November 10, 2023 • 37 mins
Listen in as Beth Mace, Senior Advisor at NIC, sits down with Zach Bowyer, Senior Managing Director and head of living sectors at Cushman and Wakefield to discuss today’s capital markets, including the intersection of property market fundamentals and capital market pressure as well as how current conditions are affecting valuations and investment strategies.
From discussing distressed properties and buyer profiles to exploring the inflection point at which the industry finds itself, this podcast is filled with insights on the unique challenges and opportunities within the senior housing sector.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Beth Mace (00:03):
Hello, and welcome to the NIC Chats Market
Conditions podcast series. Myname is Beth Mace, and I'm
currently the Senior Advisor atNIC focusing on the economy and
capital market trends andimplications. Thank you for
joining us today. The focus ofthis series of NIC Chats
podcasts is talking to expertsand industry leaders impacted
by today's property and capitalmarket conditions and trends as
(00:26):
they pertain to the seniorhousing transaction market,
property, pricing, deal flow, and market sentiment. As you
listen today, hope that you'llfind some insights and ideas
that a re relevant to you i nyour business, be it as an
operator, developer, banker,private equity provider, public
entity, or other capitalprovider. Z ach, before we
(00:47):
begin, I would like to thankyou for participating in NIC's
Fall Conference, both as amember of the planning
committee, as well as apanelist o n the State o f
capital markets and Valuationpanel. NIC very much
appreciates your support a ndtime commitment as a volunteer
to help us deliver timely andinformative content. So now, Z
ach, tell us about Cushman a ndWakefield and your position
(01:08):
there as a senior managingdirector in the e valuation a
nd advisory living sector.
Zach Bowyer (01:12):
Thank you, Beth .
It's always a pleasure justchatting with you about the
market, sharing ideas andreally working together to try
to get smarter. So thank youfor having me. So Cushman and
Wakefield, I've been at Cushmanand Wakefield for almost two
(01:34):
years now, and I lead what wecall our living sectors on the
valuation and advisory side. So, living sectors, that's
basically your conventionalmultifamily, and then all of
the subsets underneath (01:47):
student housing, manufactured housing,
affordable, etc. In the seniorshousing space, I've specialized
almost exclusively there forabout 20 years. That is my core
competency and really where mypassion is from a commercial
real estate standpoint. Just togive you an idea on the volume
(02:08):
that we do on an annual basis,we'll do, I guess this year
within that business line,we'll do around 9,000
valuations and advisory typeassignments.
Beth Mace (02:19):
Sounds like a lot, and I bet that keeps you and
your team pretty busy. That's alot of valuations. So I know
that, as you just said , you'reinvolved with both valuations
for, as you call it , theliving sectors group, but that
includes multifamily and seniorhousing, and I think you have a
pretty unique window into theseproperty types and their trends
as well as the activity ofcapital and transaction markets
(02:39):
associated with these propertytypes. So tell us a little bit
more about that in terms ofwhat you're doing for
multifamily and then seniorhousing and how they compare,
and we'll get into more detailof this in a minute, but just a
brief overview of that.
Zach Bowyer (02:53):
Yeah, I think at a very simplistic form ,
everything, I mean, it startswith the real estate. But I
think when you're digging intoseniors housing, and really
where that differs is theoperating business that's in
place is much more impactful.
(03:15):
The valuation you have, notonly a more frail population
base that requires care. Youhave a more regulated type
environment, especially as youmove up that acuity scale. And
I think that not only thatcreates more risk from an
(03:37):
investor's perspective, but alot more certainty and
expertise involved in managingthose properties.
Beth Mace (03:43):
Okay. So we're gonna dive into that a bit more in a
minute, but I just wanna talk alittle bit about what's been
happening recently, andprobably most of our audience
is aware of this, but a lot hashappened in the capital markets
since March of 2022 when theFed started to raise their
interest rates. And today theFed funds rates in a range of
five and a quarter to 5.5%, andthat's up from virtually zero
(04:04):
in March of 2022. The Fed actedquickly to raise interest rates
in an attempt to slow theoverall economy, to take the
strength out of inflation.
Inflation was up to 9% at onepoint last year. And there's a
lot of debate as to the causesof inflation, but again, it's
been quite high, but recentlywe've seen it slow down to,
(04:26):
well , in September to pace ofabout 3.7%. Now at the FOMC
meeting, which actually justhappened on November 1st , the
Fed decided to keep interestrates flat, but it did indicate
that it would mean datadependent in making its
decisions until inflation comesdown, and that it would be
higher for longer sort of theWall Street Creed right now of
(04:47):
what the fed's doing. And thenon the other end of this, of
the yield curve, we've seen the10 year goal past 5% the end of
October, and that was itshighest level since 20 2007. So
you specialized appraisalvaluation and clearly interest
rates affect cap rates and itaffects valuation. So how has
(05:08):
this higher interest rateenvironment affected valuations
for multifamily and also forsenior housing in particular?
Zach Bowyer (05:15):
Sure. It's really interesting. I think that
there's certainly across theboard for all commercial real
estate, there's the currentcapital markets environment,
rising interest rate is puttingdownward pressure on valuations
across the board, some morethan others. For seniors
(05:36):
housing specifically, I thinkit's a little bit of, in terms
of the impact on, on valuations, a little bit of a double
whammy , the seniors housingsector. I've been in the space
for almost 20 years now, itreally through prior recessions
earned a reputation for beingrelatively recessionary
(05:57):
resilient. And a lot of thatwas the more need-driven demand
component. Well the last we canwe'll call it a recession or
downturn during c ovid 1 9 really tested that, r
ecessionary resilientreputation for seniors housing.
