The seniors housing market has had its fair share of well-documented struggles, including plunging occupancies during COVID-19 and continuing labor challenges. Like the rest of the commercial real estate market, the sector is now confronting higher interest rates and recession.
Despite those headwinds, investor demand for seniors housing assets remains strong, says Dawn Davis, an advisor specializing in seniors housing and skilled nursing with NAI Greywolf in Milwaukee.
But sellers are only now grudgingly coming to terms with the fact that, because capital has become more expensive, the price buyers can afford to pay today is less than it was six months ago, adds Wally Sauthoff, managing broker at NAI Greywolf. That is putting upward pressure on cap rates.
“Sellers are beginning to accept reality,” he states. “We’re having to do some additional coaching to help them understand where the market is today, and we’re seeing people want to make a deal now rather than wait for things to get worse next year.”
Even in less volatile economic and interest rate environments, brokers usually perform much more of an advisory role in the seniors housing sales process than is required in transactions involving shopping centers, warehouses or other properties, Sauthoff says. The consultive function is particularly critical when working with small investors or mom-and-pop seniors housing owners who are looking to maximize the value of their assets.
Such investors tend to be less financially sophisticated compared to large institutional investors, he notes. For example, many small operators are unaware of what the ratios of wages, food and other expense line items should be to total revenue, nor do they track them, he explains. Consequently, NAI Greywolf helps owners fix their financials and improve cashflow so that they have a better story to tell a potential buyer.
Smaller investors typically lack the marketing sophistication of larger owners, too, Sauthoff adds. They often own older properties that need updating so that they can attract more private-pay residents to boost net operating income (NOI), points out Davis.
Preparing for a sale also includes reviewing contracts with vendors and service providers to find ways to cut expenses. Reducing or eliminating the need for staffing agencies presents arguably the biggest opportunity, she stresses. Given the difficulty finding labor, seniors housing operators have had little choice but to turn to the agencies to fill in worker gaps. But that approach comes with a high cost, Davis says, so it’s better to pursue a permanent staffing solution.
The good news for operators is that labor problems appear to be getting better, according to findings of the latest survey of seniors housing and skilled nursing operators by the National Investment Center for Seniors Housing & Care, an industry data and analytics provider. Just under 10 percent of respondents reported severe staffing shortages, which was down from 25 percent in March, the survey reports. Additionally, the number of operators reporting only minimal staffing problems, which represents an improving labor situation, increased to 19 percent from 6 percent in March.
“Investing in your staff goes well beyond paying them higher wages; it’s really about building a culture where the workers — and, for that matter, the residents — want to stay,” she says. “If you can retain your employees, you’re decreasing the amount of money you’re paying out for expensive temporary help.”
In some cases, buyers of older properties that are nearing obsolescence are repositioning the assets into behavioral health clinics, Davis reports. Many times, these are assisted living properties that do not offer private units with private bathrooms. Yet where it makes sense, investors are maintaining seniors housing uses, she adds. In April, Davis represented the seller of a 37-unit skilled nursing facility in Brodhead, Wisconsin, that closed down in the summer of 2021. The new owner intends to turn it into an assisted living operation.
“There is always going to be a need for the smaller mom-and-pop facilities because some residents prefer a smaller family-living atmosphere,” Davis says. “So, transactions are taking place despite the higher interest rates.”
Would-be sellers of larger seniors housing facilities are also looking for ways to maximize value. But those clients frequently have amenity-rich and updated properties, so Davis primarily focuses on putting the financials in order to boost NOI.
Even so, the effort to increase revenue and cut expenses takes time. In one case, Davis says, it took two years to position a money-losing skilled nursing facility for a sale that ultimately netted a nice profit.
While owners of large facilities typically have the resources to tackle such endeavors in a timely manner, smaller seniors housing investors can be limited in the number of changes they can make, she says. Consequently, managing expectations is part of the job, as well.
“Once people come to me, they’re ready to sell,” Davis explains. “I’ll evaluate their financials and give them my feedback on where they are now and then give them ideas on how they can improve their financials and work toward a stronger price.”
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