Low Interest Rates Continue
We continue to see low interest rates. Should this be of concern? No. On the contrary, real estate developers and investment firms continue to monitor lower interest rates as a good sign for senior housing. In addition to borrowing money from banks, low interest rates make construction costs more affordable both through cheaper raw materials and through cheaper borrowing when developers secure construction loans. This means there are lower all around risks developers could face with their construction, the most critical element of a real estate project. For example, elevators are time-intensive, requiring permitting, soil tests, time and help of experts including engineers and environmentalists, and are capital intensive to procure and build. Lower interest rates allow for more affordable development. But why is this notable? Cheaper borrowing means projects may be built at lower costs, thus incentivizing developers to build. New construction of buildings usually improves economic activity for many types of businesses with goods and services like raw materials, architecture, landscaping, marketing, and so on.
Cheaper Borrowing for Senior Housing
Such a spurring of economic activity through cheaper borrowing, of course, is only good when there is an assumption that after the construction is finished, there will be sufficient demand for the built product. This is where senior housing comes into play as a product type in real estate, because there is indeed sufficient demand for senior housing. Such a combination has forged more opportunity for this coming year than ever before for investing in senior housing.
Even States are Paying Attention
Government agencies tracking and publishing healthcare, residency, and population data relating to the senior housing market have inspired many state legislatures to formalize a process in order to provide licensing opportunities to businesses systemic to maintaining regulated, yet freely running senior housing markets in their respective states. The wealth of attention from government and private sector entities on senior housing affords smart investing decisions in senior housing. For example, the Centers for Disease Control and Prevention’s National Center for Health Statistics published a spiked pronouncement in demand for more senior housing facilities. In 1986, there were 600-700 structures serving 100,000-200,000 residents. It was predicted that by the late 1990s there would be over 1500 structures with over 450,000 residents. Now, that number has been well-surpassed, as the National Center for Health Statistics reports 16,100 nursing homes with 1.7 million beds with an occupancy rate of 86 percent. And within the last four years alone, the industry saw an influx of an additional 400,000 residents relocating to senior living facilities.
Our increasingly aging national population, combined with the favorable conditions for real estate development while interest rates remain low, point to an attractive outcome for securing construction loans and other opportunities within financial institutions for new development. San Francisco Federal Reserve President John Williams says that Federal Reserve officials are in no rush to raise interest rates this year. Most economists expect the central bank to raise interest rates sometime this year, and Fed chairwoman Janet Yellen has said that an increase is unlikely before March 2015. As the recent CDC study showed above, with only roughly 14 percent of all beds in senior housing vacant as of 2014, there is a strong likelihood that existing senior housing could become over-capacity thus leading to construction as a matter of public health.
Thus, a need for senior housing, not merely through some speculative lens or banter in the real estate business, but actually through a matter of state and national concern, is undoubtedly the type of demand that will eventually become the ideal economic backstop as cheaper borrowing paves the way for new construction and development. This need is met through new development opportunities underway in senior housing at Cambridge Realty Capital.