(06:17):
So , we all know a lot of theheadlines and it's still fairly
recent, so we understand theimpact that it had on occupancy
for seniors housing. Andthenalso staffing coming out of
that, staffing shortages,rising cost on that side really
hit operating margins hard andalso I think added or brought
(06:42):
back a lot more increased thatrisk perspective that investors
had on the space because ofthat, that environment. So you
couple that with the risinginterest rate environment,
decreased margins, and thenwhat happened for occupancy. I
think that just that overallenvironment and those
(07:03):
fundamentals really had acombined impact on, on
valuations more thanmultifamily , a pretty
interesting parallel I guessduring that time or lack of a
parallel coming outta of thecovid environment performed
(07:26):
really well. Rental increaseswere near all time highs ,
vacancy levels, near all timelows. I think if you had a
penny during that time, youwere putting it in industrial
or, or multifamily. So fromthat operating certainty
standpoint or certainty andcash flow standpoint,
(07:50):
multifamily became much more,much more attractive than
seniors housing . So I thinkseniors housing valuations did
adjust even a little bitquicker, the multifamily to the
current environment, but therestill is a lot of uncertainty
out there.
Beth Mace (08:10):
So you and I have both been in the senior housing
business while , so we've seenthe yield premium change over
time or multi-family versussenior housing, especially when
you compare that against the 10year risk-free rate. So , for a
while that yield premiumbetween multi-family senior
housing had actually shrunkpretty significantly, and you
(08:30):
were seeing the pretty narrowdifferences between multifamily
and senior housing. So, as youjust pointed out that the risk
, perspective on senior housinghas changed since covid. So any
sense of what that premium istoday versus what it might've
been prior to covid ?
Zach Bowyer (08:46):
First it's such an interesting conversation
because conversation and, Ithink that the narrative of our
aging population, that's alwaysa high discussion point, just
so much more transparency inthe senior housing sector from
(09:08):
an underwriting standpoint,from an operational standpoint,
I really think it was slowly wewere saying that premium
declined in terms of pricepoints that investors were
willing to pay for multifamilyversus for seniors housing. And
(09:33):
so I, you sent me a researchpaper that you wrote in 2013 ,
and the first three bulletpoints, I think really speak to
that. Number one, you say bothasset classes share the same
stable cash flow . Well, at thetime that was certainly the
case, and that was certainlythe case leading into leading
into covid coming outta covid.
(09:54):
I just discussed, we had forseniors, housing occupancy
stalled quite a bit and now alot of uncertainty around
operating expenses and wherestabilized operating margins
are gonna be for seniorshousing . Then your next bullet
point, both asset classes havevery attractive growth outlook.
Maybe long-term , yes. Butright now I would argue that
(10:22):
that's probably more weightedtowards seniors housing. I
think that multifamily, a lotof construction took place, as
I mentioned. I mean, if you hada penny, you're putting in
multi industrial, and I thinkthat sector right now, there's,
there's a little bit of concernwith short-term supply growth.
What that's gonna do to vacancywell
Beth Mace (10:42):
Isn't in fact that , aren't there most number of
units under construction andmultifamily right now that
we've seen in quite some time ?
Zach Bowyer (10:47):
Absolutely.
Absolutely. Now that's, similarto see , seniors housing
construction starts are downsignificantly, and we think
those, those units will beabsorbed and that will return.
But we're seniors housing asit's right now, the NIC data
would suggest that the numberof occupied units are at an all
time high. We went through aperiod with really strong rent
(11:08):
growth, and I can tell you fromthe valuations that we're
conducting, we're still seeingactual rent growth 5, 6% and
even in some cases into the lowdouble digits.
Beth Mace (11:21):
So that's not projected, that's has occurred
in those properties that you'revalued
Zach Bowyer (11:25):
Happening on the rent rolls and still being
budgeted in a lot of cases. SoI would say, looking at that
bullet point, I would go backto the seniors h ousing side,
really strong short-termgrowth, l ong-term for both of
t hem. But r ight now i t's, Iwould put the s cales over on
the seniors h ousing side. Andthen t he third bullet point
that you mentioned is bothasset classes are in a position
(11:48):
in which near t erm supply willnot match demand. So just kind
of touched on that a little bitfor multifamily. We can get
into that a little bit more forthe senior space. But you and
I, as I have also discussed, Imean, i t's, since the 20 years
I've been in t he sector, thebaby boomer segment has always
been a h ot point. The realityis that segment of our
(12:11):
population is now literally atthe doorstep. For me, just
looking at capture rates,historical capture rates, and
applying that to the populationgrowth, right now, we would
need to increase ourconstruction deliveries by
around 35,000 units a year tomeet peak demand levels . So we
(12:36):
had so much certainty in themarket and seniors housing
leading up to covid and thosespreads were compressing. I
think we were started lookingindependent living cap rates,
as little as 25, 50 basispoints above conventional
multifamily. I think now thatspread has widened for some of
(12:58):
that operating uncertainty thatwe're seeing, and now anywhere
from a hundred , 125 basispoints spread.
Beth Mace (13:06):
Wow. So that's, that's a lot. So given the,
sort of the positive prospectsas we sort of move out of this
current capital cycle thatwe're in right now with capital
constraints on and interestrates and availability and cost
of debt, do you think thatspread will narrow back to
where we were, the 25 basispoints for IL from the 125
today ?
Zach Bowyer (13:27):
I'd like to say yes in the near term , but I
think it's gonna take a littlewhile. I think that one of the
things, just looking back at, Ithink you mentioned the 10 year
treasury, well , in Q three , Iknow it average, the average ,
10 year was was 4.3 , 4. 38.
Beth Mace (13:51):
About five now. Yep .
