TAKES STEPS TO A RECOVERY
THE ASSET CLASS WAS PUMMELED BY THE PANDEMIC BUT THERE
ARE SUBTLE SIGNS THAT POSITIVE MOMENTUM IS UNDERWAY.
BY ERIKA MORPHY
This October Taurus Investment Holdings and Northbridge Cos. formed a partnership acquiring six class-A senior hous- ing properties for $200 million from the senior housingREIT Welltower. The 507-unit portfolio marked TaurusInvestment Holdings’ first investment within this sector of thecommercial real estate universe.
For various—and obvious—reasons, a plunge into the seniorhousing market right now may seem to be a contrarian play. ButTaurus is undaunted.
“We believe that the demand for high quality senior housingwill remain strong in the coming years with the upcoming demographic shift as the 75-plus population continues to accelerate,”CEO Peter A. Merrigan said at the time of the deal.
Merrigan has good reasons to enter the space right now. Whatbetter time, after all, to buy when pricing is low.
Also, future supply and demand fundamentals are aligningfavorably.
Before COVID- 19, construction starts had started to slow due
to oversupply, increasing land costs, increasing operating and
construction costs, and some widening in credit spreads, accord-
ing to Kevin Maddron, CFO of Foundry Commercial, all of which
is changing as the pandemic rages on. “A slowdown in new con-
struction costs coupled with an improving labor market and an
increasing older population will create significant investment
opportunities in the future,” he says.
At the same time there are subtle signs that the pandemic’s
negative effects are starting to wear off.
Still, there is a reason the Taurus-Northbridge deal is a rarity:the current situation on the ground is a sobering one. As Taurusentered what was a solid asset class pre-pandemic, dealmakinghad dropped significantly and fundamentals were soft. In general, Maddron says, “it is challenging to gaze into a crystal ball andknow with any degree of certainty what the near-term holds.”
WHERE DID THE DEALS GO?
Indeed, the number of publicly announced seniors housing andcare acquisitions in the third quarter fell to a new low of 58 deals,according to Irving Levin Associates. That dip only represents a 3%decline from the 60 transactions in the previous quarter, but it’s asteep 44% drop from the 104 deals made public in the third quarter of 2019. On the bright side, the $1.48 billion spent on third-quarter transactions shows an increase from the previous quarter’stotal of $1.36 billion by 9%, based on publicly disclosed prices.However, compared with the third quarter of 2019, when $5.74 billion was spent, dollar volume nosedived by 74%.
“The pandemic continues to stymie dealmaking in the seniorshousing and care sector,” says Ben Swett, editor of The SeniorCareInvestor, a publication associated with Irving Levin. “Difficulty inobtaining acquisition financing, third-party approvals and propertyinspections, along with serious questions about the time it will takefor occupancy and operations to recover, has caused many buyersto either delay or hit the pause button on dealmaking.”
A PROBLEM WITH PRICING
Another problem—and one not limited to senior housing—hasbeen less-than-transparent pricing, in some part because deals havebeen so few and far between.
In some cases, for example, cap rates are diverging from valuations, according to participants on a recent CBRE podcast.
“Across the board, cap rates haven’t moved that much for a stabilized product,” said Spencer Levy, chairman of Americas Researchand senior economic advisor.
But cap rates aren’t the only things that affect value. Changes inNOI and operating costs also impact what a property is worth andin the senior housing space people are removing the temporaryoperating costs associated with COVID from the cap rate equation.
“For the stabilized assets, the cap rates really haven’t changed all