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‘It’s Painful’: Senior Living M&A, Financing Market Must Absorb Another Interest Rate Hike

The Federal Reserve’s move to raise interest rates once again, despite two domestic bank collapses and international financial turmoil, could further dampen lending activity in the senior living industry.

In a news conference on Wednesday afternoon, Federal Reserve Chairman Jerome Powell announced an anticipated 0.25% increase in interest rates, with Powell noting recent developments in the financial sector would likely result in tighter credit conditions for households and businesses, while also weighing on economic activity, hiring and inflation.

“Inflation remains too high and the labor market continues to be very tight,” Powell said during the press conference. “… If we need to raise rates higher, we will. I think for now … we will see the likelihood of credit tightening.”

In reaction to the Fed’s decision, National Investment Center for Seniors Housing and Care (NIC) Chief Economist Beth Mace said the increase would be “tough” on the industry, with the latest hike marking the ninth straight by the Fed since March 2022.

“It’s tough after so many interest rate increases that we’ve seen since last March,” Mace told Senior Housing News. “A higher cost of capital is painful.”

Higher interest rates and tightening credit lines make it harder for operators to refinance current deals or seek capital for new projects.

Wednesday’s increase showed the Fed remaining “diligent” in its inflation fight.

One result of the Silicon Valley Bank (SVB) and Signature Bank failures was the Fed changing the wording of its previous guidance around “ongoing” interest rate hikes, with Powell now issuing guidance saying that “some additional policy firming may be appropriate,” in an effort to “reflect the uncertainty” about the path ahead.

Powell said the Fed “did consider a pause” to its steady march on raising rates, but proceeded onward due to “a strong consensus” for another hike during the most recent Federal Open Market Committee (FOMC) meeting based on intermediate economic projections.

The projections include one additional, 0.25% hike in 2023, but future hikes would be market dependent. Unemployment projections for the end of the year are down to 4.5%, down 0.01% from the December FOMC meeting. The U.S. economy is projected to grow by 0.4% in 2023, a decrease of 0.5% from previous predictions.

“We’ll be focused as always on the incoming data and the evolving outlook and in particular on our assessment of the actual unexpected effects of credit tightening,” Powell said on Wednesday.

The impact since last year, Mace said, has been a significant slowdown in permanent debt, bridge financing and construction financing.

“It causes expenses to go up for operators, and it has an impact on purchasing power of consumers,” Mace said. “[The Fed] is between a rock and a hard place so I think the Fed decided that it really has to continue on its fight against inflation.”

The senior living industry has faced persistent headwinds when it comes to rising interest rates, inflation and expenses that have eaten into operators’ bottom lines. Newer, higher-quality and lower acuity properties are becoming more attractive for some investors as they seek “safe havens” in the current environment.

But even still, this flight to quality comes as the senior living mergers and acquisitions (M&A) market remains flat as buyers pass on opportunities due to the economic environment.

While uncertainty plaguing the financial sector has bled over into many industries, including senior living, one thing is certain: Pain remains and the uncertainty is slowing down senior living transactions.

“Nobody likes uncertainty,” Mace said. “There’s a lot of it in the world right now which is causing that slowdown in transactions that we’re seeing. It’s hard to tell the future when your crystal ball gets dirt on it.”

The post ‘It’s Painful’: Senior Living M&A, Financing Market Must Absorb Another Interest Rate Hike appeared first on Senior Housing News.

Source: For the full article please visit Senior Housing News

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