Zach Bowyer (13:52):
Yeah. So the last time the treasury was at that
level was during the GFFC in2002 , where it was right at
around 5% during that time caprates for seniors housing ,
average, as according to NICaverage around 8.1 and pushed
(14:13):
up to 9.8 a peak of 9.8 duringthat period. So I do think that
we're gonna continue to seesome pricing adjustment in the
seniors housing space. I thinkit's gonna be a little bit more
impactful than for multifamily.
But I think long term , I thinkthat there's a lot of
innovations that are going inplace in terms of care delivery
(14:36):
models, operating partnerships,and just innovations and
technology that will help bring, operating margins. I know if
we'll get back to pre covidlevels , but I think we'll
improve from where we're attoday . I think the certainty
and operations will return. AndI think that when that net
demand, when that demand reallyhits the market, and that's
(14:59):
realized by investors, I thinkwe'll once again, start to see
those spreads compress .
Beth Mace (15:05):
Yep . I actually agree with you on all of that.
So in terms of valuations , howare the inputs or assumption
changing today , versus wherethey were, take any timeframe
you want in the recent past orthe longer past and what are
you seeing in terms of entryand exit caps? What's that
spread? What are your kind ofrent assumptions? Are you using
(15:28):
occupancy projections? So if Iwere to do my own valuation,
what would be some of the keyassumptions I'd wanna think
about and how would I adjustthose to take into account
today's positions?
Zach Bowyer (15:40):
Yeah, so we, I've been conducting that investor
survey now for about 10 years.
We just completed , the firstsurvey that...
Beth Mace (15:53):
Before you go there, can people get that, get a copy
of that investor survey?
Zach Bowyer (15:57):
They can, yeah .
So we'll send it out. I'llshoot one over to you. It
should be published next week.
But we sent it out, well , wegot a little over 90
respondents, but we onlyinclude people who are
transactional and focused inseniors housing. So we want
sediment from actual marketparticipants who are at that
(16:17):
front line , and those are alot of the questions that we
ask . So I can get into some ofthe responses there , but I can
tell you, it is a very highlydebated topic right now in
terms of where exit cap ratesare at and what type of
methodology that we're using toget a value in a more
stabilized market. It's verysimple. We look at market
(16:40):
transactions, market sales, weextract the cap rate and we
apply that to ,
Beth Mace (16:45):
Yeah , so market comps, but limited comps today
'cause of the limitedtransaction volume.
Zach Bowyer (16:51):
Well, that's very true. And I think that even and
we're not seeing a ton ofdistress, we can get into that,
but even a lot of thetransactions that we are
seeing, there are other factorsinvolved, consumable debt,
different types of jointventure investments and other
things that you really have toknow the details of that
(17:14):
transaction to understand thatthe true cap rate or pricing on
the other end. So really what Ithink we're getting back to is
very similar to how we wereevaluating properties during
covid, where we're relying alot more on the discounted cash
flow analysis, so we can get alot more certainty where in the
property market fundamentalswhere occupancy is what we're
(17:36):
seeing for rent growth , andthen we'll rely back to your
discount rate. And interesting,I've never had more discussions
around what the right terminalcap rate should be then in this
environment. And a lot of that,I mean it's, I think it's the
debates revolve around theuncertainty on real where
(17:59):
interest rates are going . So Ithink if you're in the camp
that,this higher interest rateenvironment is a little bit
more short term , you'regetting a little bit more
comfortable with a lower orlower spreads in your terminal
cap rate above your going incap rate. I think now probably
the majority of the sediment ishigher for longer. Right? So
(18:20):
that kind of influences whereyour exit cap rate is, I could
tell you from the surveyrespondents, the majority of
them were underwriting aterminal cap rate at anywhere
between a 50 to base , 50 to 75basis points spread over your
(18:42):
going in cap rate. And I couldtell you that we're still
seeing even as low as a 20basis point spread.
Beth Mace (18:51):
So what would that have been, say, prior to March
of 22 before the Fed startedraising rates? Would that
spread between entry and exitcap rates been flat?
Zach Bowyer (19:00):
I wouldn't say flat. It would be closer to
probably more normalized spreadwould be 75 to hundred basis
points between you're going inand your terminal cap rate .
Beth Mace (19:09):
So that's not very different from today then.
Zach Bowyer (19:11):
Well, I would say, I would say it's compressed, so
you're going from on averageprobably about a hundred down
to about 50 basis points, so 50basis points reduction and your
terminal cap rate. And I wouldsay for senior solving , again,
a little bit of that would,would be your, your outlook on
what's gonna happen withinterest rates over the next
five to 10 years. But then Ithink too, a lot of people will
(19:34):
point to the stronger propertymarket fundamentals where we
think occupancy's gonnacontinue to improve. We are
seeing on a lot wider scaleimprovement in operating
margins. So that's good . Andall of those things depending
on which lever you wanna pullwould point to more favorable
(19:56):
pricing on your exit.
Beth Mace (19:58):
Okay , good . How about rank growth assumptions?
So in my prior career, I spenta lot of time on rank growth
assumptions as then put intomodels. So typically we used to
see like 3% type rank growth,but in the last couple years,
according to the , some of thedata that NIC MAP Vision has,
(20:19):
we've seen a growth in wellexcess of 3%. The latest NIC
MAP Vision data shows like a 6%year over year rank growth. And
then of course it goes muchhigher and narrow depending on
who you are and where you'relocated, who's operating. So
when you make doing evaluationand making that assumption, how
do you think about rent growth?
(20:39):
Do you take into account themarket? Do you take into
account the operator? How doesthat work?
