Colorado-Real-Estate-Journal_410628

Page 12 — Health Care, Senior & Life Sciences Quarterly — July 2024 www.crej.com SENIOR LIVING – MARKET UPDATE W hile occupancy rates continue to increase, rate growth decelerated slightly in the first quar- ter. Increases in cap rates seem to be moderating. Cost over- runs and construction delays are hurting the best plans and inten- tions in Colorado. In Castle Rock, the high-profile Bridgewater Solterra project made front page news with UMB Bank taking over the $40 million default- ing and behind-schedule devel- opment project. Yet just a short distance away, 1005 S. Perry St. in south Castle Rock, a 40-bed skilled nursing Class A rehabilitation facil- ity sold for nearly $500 per square foot to a Florida buyer intent on doing sober living recovery. This has truly been a time wit- nessing a tale of two cities senior housing style, with winners win- ning and losers losing in Colorado. Low-income senior hous- ing projects are at the forefront also, such as the new St. Stephen Senior Apartments, which broke ground in November in Denver’s Central Park neighborhood. This new 50-unit affordable older adult housing community was made possible through a unique partner- ship between MGL and St. Stephen Missionary Baptist Church, which owns the land and will provide a 65-year, low-cost land lease. El Paso County Housing Authority in part- nership with Silver Key Services is building a very similar 50-unit project at 1625 S. Murray Blvd. in Colorado Springs. While wage growth for caregivers and skilled health care professionals has moderated, many facilities still struggle to find enough staffing, and a few facilities have closed due to staffing chal- lenges. Transaction updates Since January, Colorado’s senior housing activity has been a wide variety of transactions involving skilled nursing, distressed and per- forming assisted living, and some active adult transactions. n Sales. Summit Rehabilitation and Community Care at 500 Geneva St. in Aurora, an older skilled nurs- ing facility, sold for a strong price of $11 million from the Minshall Fam- ily, original developers of that facil- ity, to a New York group. Grand Villa in Grand Junction at 2680 N. 15th St. sold for only $5 million in an off-market transaction. The former Villagio Broomfield sold at auction for $9.5 million in April, although it had once been asking $18 million. The property at 1640 S. Quebec Way, which had once been a Brookdale 42-bed facility, sold in a distress sale for only $3 million. Yet, in Greeley, at 6810 10th St., a new Class A rehabili- tation skilled nursing facility sold for just over $700 per sf, a record price. n Listings. The former Metzler Memory Care is a high-quality proj- ect built in 2010. The 48-unit project at 864 Barranca Drive lost its license in early 2022 and is still on the mar- ket for less than $5 million, after having been listed in mid-2022 with an asking price of $11 million. It formerly sold in 2014 to a California real estate investment trust for $9.8 million with an implied 6.5% cap rate. s mjmartin@martinpropertyresearch.com Senior housing: Headwinds, opportunities ahead A s we move through 2024, there is undoubtedly an active investment market for senior housing com- munities. Fundamentally, the supportive long-term trend of an aging population and indica- tions of an inadequate supply of senior housing units set the foun- dation. A few of the key reasons are the slower pace of construc- tion, limited debt financing avail- able and inflationary pressures on construction materials and labor costs. Even if there is improvement in these areas, the typical seniors housing construction cycle is cur- rently 24-36 months, which would indicate any projects initiated in 2024 would not open until 2026- 2027. Robust demand, as evidenced by the sector achieving the highest number of occupied units in the first quarter, is expected to con- tinue, which should boost sector occupancy to pre-pandemic levels in late 2024 or early 2025. It should also be noted that the senior popu- lation will benefit in the near term from a meaningful wealth posi- tion given appreciation in housing prices (equity) and the robust per- formance of the stock market. In a lemons-to-lemonade sce- nario, the market is still dominated by opportunities featuring dis- tressed assets. We are seeing more stabilized Class B-plus/A assets being introduced to the investment market, but these often are still softly forced sales as institutional sellers divest to close out funds, owner-operators look to exit the industry, debt is reaching matu- rity, a refinance is not preferred or realistic, etc. While not always the case, the profile for many of the assets currently trans- acting is usually an older physical plant, smaller unit count, tertiary or saturated markets, debt maturing, debt defeasance and/or poor repu- tation. There is plenty of capital available for deployment, but the bid-ask gap continues to persist. However, we have seen movement in early 2024 indicating this gap has nar- rowed, and we project this trend to continue through the year. The velocity of the condensing of this gap will be influenced by varying factors, but the easing of inflation- ary pressures is anticipated to lead the Federal Reserve to reduce inter- est rates at some point in 2024, which should support the trend. Over the past 24 months, the rising interest rate environment has been a primary driver in the reduction in investment in seniors housing and other commercial real estate sec- tors due to the higher borrowing costs. While the ability to assume attractive government-sponsored enterprises debt has made some transactions more viable, this debt needs to carry an attractive fixed rate, with appropriate leverage, and without significant prepay- ment penalties in order to assist in a sale. In reality, we have not seen many situations in 2024 where all of these factors align to allow a beneficial assumption. While we remain bullish on the seniors’ housing sector, we are also tracking these potential head- winds. n Centers for Medicare & Med- icaid Services staffing mandate. Trickle-down effect on seniors housing staffing – meaning if wages increase for SNF staff, it will most likely cause other seniors housing wages to increase. Plus, general supply and demand for nurses would also cause wages to increase. n Health Over Wealth Act. Three federal agencies are launching a joint public inquiry into “corporate profiteering in health care.” There are also a few beneficial- to-the-sector items we are tracking. n Expanding Veterans Options for Long-Term Care Act. Legisla- tion to create a new pilot program that will allow eligible veterans to access assisted living communities for their long-term care. n Demand growth. Continues to exceed new supply; total seniors housing inventory is only expected to grow 4.1% by 2025, which is half of the projected demand growth (National Investment Center for Seniors Housing & Care). n Interest rates. Likely a reduction in the near future. Having closed well over 200 seniors housing transactions over the last three years (2021-2023) and a strong pipeline in 2024, the volume of our activity provides us a clearer picture of the overall market than most firms. Hav- ing reached the midpoint of 2024, there are several trends that we are noticing in our investment activity, including higher average transaction size; increased buyer interest leading to a larger average number of bids per offering; and, as mentioned previously, greater acceptance by sellers to come off of initial pricing expectations. s Market dominated by distress asset opportunities Michael J. Martin, CFA, MAI Martin Property Research Inc. Vince Viverito Senior vice president, Senior Living Investment Brokerage Over the past 24 months, the rising interest rate environment has been a primary driver in the reduction in investment in seniors housing and other commercial real estate sectors due to the higher borrowing costs. Bridgewater Solterra