Defining the New Normal

It’s a pattern that occurs regularly in commercial real estate. Activity levels—volume, development and pricing—heat up, establish new records and likely set the bar for future expectations as the euphoria of the market sets in.

Inevitably, from time to time, previously established levels need to be reset. Investment sales and development activity take a bit of a pause, as much to catch its breath as anything else. The market plateaus, or begins to define the new normal.

According to RCM’s Senior Housing Snapshot and industry statistics from Real Capital Analytics and the National Investment Council for Seniors Housing & Care, the sector is in the midst of doing just that. Despite a slow start to 2019, industry experts, and participants in our survey, continue to look favorably on the sector.

Based on our Snapshot, here is a look at how the new normal is being defined.

  • Activity levels: After peaking at $22.1 billion in 2015, activity levels have averaged approximately $15.5 billion over the last three years. Further, according to the survey, 66 percent of participants believe activity levels in 2019 will be on par with 2018 activity, which totaled $15.2 billion.
  • Investor profile: Over the last five years the sector has settled into a new normal in terms of those investing in senior housing properties. The most significant categories—private equity, REITs, institutions and foreign entities—all remain active, with some noticeable shifts. REITs, which were big on the scene a few years ago with activity levels reaching as much as $11.4 billion, have tapered off. Still accounting for nearly 25 percent of annual activity, REITs have been focused on absorbing what they bought previously—typically in substantial portfolio acquisitions. Private equity buyers have been a dominant buyer, largely because the yields they typically target align nicely with senior housing investments.
  • The property profile: An emphasis on hospitality-oriented services and amenities will continue to be prevalent in the newest generation of senior housing properties. Those that have these features will attract and retain residents; those that don’t, won’t. There also will be ongoing evolution as well, with developers and operators considering the more sophisticated needs and lifestyle choices of the next wave of seniors. To paraphrase what one expert said, “popcorn and happy hours won’t be enough for the next generation of residents”.
  • The presence of disruptions: The senior housing sector, like many others in commercial real estate, will continue to face challenges that impact operations and, ultimately, profitability. The most notable disruptions, according to the Snapshot include issues related to labor (and labor costs)—finding the most qualified people at the most competitive cost, and technology—having systems in place for use by a resident population with increasingly sophisticated technology needs and capabilities.

Not to be overlooked are the technological tools, systems and capabilities for the management team to more quickly and efficiently manage a host of property functions. According to the RCM Snapshot, because of the increasingly sophisticated nature of property operations, more than 61 percent of investors believe partnering with a strong operating firm is the most critical factor impacting property profitability.

The senior housing sector as we know it today is vastly different and rapidly changing from even just five years ago. Increasingly, investors are looking to the long-term as the market redefines its new normal. With significant capital remaining in the market and a senior population that is only increasing in size and sophistication, the new normal isn’t something to be feared.

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