Zach Bowyer (20:44):
Absolutely, absolutely. So we're looking at
the market , we're looking atthe operator , we're looking
very closely at the rent roll ,what's being achieved in the
more recent contracts. It'schallenging though on the
valuation side, even at aproperty for example, where
maybe we are seeing six 8% rentgrow we're not gonna be able to
(21:06):
underwrite that for the longterm . We might go to four or
5% , which is extremelyaggressive from an appraiser
standpoint. But what that doesdo is when we see that strength
in operating performance, itallows us , I don't wanna use
the word aggressive, but itallows us, we'll kind of, we'll
get a little bit more room inour capital market assumptions.
(21:29):
So for our discount rate, ourcapital , our cap rate , so
that's what we do see, andmaybe this is just my
methodology and my perspective,but the banks that we're doing
valuations for, even a lot ofthe funds, will have probably
more muted long-term rentgrowth assumptions relative to
(21:49):
what we're seeing in today'smarket. But on the flip side of
that, that does reduce the riskin that when the current
performance is greater thanthat. And we'll reflect that
probably more on our capitalmarket side.
Beth Mace (22:02):
Yeah, and I think some of the rent growth that we
saw in the last year is relatedto the fact that we've been in
a highly inflationaryenvironment. There are a lot of
revenue growth that wasjustified because expenses has
gone up so much for PPE andthings like that. And I think
in social security increase, wesaw an 8.7% of social security
increase as we went intoJanuary of 2023. That's gonna
(22:23):
be 3.2% as we go into 2024. So,overall inflation has slowed
down a little bit and , um,we'll see how that translates
into rents . So when yourcrystal ball , I don't know if
you have a projection, when doyou think, or what do you think
the Fed, what , when are ratesgonna change? When is this
capital market period gonnastart to end , the turmoil
(22:44):
start to,
Zach Bowyer (22:45):
I have no idea.
Yesterday rates remained flat,so I think that was good news ,
yesterday
Beth Mace (22:54):
Being November 1st, which was when the Fed met.
Yeah. Just for , yep , yep .
Zach Bowyer (23:00):
So I really dunno . And it's a highly debated
topic and there's a lot of veryconvincing research that points
in different directions. Ithink for me, the way I
(23:20):
approach it and what I see inthe market right now it's
really, we're leaning on whatwe do now and that's the
property market fundamentals. Ithink that we're, I guess one
of the things that is, if youreally started to see a lot of
(23:50):
the stress truly at the market, which with, and that is
certainly a , a lever that canbe pulled to get that back
under control. And I thinkthere are a lot of headlines
around the stress . We'recertainly seeing , that in the
office space. But, and we canget into this if you want in
(24:12):
more detail, but I really don'tsee at least in my practice,
the level of distress inseniors housing that a lot of
the headlines might suggest .
Beth Mace (24:24):
Yep .
Zach Bowyer (24:24):
And I think as long as that's the case, I
think that the Fed will becomfortable. And , and same ,
very similar with multifamilyand valuations are certainly
impaired and returns aregetting pressed, but there's,
there's not fire sales , not atall levels that we've seen in
past recessions in terms ofwhat's happening in the real
(24:46):
estate markets. And so, until,or as long as that's not the
case, I think the Fed willstill, or I think the
expectation would be we're ,we're in this environment for,
for a little bit longer.
Beth Mace (24:59):
Yeah, I mean, my viewpoint is that we're in
higher for longer as the Fedhas been saying, and I think
there will be a time probablysometime in 2024 where rates
will come down, but we'recertainly not going back to
like a 0% interest rateenvironment again. Yeah, I
mean, if they had to settleback down, I would think in the
three to 4% range from maybetoday's five to quarter percent
(25:21):
range, but a lot of things haveto happen for that, to her
foremost of mine that would beinflation has to really get
down to that 2% target that thefed's seeking. So Zach , I know
you , Cushman you guys track ,l oan a nd loan levels a nd l
oan maturities, and you and I have shared data that looks a t
low maturities coming forsenior housing in the next,
(25:43):
this year and next. And I thinkwhat's the latest value h ub on
that, and how do you thinkthat's gonna play out?
Zach Bowyer (25:49):
Yeah, so we're up now, so in for seniors housing,
low maturities, we're tracking18 billion in low mat that are
set to come due over the nexttwo years.
Beth Mace (26:03):
So that's, that's the rest of 23 and 24 or 24 and
Zach Bowyer (26:07):
25, 24, 25, yes .
Or 25. I don't know the ratiofor seniors housing for
multifamily, I think offmemory, I know this is being
recorded, but don't quote me onit . I think about 40% of the
maturing debt is floating ratemortgages.
Beth Mace (26:27):
Just for perspective, I think that
multifamily is like 250 billion, right?
Zach Bowyer (26:31):
I t's, yeah. A nd t hen I t hink w hat, w here i
s t hat? I 've g ot t he numberoverall.
Beth Mace (26:39):
For like the overall commercial real estate. The
senior housing is fairlyrelatively small segment. So ,
relative to the amount of loansthat are maturing across all
commercial real estate, small,but for our industry that $18
billion over 24 and 25 issignificant. So yeah ,
Zach Bowyer (26:59):
We're tracking 90 billion overall for all
commercial real estate justwithin the next 15 months.
Beth Mace (27:04):
So , and that includes office
Zach Bowyer (27:07):
That Yes, that's all, all asset classes.
Beth Mace (27:10):
Wow, okay. So, and that's 15 months and we're
looking at 18 billion for twoyears in senior housing . Yeah.
