Investors have a continued interest in the skilled nursing space, despite increased costs associated with staffing challenges and Covid expenses at this point in the pandemic.
That’s based on data collected by commercial real estate services company JLL for its latest seniors housing & care investor survey and trends outlook report published on Thursday.
Investor interest is tied to less “stroke-of-the-pen” risk in the industry, as facilities continued to receive an influx of federal dollars the past two years.
“We are seeing demand improve each quarter, so the long-term opportunity is quite attractive for institutional capital looking to diversify their portfolios or hedge against riskier investment classes,” said Bryan Lockard, managing director and co-lead for the seniors housing practice, valuation advisory for JLL. “Additionally, capital for commercial real estate investment continues to accelerate to all-time highs, reaching $243.7 billion in February 2022.”
Private buyers made up $3.3 billion of the $3.7 billion spent on nursing home transactions in 2021, according to data released in February by the National Investment Center for Seniors Housing & Care (NIC).
About 17% of investors said skilled nursing was their most sought-after investment opportunity as of Q4 2021, up from 9% in Q1 of 2020.
The active adult 55+ sector took the lead at 31% in Q4 2021, followed by assisted living at 28%, independent living also at 17%, with memory care and continuing care retirement communities (CCRCs) at 4%.
Investors are “even more bullish” on nursing care and seniors housing today, JLL found, with 76% of respondents indicating increased exposure in those markets this year.
According to JLL’s market valuations in 2021, the average gross revenue per nursing home unit was higher than other areas of long-term care at $84,128 – while also having the highest Covid expenses per unit at $1,325.
More than 100 investors participated in JLL’s survey this year, including some of the most influential industry leaders in the post-acute care world, the firm said.
Aggregate market values total about $45 billion, or 9.5% of the seniors housing and care market cap of $475 billion. The JLL valuation index represents an aggregation of market valuations completed in 2021.
The average capitalization rate for the SNF market was 12.5%, also the highest compared to other aging service markets, while its value per unit came in below assisted living, independent living and memory care at $105,833.
“The data re-enforced what we’ve been seeing for the past 24 months – despite some of the well-known issues [like] labor shortages, increased nursing costs, our survey indicates continued compression and activity in the skilled nursing space,” said Brian Chandler, JLL managing director and co-lead for the seniors housing practice, valuation advisory.
Nursing care transaction volume, along with M&A in seniors housing, increased during the first quarter of 2021.
It’s the first time volume for both sectors picked up since the onset of the pandemic, JLL authors said, up 24% for the SNF market and 61% for seniors housing by Q4 2021.
Volume quarter-over-quarter for both sectors totalled $10.6 billion. Health care expenditures are expected to make up 19% of the U.S. GDP by 2025, JLL added, and an estimated 11% of the total GDP will be attributable to nursing care spending by the senior population.
“The advancements in medical science and the tremendous momentum in the life sciences sector today and into the future will bolster consumer demand for both life-saving therapies and elective procedures, keeping individuals alive longer,” JLL authors said.
Prior to the pandemic and through 2020, both sectors perhaps unsurprisingly recorded their weakest transaction volume since 2012, JLL found. Investment volume was down 43% in Q4 2020.
The study also saw investors seeking “alternative assets” outside of their traditional sectors, but the nursing home market was not noted – seniors housing was the preferred market alternative for 2021.
“[SNFs] will always carry the ‘stroke-of-the-pen’ risk and for that reason I do not think nursing homes will be as popular of an alternative investment,” Lockard said. “The pandemic further supported that without government stimulus this industry would not have survived.”
In terms of market outlook, an overwhelming majority of respondents felt the worst of market disruption from the pandemic has passed.
About 80% of investors feel market fundamentals will improve; the statistic is a “vast improvement” to JLL’s survey at this time last year – only 48% felt this way in the spring of 2021.
