By Beth Mattson-Teig for National Real Estate Investor
The development boom underway in the seniors housing space has not put a damper on confidence. Exclusive survey results from the fourth annual NREI / NIC Seniors Housing Market Study indicate a more positive outlook across the board on questions related to improving fundamentals, access to capital and transaction pipeline.
The steady stream of new supply being added to the market has been a hot topic of conversation across the industry, and a majority of respondents (59 percent) expect to see a further increase in construction starts over the next 12 months. That is a notable increase over the 45 percent who held that view a year ago. Overall, 26 percent of respondents believe that construction starts will remain the same, while 15 percent predict a decline.
Current construction as a share of existing inventory for seniors housing preliminary maintained a robust pace of 5.8 percent in the second quarter, which is 0.8 percent below its recent high of 6.6 percent in the third quarter of 2016. Despite the new supply already added, and more on the way, 80 percent of respondents said they do not think that new construction will lead to overbuilding.
Another factor driving development is that the available product is outdated compared to what today’s seniors want in terms of the properties, services and amenities.
Demand Mops Up New Supply
Despite the new supply coming online, respondents remain confident in improving fundamentals. A majority of respondents (78 percent) anticipate rents will rise over the next 12 months, which ticked slightly higher compared to the 73 percent who predicted that rents would rise in last year’s survey. An average increase of 84.2 basis points is expected.
NIC reported that average asking rents for seniors housing grew at a rate of 3.4 percent as of second quarter, which represents a 20 basis point increase from the prior year.
Respondents also are more bullish that occupancies will rise over the next year. Overall, 65 percent said they felt that way this year vs. 56 percent who held that view in 2016. Among those who do anticipate an increase, the average rise expected is just 10.9 basis points.
At a glance, that confidence appears to run contrary to NIC data that shows a slight decline in occupancy during the second quarter. The overall occupancy rate for seniors housing properties dropped 90 basis points year-over-year to 88.8 percent, a drop that is likely due to new supply and properties still in lease-up phases.
When asked to rate the strength of market fundamentals by region, the South/Southeast/Southwest rated the highest. On a scale of one to 10 with 10 being the highest, 46 percent rated that region as an eight or higher.
When comparing with other property types, respondents continue to rate seniors housing as a highly attractive property type. Its scores topped that of the five major property types on a scale of one to 10.
Buyers Continue to Pursue Assets
The big REITs have been more subdued in their acquisition activity this year, which analysts attribute in part to political uncertainty surrounding healthcare reform and caution regarding new supply. However, nearly half of survey respondents (47 percent) said that they plan to buy seniors housing property over the next 12 months compared to 38 percent who said the same in the 2016 survey. Overall, 42 percent plan to hold property and 11 percent intend to sell assets.
Most respondents (48 percent) anticipate that sales volume will maintain a steady pace over the next year. However, a bigger percentage of respondents expect sales transactions to increase over the next year as compared to a year ago. In fact, 39 percent said they believe sales will rise as compared to 26 percent who held that view in the 2016 survey. Those who predict a decline in sales are in the minority at 13 percent.
Read the full report at National Real Estate Investor.