S o, is that g onna, cause youthink, i s those loans mature
and it becomes more difficultfor some operators and owners
to refinance because rates arehigher. Some of those are
adjustable rates and theyrequire caps, interest rate
(27:32):
caps, and there's also typically lower proceeds. So if
you look at that makes it adifficult time to refinance
right now for some operators atleast. So how is that gonna
affect the market, do youthink? And will that have an
impact on valuations as well?
Zach Bowyer (27:52):
I mean, we think it will , and we think it'll,
we think there's potential tomaybe even bring some clarity
to the market , f or better orworse, I think that t hose l
oan m at are gonna force peopleto make tough decisions. The
banks are are gonna say, look,we need t o move some of this p
(28:13):
aper. And I think as aninvestor, y ou're g onna m ake
t he tough decision. Do we wanna do a cash i n refinance?
And what does that do to ourinvestment returns, or do we
wanna go ahead and take ourloss. And I think that you will
(28:36):
see more properties come tomarket. I think some people
will stay in for variousreasons. We are though.
Interesting. We have a lot ofcalls with appraisal
departments at various banksand it still is really hard to
get a pulse on what directionthat's gonna go. We're hearing
that a lot of banks are stillwilling to extend and work with
(29:01):
their borrowers. I I think thatin the larger commercial real
estate bond , again, despitethe headlines that we're
reading about seniors housingit's a smaller percentage of
their book. And from anoperating standpoint , it's
(29:24):
not, it could be worse. So Ireally don't know . I mean,
that was kind of our thoughtthat those maturing loans would
really force a market again andhelp bring that disconnect
between buyers and sellerstogether. Give a little bit
more certainty in pricing. Andmaybe that will happen. We'll ,
(29:45):
time will tell at to as to whatlevel.
Beth Mace (29:49):
So that could be a catalyst to get the transaction
market moving again. What mightbe other things, I mean, my
expectation is that NIC MAPVision had data in terms of
transaction volumes through thethird quarter. It was pretty
weak relative to what we hadseen in prior years. So the
expectation is that things willstart to move more in 2024
(30:09):
buyers and sellers that bid askspread will start to narrow.
There'll be a little bit moretransparency in the market.
Some of the closed end , equityfunds are gonna have to sell
because they can't extend theirlife any longer. There is some
degree of people needing tosell because they're investors
want their returns, they wanttheir cash back , they wanna
reinvest. So what might beother catalysts you think to
(30:33):
get that transaction marketmoving
Zach Bowyer (30:37):
In addition to the points that you just made? I
really don't know .
Beth Mace (30:43):
Are you seeing like any cash deals that people are
trying to get off their
Zach Bowyer (30:47):
Cash deals, but there's, I would long the
transactions that we're seeingI I'd three different buckets .
So on the distress side wherewe're seeing, a lot, like the
number one question I got askedNIC, are you seeing a lot of
distress and where's thepricing on that distress? And
the distress that we're seeingis probably at the larger scale
(31:11):
with the largest discount areolder properties, B minus,
investment BC class that werenot performing prior to Covid.
And so the banks are the banksare liquidating those and very,
very significant discount onthose properties. A lot of them
, however, are being purchasedfor some alternate use and
(31:34):
their behavioral health or, youknow, but, but massively
discounted. Right. And, but Iwould even, I would question as
even if the best operator couldgo in and get a healthy margin
outta those properties, right?
So those are easy ones. Thebanks and investors are moving
away from those.
Beth Mace (31:53):
So in those repositionings, are you seeing,
there's a lot of talk abouttaking some of those properties
and repositioning them formiddle market. Have you seen
any of that yet?
Zach Bowyer (32:01):
I haven't seen much middle market. I haven't
seen most of it is some sort ofsmaller medical office,
behavioral health, somethingalong those lines, even just
buying it for the dirt and, andholding it. But I would go, I
would say, and these aresmaller, smaller properties,
(32:22):
again. I think that you wouldjust, you would be hard to get
a margin outta them with areally great operator , then
the next bucket would be , andwe're not seeing a whole bunch
of this, but what we're seeingwould be, say , 10 year and
(32:48):
newer vintage that, took apretty big occupancy hit during
covid and just hasn't been ableto recover. So we're seeing a
little bit of that and orproperties that were recently
delivered , maybe on the tailof covid or recently entered in
lease up and just can't getover that hurdle at enough
(33:13):
time. And those are coming tomarket and , and being
discounted. I would say thatfor the very limited volume
that we're seeing there,probably a discount of 70 cents
on the dollar, I think onaverage. But anything that's
and there's something involvedthere that's really kind of
(33:35):
forcing that sale . I think ifpeople have capital, then
they're gonna lease up theproperty . I think that even
with stabilized propertieswhere say you're reaching your
investment , you need to sell ,I think right now people are
doing everything they can tonot sell just because of that ,
(33:55):
that disconnect. And whatbuyers are willing to pay.
Beth Mace (34:00):
Alright , so that's on the seller side. On the
buyer side , there's some ,large institutional investors
out there, pension fund moneythat came through. There's the
public REITs that are outthere, the private REITs that
are out there. Any sense ofwhat the buyer profile is like
as we go into 2024 versus wherewe've been? Or has it changed
(34:21):
at all? Maybe not.
Zach Bowyer (34:22):
I think right now, so again, going back to our
survey, what we saw in terms ofthe two most prevalent
strategies for investors wascore plus and then
opportunistic.
Beth Mace (34:35):
Oh , okay.
Zach Bowyer (34:35):
So I think that there are core plus investors
for stabilized Class Aproperties. I think the pricing
on that is gonna be rightaround a seven cap . I'll still
get emails from brokers andother investors asking if we
can support anything below aseven cap. I'm not sure we can
in this environment.
Beth Mace (34:56):
Yeah .
Zach Bowyer (34:57):
But those numbers are at least I guess you could
assume are being discussed.
