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Uncertainty, High Borrowing Costs Send Investors to the Sidelines

Uncertainty, High Borrowing Costs Send Investors to the Sidelines

While the credit markets remain extremely tight, investment activity in seniors housing is expected to remain on hold for the next few months. Investors are trying to gauge the direction of the economy and the financial markets before starting new projects, or buying existing ones.

"Everybody's in the same boat," says Raymond Lewis, executive vice president and chief investment officer at Ventas, a Chicago-based healthcare REIT. "If you don't have to transact in this environment, you don't."

Like other investors, Ventas is being "patient and disciplined" with its money, Lewis adds. "We have not deployed a lot of capital this year." With so few transactions taking place, he says, it's hard to know what a fair price for a property is.

Senior Lifestyle Corp., a building owner and operator, recently bought a continuing care retirement community outside Milwaukee, but it might be the company's only purchase for the year, says John Cobb, president and CEO of the Chicago-based company.

Senior Lifestyle paid $28 million for the 232-unit Harbour Village property, financed with a $21.6 million Freddie Mac loan. "Maybe we got a good price," notes Cobb. "But it's hard to know where prices are."

Meanwhile, new projects are being put on hold. For example, Heritage Square, a $120 million, 408-unit project on Long Island, has been delayed because the developer, Landmark Properties, is waiting for the cost of financing to come down.

"Just 50 basis points can make a huge difference in a project this big," explains Michael Berne, managing director in the New York office of Jones Lang LaSalle, which put the deal together for Heritage Square, slated to be built on 50 acres.

Rather than accept unreasonable terms, Berne says that it makes sense to wait three to six months for a more favorable borrowing climate to emerge.

A handful of traditional lenders have exited the seniors housing market for now, sources say, and financing is scarce. The deals that do get done take at least four months to execute from due diligence to closing, or about twice as long as they took to complete 18 months ago.

The housing slowdown also continues to depress the volume of move-ins, especially at independent-living buildings. Seniors who want to move are waiting to see if home values improve.

"The real question is whether we are going through a permanent repricing of housing prices, or whether they'll bounce back," says Berne at Jones Lang LaSalle. The recent stock market crash has only made retirees more nervous about making a move as they see their net worth cut in half.

Because of the economic slowdown, building owners don't expect to be able to pass along the 7% to 8% annual rent increases that have been common over the last few years. If rents are raised at all, they'll probably climb a maximum of 5%, sources say.

Assisted-living and skilled-nursing facilities should have some pricing power, however. Residents usually move to these buildings out of necessity, not choice, so the conventional wisdom is that owners can probably pass along at least modest rent increases.

But owners are carefully watching government reimbursement rates for skilled-nursing care. Another factor is the rising unemployment rate in the U.S., which, by some estimates, is expected to hit 7% early next year.

About 25% of resident fees are paid by adult children, according to Lewis of Ventas. A spike in unemployment among adult children could hurt. "It's not something we have experienced before," says Lewis.

The news isn't all grim, however. Most industry professionals say that seniors housing is faring better than other real estate segments and its prospects look better going forward.

Rising unemployment could help keep wage increases at buildings in check and provide a larger pool of available workers. Declining fuel prices and lower inflation should also help reduce operating costs.

But owners are tightening their belts for the foreseeable future. As Cobb of Senior Lifestyle puts it, "You monitor expenses closely and control them."

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