HUD loan stats were recently released for the 2019 fiscal year, and they seem to indicate a healthy senior living real estate market. The total amount of HUD loan funding granted for the year was $3,700,000,000 up from $3,600,000,000 the previous year. Cambridge Realty Capital Founder and President Jeffrey Davis believes the reason for the uptick is largely due to demographics, specifically the rising number of Baby Boomers who are coming of age and are either already in some type of senior housing or will be needing senior housing of some type in the next several years. “Developers rely on statistical data as they determine what their future ventures will be,” Davis contended, pointing out that other types of development, such as retail, have fallen out of favor due to overbuilding and other factors. “It’s a natural progression for developers to look to other categories to put their development skills to work,” said Davis.
In fact, total HUD 232 funding granted has been on the increase since 2014. This steady increase followed on the heels of record-high volume in 2013 when the fiscal year closed at $5,800,000,000 in HUD 232 funding. Total volume plummeted the next year to a dismal $4,021,000,000, a phenomenon that experts in both financing and senior living attributed to a significant drop in the refinancing of existing HUD loans. Many operators took advantage of record-low interest rates in 2012 and 2013, and so the need for refinancing in 2014 simply was not there to the same degree.
If you believe the what goes up must come down, then the converse must also be true, and so HUD 232 loan volume began to increase again after 2014. The year 2015 saw a jump to $2,700,000,000, followed by $2,800,000,000 in 2016. Volume took a more significant jump the next year to $3,400,000,000 in 2017, then $3,600,000,000 in 2018. “The market corrected itself,” Davis proclaimed.
While the aging Baby Boom population is probably the most significant factor in the 2019 volume increase, Davis also believes that historically speaking, the HUD Lean program has also played a role in overall loan volume. The HUD Lean program was introduced in 2008, a process that significantly improved the efficiency of HUD 232 loan processing from the old MAP system that was in use prior to 2008. One of the most notable improvements with the new Lean system was the ability to submit applications electronically, and is, by most accounts, a successful upgrade of the system.
Davis refers to senior living developers as a ‘rare breed.’ “Sometimes they have expertise in senior housing. However, more often than not, they’re just developers who find an operator to run the building for them. They are entrepreneurs and opportunists who are skilled at determining which direction the wind is blowing and they simply follow it to where the profits are.”
So far, the winds seem favorable to senior housing for the coming year. The crest of the Baby Boom wave is still several years away, and HUD 232 remains a very attractive funding option for both new construction and refinancing. Its best features are and have always been lower-than-average interest rates (between 3.5 and 5.5 percent), long terms (up to 40 years) and no personal recourse. “These benefits have not changed,” stated Davis.
Davis predicts that future growth in senior living will come not necessarily in the skilled nursing or assisted living sector, but rather with an increase in standalone independent living communities. These types of facilities are ideal for seniors who do not yet require on-site healthcare services or living assistance, but simply wish to downsize and/or live a simpler lifestyle in a situation that requires less ongoing maintenance work and greater opportunities for socialization.
Davis also expects that affordability will also play a role in future construction and operation of senior living across all types. “The majority of Baby Boomers have been unable to save enough money to sustain themselves throughout all of their retirement years,” he conjectured, adding that “The affordability issue and crisis will not be disappearing anytime soon. Baby Boomers’ ability to pay will most certainly influence development in the new decade.”