The irrefutable fact is, the number of people who are 65+ years old as a percentage of US population is growing remarkably by day. By most statistics, about 10,000 Baby Boomers are turning 65 every single day. It is projected that by year 2035; those who are 65 years and older will account for about 20% of the total US population.
The growth of this group of population has implications in so many areas of our economy. For those of us who are intimately involved in the seniors’ space, the changing demographics have created opportunities and a set of challenges. As people in this group of population continue to age, thoughtful planning will be required to accommodate their housing needs. This so-called “graying of America” will lead to significant growth in the demand for seniors housing over the next few decades. In fact, if penetration rates remain static, the demand for seniors housing will more than double between now and 2035.
The availability of capital (debt and equity) to develop and operate the type of seniors housing which meets the needs of a 21st century senior will be key. The good news is the favorable changing demographics, the attractive industry returns coupled with confidence in the larger economy, have attracted many capital providers into the space. Despite some of the recent challenges in the sector (e.g. labor shortage, raising interest rates etc.), new capital continues to seek footholds in the industry, and lenders continue to fund construction projects.
Traditional sources of debt capital for seniors housing include: Fannie Mae, Freddie Mac, Federal Housing Administration (FHA), Commercial banks, Life insurance companies, Commercial finance companies and Tax-exempt bonds.
Several lenders (Banks, Debt Funds, Life Companies etc.) play at different levels of the capital stack (senior debt, mezzanine debt, tranche B etc.). On the other hand, with the inflation uptick fears, labor market tightening and supply concerns in some markets, lenders (especially institutional/regulated lenders) are asking a lot more questions and perform extensive due diligence. Conversely, we continue to see the rise of private (and less strictly) regulated lenders who can offer higher loan to cost ratios and occasionally non-recourse loans.
Fannie Mae, Freddie Mac and HUD continue to have a stronghold on permanent financing. 2018 lending volume caps implemented by the FHFA are set at $35 billion each for Fannie and Freddie slightly down from $36.5 billion in 2017. Exclusions apply for properties with an affordability component and/or Green Energy Efficiency standards. Projects meeting Green standards benefit from pricing reductions with Fannie Mae and Freddie Mac and a reduction on the annual MIP for HUD.
The GSEs (Fannie Mae and Freddie Mac) provide a wide range of nonrecourse permanent debt solutions. Their financing involves single-asset or multi-asset loans, structured credit facilities with fixed and floating interest rates and terms of 5–30 years. Fannie and Freddie play a lead role in providing permanent debt to Seniors Housing industry. The two entities are the largest holders of seniors housing mortgage debt in the country. In 2017 GSEs Seniors Housing Finance Volumes was $9.1 billion, which accounted for over 50% of all the seniors housing lending. It should be noted that there are several GSEs reform proposals out (including one from the White House). Nevertheless, without a clear reform timeline, for now Fannie Mae and Freddie Mac are still actively lending in seniors housing space.
FHA continues to be a consistent source of long-term, nonrecourse financing, in particular for nursing care properties, which on a stand-alone basis are not eligible for Fannie Mae or Freddie Mac financing. In Fiscal Year 2017, FHA made initial endorsements of $3.7 billion for health care and hospital properties.
Commercial Banks typically lend for new construction, acquisitions, lines of credit, corporate credit lines, and shorter-term property financing (i.e., bridge or mini perm loans). Historically, commercial banks have been the largest source of new construction financing to the seniors housing and care industry. Although commercial banks continue to fund construction and mini perm loans, lending and underwriting criteria are tightening in response to concerns of overbuilding and market performance. Banks have also become meticulous about due diligence and credit decisions. Further, some banks are more focused on relationship lending. Nonrecourse loans are a rarity (especially for larger, national banks) and spreads have been widening.
Some life insurance companies are competing strongly for high quality opportunities in primary and secondary markets, generally with top owners and operators on lower leveraged deals (65% LTV or less). Commercial mortgage-backed securities (CMBS) lenders have appeared to be out of the lending market for seniors housing and nursing care. Volatility with CMBS spreads combined with aggressive pricing from other seniors housing lenders has generally made CMBS noncompetitive.
Treasury rates have continued to increase. The yield on the 10-year bond has recently hovered around 3% which is still very low by historical standards. All in financing rates for HUD, Fannie Mae, and Freddie Mac loans have been trending up but remain quite attractive by historical standards.
Overall, lenders are much more cautious given concerns on supply, rising interest rates and the market cycle; however, capital is and will continue to be readily available, with Fannie, Freddie and HUD all expected to have a busy second half of the year. Equity for new developments and acquisitions remains readily available, with new entrants seeking to enter the market almost daily. One form of capital that may be a bit harder to obtain is construction financing especially for projects in tertiary markets and/or with owners/operators with limited experience as banks are tightening underwriting.
JLL is an AP business partner providing financial solutions to senior living operators. We thank them for contributing this valuable industry insight to our blog. To learn more about our senior living risk solutions, contact one of our experts.