Seniors Housing and Care Outlook: Q&A with Kass Matt
As the first quarter of 2016 comes to a close, Lancaster Pollard President Kass Matt shares his views on the state of the seniors housing and care market and what challenges lurk on the horizon.
Q: As seniors housing and care owners and investors consider new development and/or acquisition transactions in 2016, what are some of the challenges they will encounter?
A: One of the key challenges for development is the fact that banks have reduced construction lending as of late, both as a reaction to the rapid pace with which they reentered the market in 2014 and 2015, and because of increased banking regulations such as the High Volatility Commercial Real Estate (HVCRE) rule. The HVCRE rule increases risk weight for acquisition, development and construction real estate loans, which may affect the pricing and availability of capital for some transactions.
Separately, the continued effect of volatility in the equity markets on seniors housing and REIT activity is also a challenge. This year started with extreme volatility in the equity markets given concerns globally. We will be watching the Fed very closely to see how they react to any ongoing turmoil in the equity markets.
Q: What impact will the rising interest rate environment have on capital financing?
A: It depends on the overall pace of the interest rate rise, which most expect to be slow and steady throughout 2016 and even into 2017. Extreme volatility in interest rates tends to affect the markets more than a gradual increase, so the impact in the near term should be relatively minimal. We are, however, paying close attention to how the equity and interest rate environment affects the rapid consolidation we have seen at the provider base, which has been driven largely by highly available capital and fragmentation in the senior care space.
Q: What recent development in the market strikes you as most unexpected?
A: I would say the decline in valuations for assisted living and memory care, caused by equity market volatility and an increase in capital costs, which in turn has led to a decreased appetite from the REITs.
Kass Matt is the president of Lancaster Pollard in Columbus and can be reached at firstname.lastname@example.org.