The 2024 capital markets outlook is that much remains the same. Credit is scarce and the capital markets remain unpredictable. Whether the Fed will cut rates in four months, six months, or even nine months, many investors believe that defense is the best offense. The preceding ten years created a fascinating environment with cap rate compression to historic lows and a substantial amount of newly issued debt. Today, the industry is entering a period of transition where cap rates are starting to progress upward, and historic levels of debt are being repriced in a higher cost of capital environment.
In the debt markets, loan to values are trending downward while the quality of assets and counterparties is going up. Spreads and base rates are providing investors with attractive unlevered returns, and many see credit as a good place to be active today. On the equity side, generally speaking, public real estate companies have traded off their highs, but there remains a lot of pricing uncertainty with respect to private real estate. Many private equity funds are waiting to see how the coming months unfold as repricing and price discovery occurs. Transaction volumes remain low. According to NIC MAP Vision, fourth quarter 2023 preliminary closed transaction volume was $465.8 million for senior housing, and $525.5 million for nursing care. Over the past four quarters ending fourth quarter 2023, senior housing transaction volume was $3.8 billion, down 59% year-over-year.
The senior housing market is showing signs of continued strength despite challenging capital markets. Annual inventory growth for the fourth quarter of 2023 was 1.4%, below its pre-pandemic average of 1.6%. New supply has been constrained by tighter credit conditions and increased construction material costs, which have outpaced CPI. Yet the slowdown in supply has been accompanied by persistent and accelerating demand, boosting fundamentals. Senior housing occupancy for the third quarter of 2023 was 85.1%, up 80 basis points from the previous quarter, which marks the tenth consecutive quarter of occupancy increases. Similarly, the fourth quarter of 2023 showed that all care segments maintained their near record high year-over-year rent growth.
In many ways it feels like it could be senior housing’s time to shine. From a demand perspective, the industry is at the beginning of an aging baby boomer population. Statistics show that that population grew five times faster than the overall US population from 2010 to 2020. New supply remains constrained, and this will continue throughout 2024. Rent growth has stayed elevated and investors are optimistic around the sector. As certainty in the treasury market returns, and capital forms around the sector, transaction activity should pick up. 2024 may represent an attractive entry point to senior housing as prices adjust lower and fundamentals remain attractive.
Sources:
- 4Q23 NIC MAP® Market Fundamentals Data
- U.S. Bureau of Labor Statistics Producer Price Index Producer Price Index Home: U.S. Bureau of Labor Statistics (bls.gov)
- US Census Bureau https://www.census.gov/library/stories/2023/05/2020-census-united-states-older-population-grew.html#:~:text=The%20U.S.%20population%20age%2065,the%20United%20States%20in%202020