As another successful year in the senior housing industry starts to wind down, the senior housing market continues to grow at a fast clip, showing no signs of slowing down before the year is up. Not only is investment activity continuing at a rapid clip, but developers are also building new communities all across the country, and new industry data confirms that growth opportunities in the sector remain plentiful as well. Industry participants who are seeking capital to take advantage of these opportunities by acquiring additional properties for their portfolios should contact Cambridge Realty Capital to learn more about the different financing options that it offers for acquisitions and other purposes as well.
Cap Rate Analysis Indicates Accurate Pricing
The commercial real estate services firm CBRE recently compared senior housing capitalization rates to the 10-year Treasury to try to gauge exactly where the senior housing market stands, and whether cap rates are accurate. According to CBRE’s findings, there is nothing in the data indicating that today’s cap rates are overly aggressive. The current spread between cap rates and the 10-year Treasury is roughly 517 basis points, which is close to the historical spread average of approximately 516 basis points.
In the past, bubbles have occurred when the spread was between 350 and 400 basis points. This was the case just before the market downturns that took place from late 1999 to 2000 and from 2006 to 2007. Smaller spreads tend to happen when there is very strong investor interest for assets that is not supported by industry fundamentals. However, that is not the case with senior housing today. The spread between cap rates and the 10-year Treasury do not indicate the formation of a bubble, and the fundamentals of the industry are also very strong, largely because of the country’s aging population.
CBRE’s research also found that, even with the heavy of construction that is taking place in the industry, demand is still rapidly outpacing supply. In fact, the amount of supply in the industry would need to increase by 150% over the next 30 years to meet the peak demand levels that are projected to occur in 2044. Furthermore, CBRE believes that the industry will undergo a significant supply shortage starting in the year 2024 unless construction is ramped up even more. Specifically, some 40,300 units would need to come online every year from now until then in order to avoid this projected shortage. This is more than twice the current rate of 16,440 units per year, and presents challenges for developers, local and state governments, and utility service providers as well. Lastly, over the next 10 to 15 years, CBRE expects demand to increase across all senior housing asset types instead of just one or two. This will create even more opportunities for a wide range of providers and investors alike.
CBRE’s findings are in line with those of other industry groups, and reveal a senior housing industry that still has room to grow even as it continues to break records for the amount and size of transactions that take place in the industry each year.