Beth Mace (35:05):
And then on the opportunistic side ,
Zach Bowyer (35:07):
Thank you. And then on the opportunistic side,
I think that's where there'sstill a big buyer seller
spread. I think there'scertainly a lot of capital,
probably more dry powder thanwe've ever seen. Not only for
seniors , but commercial realestate as a whole . Right now ,
I think the most recent data isabout two 70 billion , dry
(35:30):
powder on the sideline. A lotof that is opportunistic. And
that also applies to seniors .
I think those investors,they're seeing a lot of deals.
They're willing to make lowoffers, but they're also
willing to move to the next onebecause their sentiment is
there's a lot more behind thisdeal.
Beth Mace (35:49):
Okay. So in wrapping up a bit, if you had a one or
two sentence just , one or twominute description of where you
think we are , can you give usyour view? It may look at
market fundamentals versuscapital market stresses and
things like that.
Zach Bowyer (36:04):
Well, that's exactly it. The senior living
sector, it's at a veryinteresting inflection point.
Property market fundamentalsare stronger than ever with
even stronger seculartailwinds. Construction starts
are at an all time low , and Ithink the market still
underestimates the magnitude ofdemand that's literally at the
(36:28):
doorstep . On the other hand,as you mentioned, we're
enduring one of the morechallenging capital market
environments. The rising costof debt, lack of liquidity in
the debt markets is certainlystressing short-term
valuations. Valuations, I thinkthey will reset. Operating
margins will improve andcapital will be recycled in
(36:52):
today's market. However, it'sall about the basis.
Beth Mace (36:56):
Very good. All right , Zach , thanks so much. I
really appreciate you takingtime and I'm sure our listeners
will really enjoy this podcast.
It's been really informative. Ilove the discussion and
comparing multifamily to seniorhousing and your summary marks
and the details as well. Sothanks very much. Appreciate
it.
Zach Bowyer (37:11):
Thank you, Beth.
You're the best . It's always apleasure.
Beth Mace (37:14):
Alright , thanks sir .
Zach Bowyer (37:15):
Bye-Bye.
Hello, and welcome to the NIC Chats Market
Conditions podcast series. Myname is Beth Mace, and I'm
currently the Senior Advisor atNIC focusing on the economy and
capital market trends andimplications. Thank you for
joining us today. The focus ofthis series of NIC Chats
podcasts is talking to expertsand industry leaders impacted
by today's property and capitalmarket conditions and trends as
(00:26):
they pertain to the seniorhousing transaction market,
property, pricing, deal flow, and market sentiment. As you
listen today, hope that you'llfind some insights and ideas
that a re relevant to you i nyour business, be it as an
operator, developer, banker,private equity provider, public
entity, or other capitalprovider. Z ach, before we
(00:47):
begin, I would like to thankyou for participating in NIC's
Fall Conference, both as amember of the planning
committee, as well as apanelist o n the State o f
capital markets and Valuationpanel. NIC very much
appreciates your support a ndtime commitment as a volunteer
to help us deliver timely andinformative content. So now, Z
ach, tell us about Cushman a ndWakefield and your position
(01:08):
there as a senior managingdirector in the e valuation a
nd advisory living sector.
Zach Bowyer (01:12):
Thank you, Beth .
It's always a pleasure justchatting with you about the
market, sharing ideas andreally working together to try
to get smarter. So thank youfor having me. So Cushman and
Wakefield, I've been at Cushmanand Wakefield for almost two
(01:34):
years now, and I lead what wecall our living sectors on the
valuation and advisory side. So, living sectors, that's
basically your conventionalmultifamily, and then all of
the subsets underneath (01:47):
student housing, manufactured housing,
affordable, etc. In the seniorshousing space, I've specialized
almost exclusively there forabout 20 years. That is my core
competency and really where mypassion is from a commercial
real estate standpoint. Just togive you an idea on the volume
(02:08):
that we do on an annual basis,we'll do, I guess this year
within that business line,we'll do around 9,000
valuations and advisory typeassignments.
Beth Mace (02:19):
Sounds like a lot, and I bet that keeps you and
your team pretty busy. That's alot of valuations. So I know
that, as you just said , you'reinvolved with both valuations
for, as you call it , theliving sectors group, but that
includes multifamily and seniorhousing, and I think you have a
pretty unique window into theseproperty types and their trends
as well as the activity ofcapital and transaction markets
(02:39):
associated with these propertytypes. So tell us a little bit
more about that in terms ofwhat you're doing for
multifamily and then seniorhousing and how they compare,
and we'll get into more detailof this in a minute, but just a
brief overview of that.
Zach Bowyer (02:53):
Yeah, I think at a very simplistic form ,
everything, I mean, it startswith the real estate. But I
think when you're digging intoseniors housing, and really
where that differs is theoperating business that's in
place is much more impactful.
(03:15):
The valuation you have, notonly a more frail population
base that requires care. Youhave a more regulated type
environment, especially as youmove up that acuity scale. And
I think that not only thatcreates more risk from an
(03:37):
investor's perspective, but alot more certainty and
expertise involved in managingthose properties.
Beth Mace (03:43):
Okay. So we're gonna dive into that a bit more in a
minute, but I just wanna talk alittle bit about what's been
happening recently, andprobably most of our audience
is aware of this, but a lot hashappened in the capital markets
since March of 2022 when theFed started to raise their
interest rates. And today theFed funds rates in a range of
five and a quarter to 5.5%, andthat's up from virtually zero
(04:04):
in March of 2022. The Fed actedquickly to raise interest rates
in an attempt to slow theoverall economy, to take the
strength out of inflation.
