Senior Living Investors Expect Cap Rate Contraction, Moderate Rent Increases In Coming Year

A majority of investors of senior housing properties believe that cap rates will decrease and that operators will raise monthly rental rates by 3% to 7% in the coming 12 months, according to a new CBRE survey.

The survey, conducted in late April, is based on responses from senior living professionals working for deal brokers, private capital and institutional investors, developers and REITs. Almost all of the respondents in the latest survey also responded to a previous CBRE investor survey last October.

A majority of respondents (59%) reported relatively no changes in average cap rates compared to last October when they took the last survey. On average, respondents noted a 12-basis-point drop in cap rates over the last six months.

Class-A assisted living communities in core markets dropped 14 basis points in cap rates, landing at 7%, according to the survey. Average cap rates for active adult and assisted living properties in non-core markets both decreased 13 basis points to 6.4% and 7.4%, respectively. Respondents reported cap rates growing in only one segment, freestanding memory care, which rose by 8 basis points to an average of 9.6%.

Looking ahead to the next 12 months, 63% of respondents said they expect cap rates to decrease, while 21% said they don’t expect cap rates will change in that time. Another 16% said they think cap rates will rise in the next 12 months.

A majority of the survey’s respondents, 56.5%, also said they expect moderate rate growth of 3% to 7% in the coming 12 months, a gain over the 48% of respondents who said the same thing in CBRE’s prior survey. No respondents to the latest survey said they expect rent decreases for any segment, and 18.3% said they expect no change to average senior living rates. No respondents reported underwriting rent growth of more than 7%.

CBRE is forecasting annual rent growth of more than 5% over the next three years.

“Cost feasible rent is approximately 20% above market rent at existing competitive alternatives in most core markets,” the survey’s authors wrote.

A NIC MAP survey from almost a year ago showed that average senior living rent growth was slowing as the delta between asking rates and initial rates reached “new highs.”

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