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Buyers Return to Market

Investment sales activity has picked up for seniors housing properties.

The pace of investment sales in 2021 is below pre-pandemic levels. According to Real Capital Analytics, seniors housing single asset, portfolio and entity level deals totaled $5.8 billion through May. Although that is on par with 2018 sales for the same period, it is about 21 percent behind the 2019 pace.

Respondents are more confident that transaction will accelerate over the next 12 months. A majority 59 percent think transaction volume will increase compared to 29 percent who held that view in the 2020 survey.

When asked about the change in time to close transactions, 57 percent expect it to remain the same over the next 12 months, while 29 percent said it could be faster and 15 percent anticipate slower closings.

“We know that the baby boomers are coming. The vaccine is in place; construction is down; and replacement costs are way up, and pent up demand is there,” says Mark Myers, managing director, investment sales at Walker & Dunlop. “At the same time, you have very inexpensive capital, and many buyers and sellers are still there waiting on the sidelines. As buyers reenter the space, demand will increase, pricing will increase, and this bodes well for very positive transaction activity over the next few quarters.”

In fact, investment sales have picked up significantly in the past two months with REITs leading that charge. Ventas announced in June that it was acquiring New Senior Invest Group in a deal valued at $2.3 billion. Welltower Inc. is acquiring a portfolio of 86 independent living (IL) and assisted living (AL) properties owned by Holiday Retirement for $1.58 billion. Another sign of the increasingly positive investment climate is that Bridge Investment Group, which has a seniors housing portfolio valued at roughly $4.5 billion, filed for an IPO in June.

Healthcare REITs are becoming more active on the external growth front both in terms of acquisitions and development. In addition to the recent wave of announcements, management teams are communicating that there is more to come, notes Hartwich. There are many factors that are driving the increase in REIT transaction activity. Part of the answer is that there are more willing sellers than there were in 2020. “Perhaps the biggest driver is the cost-of-capital advantage that many health care REITs enjoy,” he says. Several health care REITs have the ability to buy assets in the private market for 100 cents on the dollar with capital that is priced more richly, in some cases in excess of 125 cents on the dollar, he adds.

Outside of the REITs, sales activity has been slower to return. “What is holding things up is that COVID did have a dampening effect on occupancy,” says Myers. Some operators closed their doors for 12 months or more to protect their most vulnerable residents. Falling occupancy levels squeezes profit margins, which in turn impacts underwriting and pricing. Owners are more likely to hold assets that don’t have stabilized occupancies rather than sell at a discount.

“People aren’t going to wait for a full recovery to start going after buying opportunities. They’ve already started to do that,” says Myers. Pent-up demand following the Great Financial Crisis was like a switch turning on that saw a surge in commercial real estate in 2010 and beyond. “I think you’re going to see a similar thing happen here once properties regain occupancies, probably starting at the end of third quarter and beginning of fourth quarter,” he says.