Inflation was up to 9% at onepoint last year. And there's a
lot of debate as to the causesof inflation, but again, it's
been quite high, but recentlywe've seen it slow down to,
(04:26):
well , in September to pace ofabout 3.7%. Now at the FOMC
meeting, which actually justhappened on November 1st , the
Fed decided to keep interestrates flat, but it did indicate
that it would mean datadependent in making its
decisions until inflation comesdown, and that it would be
higher for longer sort of theWall Street Creed right now of
(04:47):
what the fed's doing. And thenon the other end of this, of
the yield curve, we've seen the10 year goal past 5% the end of
October, and that was itshighest level since 20 2007. So
you specialized appraisalvaluation and clearly interest
rates affect cap rates and itaffects valuation. So how has
(05:08):
this higher interest rateenvironment affected valuations
for multifamily and also forsenior housing in particular?
Zach Bowyer (05:15):
Sure. It's really interesting. I think that
there's certainly across theboard for all commercial real
estate, there's the currentcapital markets environment,
rising interest rate is puttingdownward pressure on valuations
across the board, some morethan others. For seniors
(05:36):
housing specifically, I thinkit's a little bit of, in terms
of the impact on, on valuations, a little bit of a double
whammy , the seniors housingsector. I've been in the space
for almost 20 years now, itreally through prior recessions
earned a reputation for beingrelatively recessionary
(05:57):
resilient. And a lot of thatwas the more need-driven demand
component. Well the last we canwe'll call it a recession or
downturn during c ovid 1 9 really tested that, r
ecessionary resilientreputation for seniors housing.
(06:17):
So , we all know a lot of theheadlines and it's still fairly
recent, so we understand theimpact that it had on occupancy
for seniors housing. Andthenalso staffing coming out of
that, staffing shortages,rising cost on that side really
hit operating margins hard andalso I think added or brought
(06:42):
back a lot more increased thatrisk perspective that investors
had on the space because ofthat, that environment. So you
couple that with the risinginterest rate environment,
decreased margins, and thenwhat happened for occupancy. I
think that just that overallenvironment and those
(07:03):
fundamentals really had acombined impact on, on
valuations more thanmultifamily , a pretty
interesting parallel I guessduring that time or lack of a
parallel coming outta of thecovid environment performed
(07:26):
really well. Rental increaseswere near all time highs ,
vacancy levels, near all timelows. I think if you had a
penny during that time, youwere putting it in industrial
or, or multifamily. So fromthat operating certainty
standpoint or certainty andcash flow standpoint,
(07:50):
multifamily became much more,much more attractive than
seniors housing . So I thinkseniors housing valuations did
adjust even a little bitquicker, the multifamily to the
current environment, but therestill is a lot of uncertainty
out there.
Beth Mace (08:10):
So you and I have both been in the senior housing
business while , so we've seenthe yield premium change over
time or multi-family versussenior housing, especially when
you compare that against the 10year risk-free rate. So , for a
while that yield premiumbetween multi-family senior
housing had actually shrunkpretty significantly, and you
(08:30):
were seeing the pretty narrowdifferences between multifamily
and senior housing. So, as youjust pointed out that the risk
, perspective on senior housinghas changed since covid. So any
sense of what that premium istoday versus what it might've
been prior to covid ?
Zach Bowyer (08:46):
First it's such an interesting conversation
because conversation and, Ithink that the narrative of our
aging population, that's alwaysa high discussion point, just
so much more transparency inthe senior housing sector from
(09:08):
an underwriting standpoint,from an operational standpoint,
I really think it was slowly wewere saying that premium
declined in terms of pricepoints that investors were
willing to pay for multifamilyversus for seniors housing. And
(09:33):
so I, you sent me a researchpaper that you wrote in 2013 ,
and the first three bulletpoints, I think really speak to
that. Number one, you say bothasset classes share the same
stable cash flow . Well, at thetime that was certainly the
case, and that was certainlythe case leading into leading
into covid coming outta covid.
(09:54):
I just discussed, we had forseniors, housing occupancy
stalled quite a bit and now alot of uncertainty around
operating expenses and wherestabilized operating margins
are gonna be for seniorshousing . Then your next bullet
point, both asset classes havevery attractive growth outlook.
Maybe long-term , yes. Butright now I would argue that
(10:22):
that's probably more weightedtowards seniors housing. I
think that multifamily, a lotof construction took place, as
I mentioned. I mean, if you hada penny, you're putting in
multi industrial, and I thinkthat sector right now, there's,
there's a little bit of concernwith short-term supply growth.
What that's gonna do to vacancywell
Beth Mace (10:42):
Isn't in fact that , aren't there most number of
units under construction andmultifamily right now that
we've seen in quite some time ?
Zach Bowyer (10:47):
Absolutely.
Absolutely. Now that's, similarto see , seniors housing
construction starts are downsignificantly, and we think
those, those units will beabsorbed and that will return.
But we're seniors housing asit's right now, the NIC data
would suggest that the numberof occupied units are at an all
time high. We went through aperiod with really strong rent
(11:08):
growth, and I can tell you fromthe valuations that we're
conducting, we're still seeingactual rent growth 5, 6% and
even in some cases into the lowdouble digits.
