While the recession caused by the COVID-19 pandemic has certainly made life tougher for active adult investors, there is still capital available. It has just become harder to get.
“The equity is pretty rational right now. It’s the TINA phenomenon — there is no alternative,” said Mark Marasciullo, chief investment officer with The United Group of Companies, which develops active adult properties. “There is, institutionally speaking, more and more equity piling up on the sidelines. The market’s pretty liquid, but that doesn’t mean it’s easy. There’s a lot of capital out there, but it’s fickle.”
The comments came during a roundtable session titled “Investment Outlook for the Active Adult/55+ Market” at France Media’s InterFace Seniors Housing Southeast conference. The event was held virtually on Nov. 5 and 6. Marasciullo hosted the session, which invited attendees to openly lead the discussion.
Marasciullo noted that continued high housing prices could keep move-ins high for active adult operators. Housing website Redfin reports that home-buying demand surpassed pre-pandemic levels by June.
“If you’re contemplating selling your house, you’re looking around and saying ‘there’s never going to be a better time.’ Our industry has caught a bit of a tailwind,” said Marasciullo. “I’m actually very bullish on commercial real estate right now. Active adult is going to be enjoy favored-nation status moving forward.”
But as many in the industry have noted, financing terms have gotten more stringent since the pandemic.
“We sit down with our clients and try to figure out financing with them,” said Bill Foster of architecture firm Lantz-Boggio. “The leverage isn’t as attractive as it used to be. The lenders are looking for 35 to 40 percent equity. That cuts into what the equity folks get for returns. That makes some deals that were on the fence less attractive.”
Part of the challenge is educating lenders and investors on the nature of active adult housing, which is restricted to seniors but offers minimal healthcare, according to John Daly, vice president of Russell Construction.
“People have trouble underwriting it. I don’t think some of our lenders understand the lack of level of care. In terms of the lenders and equity partners, it’s difficult because they don’t know what it is or isn’t. They’re suspicious of lease-up rates.”
Marasciullo noted that lease-up for an active adult project takes between 18 and 24 months on average, and it takes five to 10 contacts before a prospect becomes a resident. “But once you get them in, you’re going to keep those tenants for five to seven years until they need a higher level of acuity.”
“The decision to make the transition from living independently in a single-family home to a retirement community is a difficult one,” said Marasciullo. “But I’m very bullish on the choice-based space. It’s not going to feel like you’re surrendering to the gods of time.”
“It’s very relationship-based,” added Foster. “If your lender is used to lending on a different product type, you can move that relationship to a new product or try to find a new lender and build a relationship with them around a new product.
— Jeff Shaw
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