growth expectations remain robust, with over 75% of respondents projecting increases of 3% or more across most property types. Notably, the proportion of investors expecting rent growth above 7% in Assisted Living facilities nearly doubled to 28.1% in 2023, up from 15% in 2022. This optimistic rent growth outlook may help offset some of the pressure from higher capital costs.
Operational challenges persist, with staffing difficulties ranked as the sector's primary headwind. This ongoing challenge could impact operational performance and ultimately investment returns, particularly in higher-acuity settings requiring more specialized staff.
The data suggests a market in transition, with investors adapting their strategies to account for higher financing costs while remaining optimistic about fundamental demand drivers and rent growth potential. The bifurcation between property types and quality levels presents both challenges and opportunities for strategic investors in this evolving landscape.
