As 2024 winds down, change is in the air. Long-awaited interest rate cuts and a power-shifting presidential election are among the main macro drivers influencing the capital markets landscape in a variety of ways—some immediate, others slow and steadily.
Clearly 2025 will look very different; how those differences manifest remains to be seen. In the meantime, preparing oneself with the latest insights, tools, and resources is essential, as those well-versed in the challenges and opportunities of the current market will be best positioned to capitalize when the time is right.
Opportunities Ahead
Going forward there should be ample opportunities for seniors housing and care borrowers looking for lower rates, buyers looking to acquire and expand portfolios, and sellers looking to exit the industry. Organizations that are prepared with an effective strategy should see their portfolios grow in the coming 12 months.
Indeed, many industry participants are already seeing an uptick in financing and acquisition inquiries, especially regarding properties that were financed with bridge deals three to four years ago and are starting to reach the end of their term. That should lead to more borrowers seeking permanent financing in 2025, often via Fannie Mae, Freddie Mac, or the U.S. Department of Housing and Urban (HUD)/Federal Housing Administration (FHA), with many seeking a cash-neutral refinance.
What an Investor Wants
Clearly, the first interest rate cut provided a psychological boost, as did the much-anticipated second cut in November. But more substantial cuts are needed to substantially boost transactions. For investors, the phrase “opportunity-driven” remains at the forefront of inquiries, meaning there is not one type of deal they are looking for. Instead, a deal becomes appealing when all factors of a story come together: market, operator, operating history, valuation, and culture.
When it comes to what type of seniors housing community an investor targets in today’s market, the prevailing sentiment is that those that offer the complete continuum of care are the most appealing. Echoing a common sentiment throughout the industry in recent years, communities that thrive are often those that offer care and services that span the continuum of independent living (IL), assisted living (AL) with memory care (MC), and skilled nursing. Investors like to see integrated care and effective aging-in-place strategies, all of which help with resident retention.
Alternatively, some investors may focus more on the seniors housing side of the continuum in the current market, with a strong appetite for IL communities that feature AL/MC services. Of course, stabilized and stabilizing communities are the most appealing to institutional investors.
Can a Post-COVID Normal Settle In?
Just as the seniors housing and healthcare industries were recovering from COVID in 2022, interest rates spiked, and market volatility followed. With the market looking like it may settle in 2025 and enjoy a series of rate cuts, will operators be able to finally enjoy a new post-pandemic normal where margins return to pre-COVID levels?
Industry participants by and large remain optimistic that brighter days are ahead for the industry. Borrowers seem more optimistic, occupancy is almost back to pre-COVID levels, and many portfolios that were stressed have recovered. That said, net operating income (NOI) continues to lag for some because margins have compressed. The hope is that margins will expand again once the post-COVID normal settles in. That is surely a goal of operators’ coast-to-coast, and hopefully rate cuts and a stable market outlook will provide fuel for their strategies, notwithstanding a material rebound in labor supply.
New Construction Outlook
With construction costs settling and approaching predictable levels, there should be a lot of transactions that were previously tabled and now are ready to re-engage. Although construction pipelines have not been particularly robust as of late, going forward there is clearly a need for construction lenders to accelerate growth in anticipation of the impending silver tsunami of retiring seniors. Supply will need to increase to keep up with demand, and construction transactions are slowly picking up steam.
Valuations Improving
It looks promising that seniors housing and care valuations will be higher in 2025 than they were in 2024. With more rate cuts expected, strong industry fundamentals and demographics, and more capital coming into the sector, values should go up over the coming several months.
Although capital inflows may be slower than many want, positive momentum is apparent, even if it is more sentiment-driven and emotion-driven than capital-driven. More players examining and considering transactions will drive demand which helps valuations rise. For some owner-operators, contemplating a liquidity event that yields a favorable valuation after taxes will be a driver of sales in the new year. That’s where advisors with creative M&A transaction experience can help deliver results.
Contact Lument’s M&A team for more insights.
