Construction lending jumped in the second quarter of 2021 in both senior housing and nursing care, according to the latest Lending Trends Report from the National Investment Center for Seniors Housing & Care (NIC).
In senior housing, banks closed on more than $395 million in the quarter while in nursing care they lent more than $118 million, increases of more than 46% and 70% from the previous quarter, respectively.
In senior housing, that’s the largest increase since Q4 of 2017.
Banks are once again (cautiously) opening their spigots, Beth Burnham Mace, NIC’s chief economist, told Senior Housing News.
“I think it’s because we’re seeing lenders becoming a little bit more comfortable in development activity,” said Mace.
She noted that banks were nervous during the pandemic as occupancy rates dropped throughout the second, third, and fourth quarters of 2020.
There was a “world of uncertainty” amid the height of the pandemic, Mace said — but in 2021, banks have been cautiously optimistic about improving market fundamentals.
Now, as many people in the U.S. become eligible for a Covid booster shot, Mace said occupancy is starting to improve and operators are opening their doors again.
“NIC MAP [Vision] data would suggest that we’re past the low point of occupancy rates,” said Mace. “Move-ins are starting to occur again as operators welcome new residents into their properties.”
Despite this, lenders need to do their homework. They need to look into competition and land entitlement, Mace told SHN. And, she believes that refinancing existing loans remains an “easier lift” than new construction lending.
The amount lent out in Q2 was the highest since Q1 2020 when banks loaned more than $700 million for senior housing construction for the second consecutive quarter.
Residents returning to communities may not be the only reason that lending was up in this quarter. Outside economic factors may have impacted the numbers and may continue to do so moving forward.
“We’re facing inflation numbers that we hadn’t faced in 30 years,” said Mace.
There are some delays that didn’t exist pre-pandemic that banks and investors are probably considering when they lend money or extend capital to developers, according to Mace.
“I think the return on investment has probably changed because of the supply chain issue that we’re seeing,” said Mace. “It’s hard to get the materials and the labor you need to finish a job on time.”
Many industries other than senior housing face inflation, labor shortages, and supply chain issues. Those outside factors impacting construction costs raise the question of whether recent price increases are transitory or permanent — which is an issue that the Federal Reserve is grappling with, in determining interest rate strategy.
Interest rates are still generally low, which could be motivating lending activity as borrowers seek to lock in favorable rates, Mace told SHN, noting that there is talk of the Federal Reserve moving toward higher rates sometime in 2022.
In reality, price increases may moderate but will not be entirely transitory, said Mace: “It’s probably somewhere in the middle.”
Other notes from the NIC Lending Trends Report:
— Nursing care delinquencies increased from 0.8% in Q1 of this year to 1.6% in Q2.
— For the second consecutive quarter, senior housing reported foreclosures after nine consecutive quarters without one. Foreclosures this quarter totaled nearly $62.7 million.
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