Senior Housing Cap Rates Fall, Active Adult Emerges as Top Investor Pick

Senior housing capitalization rates have compressed amid a recovery from the effects of the Covid-19 pandemic, but an increasing number of industry stakeholders believe that elevated operating expenses are here to stay.

That’s according to the recently released H1 2021 U.S. Seniors Housing & Care Investor Survey from CBRE. The findings also indicate that investors see the biggest opportunity in the active adult segment at the moment. That’s a change from the previous two reporting periods, in which respondents identified assisted living as the biggest opportunity for investment.

This was the 10th consecutive investor survey conducted by CBRE gauging the expectations of senior housing investors, developers, lenders and brokers. The results indicate that the sector is bouncing back from pandemic challenges, but there are differences in expectations across the continuum.

Across all care levels, cap rates compressed by an average of 13 basis points in this survey period, the survey findings show — that compares to a cap rate expansion of 31 bps during the prior survey period.

Active adult led the way with cap rates falling 32 basis points on average. Cap rates remained more elevated in higher-acuity settings.

Investors may be avoiding those higher-acuity settings due to greater associated risk, the report authors surmised. In this survey period, 31% of respondents chose active adult as the segment of greatest opportunity, up from 15% in the prior survey period. Assisted living had led the pack at 33% in the prior survey period, but fell to 28%.

Meanwhile, investors appear to be favoring higher-quality assets.

“The spread between core and non-core assets increased from 41 bps for the H2 2020 to 51 bps during this report (H1 2021), representing a flight to quality,” the report authors wrote. “This delta in the spread is the most significant for Independent Living and CCRC/LPC communities, at 77 bps and 66 bps, respectively.”

Generally, survey respondents became more bullish in their outlook on senior housing occupancy, with 90% expecting census to increase over the next 12 months. However, there was a concerning wrinkle in relation to operational expenses.

“Notably, while 85% of responses showed a trend towards a reduced timeline for elevated Covid-19 expenses, the number of respondents who forecast these expenses in perpetuity more than doubled, or increased from 7% to 15%, a trend that requires our attention in the near term,” the authors wrote.

Operators are contending with rising expenses in a variety of categories, including labor, insurance and sales/marketing, Senior Housing News recently reported.

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