Memory Care on the rise in the Senior Housing Market
Over the last few decades, the world-view of how to take care of elders suffering from Dementia and in particular Alzheimer’s disease has improved significantly. Memory Care facilities, are meant to take care elders suffering from Dementia, memory loss and Alzheimer's. They have been able to better cater the needs of those affected by this irreversible disease. In the past, a Memory Care Facility was an additional wing attached to assisted living, personal care and skilled nursing facility. However today, Memory Care communities are developed as specialized stand-alone facilities.
Due to lack of transparency in the senior housing market in the mid-1990's, the cost of capital for Memory Care facilities was high, transaction volume was low, and specialized construction was at a minimum. It wasn’t until 2014, when the National Investment Center for Seniors Housing & Care (NIC) established a market database, that Memory Care started to pick up pace. The improved transparency, which lowered the cost of capital and raised transaction volume, increased investors' appetite and as a result effected pricing. Furthermore, once developers started to notice the new trend, specialized Memory Care construction started to take place.
Demographic Trends present a positive outlook for the Memory Care market. Recent statistics by the Alzheimer's Association indicate that there are currently 5.3 million people living with Alzheimer's disease (1 in 8 older Americans) in the US. This number is expected to rise up to 13.5 million by 2050 (1 in 6 older Americans). Furthermore, with life expectancy on the rise, and the fact that people are having fewer children, the CBS (Central Bureau of Statistics) estimates that the ratio between the number of potential caregivers aged 45-64 compared to the ones aged 80 plus, which was 7:1 in 2015, is expected to drop to 3:1 in 2050. Therefore, knowing when and where to enter the market is crucial for any new facility in order to survive and thrive.
With regard to investors who are looking to enter the Memory Care space, investment success will depend on three main factors: targeting a strong local market, choosing the right product, and collaborating with an experienced operator. Investors should make sure the developer understands both micro and macro dynamics of the market, and more importantly, they should look for an experienced operator, who is able to adapt to changing market conditions. Nowadays, the operator should not only know how to manage the day-to-day operations of the facility, but have the ability to access the appropriate referral sources to drive property leasing and to incorporate the latest innovations entering the market space. Focusing on the above-mentioned criteria will mitigate the risk and optimize returns for investors.
HUD in the new Administration
The Department of Housing and Urban Development commonly known as HUD, is a government agency with the overall general purpose of providing the citizens of the USA “fair and equal” access to housing. HUD has several different sections, each with different roles to play in controlling the housing market. One of the sections with the biggest influences on the market is the Federal Housing Administration (FHA).
Aside from setting standards in construction and underwriting, the FHA’s main output is its mortgage insurance for private single-family properties with HUD overseeing the insurance of commercial loans. The FHA and HUD provide full insurance cover to approved lenders on mortgages that they offer that meet certain criteria. This insurance allows banks to lend at a more competitive rate and with favourable terms for borrowers.
These “HUD loans” have had a huge effect on the housing market in the USA since their introduction in 1934. Back then, with the real estate market still suffering from the great depression, the housing market was largely stagnant with the majority of people unable to afford to buy with the tight rates offered by the lenders. Mortgages were only available on a short three to five-year term with LTV rates limited at 50%. Today, one in five homes purchased by US buyers are financed by HUD loans, with LTV rates of as much as 96.5% available.
For commercial properties, primarily multifamily, student housing and health care, HUD offers non-recourse loans with long fixed rate terms of up to 40 years and high LTV rates of between 80%-90%. These favourable terms are available to experienced borrowers and are nearly always unbeatable by non-government backed lenders.
Given the huge impact that HUD has on the housing market, the coming appointment of Donald Trump’s HUD secretary Ben Carson will be crucial. Carson, the former Republican Presidential contender is thought by many to be an odd choice coming from a background in medicine as opposed to housing or real estate. With two interest rate hikes over the last eighteen months, and with many analysts forecasting a continuation of that trend, having an experienced man at the helm of HUD would seem essential to keep the market on the right track. Assuming the Senate approves Carson’s nomination, he will formally be appointed as the new HUD secretary when the Trump administration starts its reign in January 2017. His policy decisions over the next four years will therefore begin to influence the entire HUD umbrella which would include policy on HUD’s insured mortgages.
Ever since Trump's confirmation of Carson as his chosen HUD secretary, experts have been trying to understand what his policy direction will be. In terms of access to housing, Carson’s campaign rhetoric has mainly been focused around eliminating discrimination in the affordable housing sector. One example of this is his reference to the current fair-housing system as “a mandated social-engineering scheme”.
On the other hand, his policy for commercial real estate and in particular HUD mortgages is less clear. Some may see his lack of experience as a weakness when it comes to setting direction for the future operation of HUD backed lending. However, the fact that he is being backed by one of America's top and best known Real Estate tycoons, goes some way to convince that he is up to the job of steadying the ship in these times of change.
Technology and CRE
Historically, Commercial Real Estate (CRE) investment has a relatively high ‘barrier to entry' compared to private investments or private equities. The use of ‘low-tech’ and ‘high-touch’ channels between owners, managers, brokers and investors has traditionally been the standard route of connection for the industry, keeping the community close knit and information obscure.
However, with the use of spreadsheets for analytics and emails for communication, there has been a gradual implementation of technology into the CRE market since the late 1990’s. CRE’s use of tech has taken a bigger leap to include the use of cloud computing and big data analytics. The JOBS (Jumpstart Our Business) Act of 2012 and ‘data driven’ decisions taken by major companies, have further altered the CRE landscape to be more tech-driven.
When Obama decided to put this Act in motion, the vision was to ease regulation on small businesses in terms of canvassing for investors. This Act subsequently had a ripple effect eventually reaching the CRE market in 2014, as companies began using online crowdfunding to fund their deals.
The crowdfunding model utilizes an online platform and digital marketing to access a large pool of potential investors. According to the Cambridge Judge Business School, the rapid growth of crowdfunding continued into 2015, as investments through this medium tripled to around 500 million USD, for commercial real estate projects.
This suddenly allowed investors to gain access to deal flow that up until then was out of their reach. Furthermore, geographic limitations of both investors and sponsors have been lifted as sharing documents and information has become far easier. These factors as well as improved transparency, have led to a significant spike in deal flow.
Additionally, large troves of CRE data have become available which initially only benefited brokers and landlords. However lately, there has been a transition to include data geared towards aiding the owner, operator and investor in terms of transactions.
Customer management tools, enhanced security and ‘big data’ driven decisions, as well as the use of So-Lo-Mo (social media, location based, mobile experiences) in making investment decisions and marketing for tenants, are also beginning to pick up pace in the market. This was recently discussed in depth at the National Multifamily Housing OPTECH Conference 2016.
With data driven decisions offering Real Estate investment firms the ability to be more meticulous in their acquisition search, it is still unclear if the influx of data will have an effect on market cap rates. It is yet to be seen if the availability of information will keep cap rates decompressed and buoy the marketplace.
Despite all this movement, skeptics still believe that it all might be an offshoot of a technology bubble that is destined to burst. It remains to be seen if within three years the market will be inundated in CRE crowdfunding companies or whether they will be looked upon as a failed methodology. However, the recent 300 million USD merger of Real Estate tech giants VTS and Hightower possibly signals the beginning of the action in terms of tech-driven CRE firms.