Senior living developers are feeling the squeeze from both recent new tariffs on building materials and the ongoing shortage of skilled laborers. Even though neither situation appears to be improving any time soon, Cambridge Realty Capital President Jeffrey Davis points out that HUD 232 loan interest rates are still highly competitive. Not only are they low in comparison to conventional loans, but they’re also fixed, “allowing senior living developers a measure of control over their mortgage expenses for the future of the loan.”
Despite the fact that senior housing construction costs were up between 6% and 8% throughout the early part of 2019, Davis says it’s important to put such stats into perspective. According to the National Investment Center for Seniors Housing & Care’s (NIC) first-quarter market fundamentals report, demand slightly outpaced new senior housing development. Senior housing new construction continues to represent a strong percentage of overall new construction in many major markets, with Atlanta, Georgia emerging as a leading market for senior housing inventory growth. “The demand for senior housing overall, and new senior housing, in particular, remains strong and positive,” notes Davis, “so the opportunity is certainly there, especially in major markets in US urban areas.”
Increased costs associated with tariffs on building materials can often be recovered by developers. Perhaps the only real worry for developers, then, is the continuing shortage of skilled laborers, particularly those with advanced skills in the construction field. “It’s a real issue, with some areas being harder hit than others,” Davis points out.
Industry stakeholders are brainstorming solutions for the problem. For now, developers are finding their own ways to deal with the labor shortage. Some are simply increasing their budgets and offering to pay higher wages to get the help that they need. Others are offering incentives, such as signing bonuses, apprenticeships and on-the-job training. Of course, all of these things create added expenses for developers, but they may not have a choice, at least for the time being.
“Unfortunately, it may take time before the labor situation improves,” Davis concedes. Until then, Davis reminds developers that, despite rising costs in a number of areas, HUD new construction loans are still one fixed expense that they can count on. “Historically, HUD loan rates range between 3% and 4%, and rates are fixed for the duration of the loan,” Davis explains. Borrowers can easily calculate the cost of interest payments and plan their budgets accordingly. “In an industry that is rife with uncertainties when it comes to expenses, it’s rare to have costs that can be counted on to remain the same even for a few years, let alone 20 or 30 years.”
And despite reports of some markets experiencing slow or no growth, Davis notes that Cambridge’s business remains strong, an indicator that senior housing operators and senior living developers are still borrowing money and expressing confidence in the future of senior housing. “Nothing has changed for us in that way,” Davis expresses, adding that much of this confidence lies with the HUD 232 loan product, both on Cambridge’s part and the part of the developers.