Beth Mace (11:21):
So that's not projected, that's has occurred
in those properties that you'revalued
Zach Bowyer (11:25):
Happening on the rent rolls and still being
budgeted in a lot of cases. SoI would say, looking at that
bullet point, I would go backto the seniors h ousing side,
really strong short-termgrowth, l ong-term for both of
t hem. But r ight now i t's, Iwould put the s cales over on
the seniors h ousing side. Andthen t he third bullet point
that you mentioned is bothasset classes are in a position
(11:48):
in which near t erm supply willnot match demand. So just kind
of touched on that a little bitfor multifamily. We can get
into that a little bit more forthe senior space. But you and
I, as I have also discussed, Imean, i t's, since the 20 years
I've been in t he sector, thebaby boomer segment has always
been a h ot point. The realityis that segment of our
(12:11):
population is now literally atthe doorstep. For me, just
looking at capture rates,historical capture rates, and
applying that to the populationgrowth, right now, we would
need to increase ourconstruction deliveries by
around 35,000 units a year tomeet peak demand levels . So we
(12:36):
had so much certainty in themarket and seniors housing
leading up to covid and thosespreads were compressing. I
think we were started lookingindependent living cap rates,
as little as 25, 50 basispoints above conventional
multifamily. I think now thatspread has widened for some of
(12:58):
that operating uncertainty thatwe're seeing, and now anywhere
from a hundred , 125 basispoints spread.
Beth Mace (13:06):
Wow. So that's, that's a lot. So given the,
sort of the positive prospectsas we sort of move out of this
current capital cycle thatwe're in right now with capital
constraints on and interestrates and availability and cost
of debt, do you think thatspread will narrow back to
where we were, the 25 basispoints for IL from the 125
today ?
Zach Bowyer (13:27):
I'd like to say yes in the near term , but I
think it's gonna take a littlewhile. I think that one of the
things, just looking back at, Ithink you mentioned the 10 year
treasury, well , in Q three , Iknow it average, the average ,
10 year was was 4.3 , 4. 38.
Beth Mace (13:51):
About five now. Yep .
Zach Bowyer (13:52):
Yeah. So the last time the treasury was at that
level was during the GFFC in2002 , where it was right at
around 5% during that time caprates for seniors housing ,
average, as according to NICaverage around 8.1 and pushed
(14:13):
up to 9.8 a peak of 9.8 duringthat period. So I do think that
we're gonna continue to seesome pricing adjustment in the
seniors housing space. I thinkit's gonna be a little bit more
impactful than for multifamily.
But I think long term , I thinkthat there's a lot of
innovations that are going inplace in terms of care delivery
(14:36):
models, operating partnerships,and just innovations and
technology that will help bring, operating margins. I know if
we'll get back to pre covidlevels , but I think we'll
improve from where we're attoday . I think the certainty
and operations will return. AndI think that when that net
demand, when that demand reallyhits the market, and that's
(14:59):
realized by investors, I thinkwe'll once again, start to see
those spreads compress .
Beth Mace (15:05):
Yep . I actually agree with you on all of that.
So in terms of valuations , howare the inputs or assumption
changing today , versus wherethey were, take any timeframe
you want in the recent past orthe longer past and what are
you seeing in terms of entryand exit caps? What's that
spread? What are your kind ofrent assumptions? Are you using
(15:28):
occupancy projections? So if Iwere to do my own valuation,
what would be some of the keyassumptions I'd wanna think
about and how would I adjustthose to take into account
today's positions?
Zach Bowyer (15:40):
Yeah, so we, I've been conducting that investor
survey now for about 10 years.
We just completed , the firstsurvey that...
Beth Mace (15:53):
Before you go there, can people get that, get a copy
of that investor survey?
Zach Bowyer (15:57):
They can, yeah .
So we'll send it out. I'llshoot one over to you. It
should be published next week.
But we sent it out, well , wegot a little over 90
respondents, but we onlyinclude people who are
transactional and focused inseniors housing. So we want
sediment from actual marketparticipants who are at that
(16:17):
front line , and those are alot of the questions that we
ask . So I can get into some ofthe responses there , but I can
tell you, it is a very highlydebated topic right now in
terms of where exit cap ratesare at and what type of
methodology that we're using toget a value in a more
stabilized market. It's verysimple. We look at market
(16:40):
transactions, market sales, weextract the cap rate and we
apply that to ,
Beth Mace (16:45):
Yeah , so market comps, but limited comps today
'cause of the limitedtransaction volume.
Zach Bowyer (16:51):
Well, that's very true. And I think that even and
we're not seeing a ton ofdistress, we can get into that,
but even a lot of thetransactions that we are
seeing, there are other factorsinvolved, consumable debt,
different types of jointventure investments and other
things that you really have toknow the details of that
(17:14):
transaction to understand thatthe true cap rate or pricing on
the other end. So really what Ithink we're getting back to is
very similar to how we wereevaluating properties during
covid, where we're relying alot more on the discounted cash
flow analysis, so we can get alot more certainty where in the
property market fundamentalswhere occupancy is what we're
(17:36):
seeing for rent growth , andthen we'll rely back to your
discount rate. And interesting,I've never had more discussions
around what the right terminalcap rate should be then in this
environment. And a lot of that,I mean it's, I think it's the
debates revolve around theuncertainty on real where
(17:59):
interest rates are going . So Ithink if you're in the camp
that,this higher interest rateenvironment is a little bit
more short term , you'regetting a little bit more
comfortable with a lower orlower spreads in your terminal
cap rate above your going incap rate. I think now probably
the majority of the sediment ishigher for longer. Right? So
(18:20):
that kind of influences whereyour exit cap rate is, I could
tell you from the surveyrespondents, the majority of
them were underwriting aterminal cap rate at anywhere
between a 50 to base , 50 to 75basis points spread over your
(18:42):
going in cap rate. And I couldtell you that we're still
seeing even as low as a 20basis point spread.
Beth Mace (18:51):
So what would that have been, say, prior to March
of 22 before the Fed startedraising rates? Would that
spread between entry and exitcap rates been flat?
Zach Bowyer (19:00):
I wouldn't say flat. It would be closer to
probably more normalized spreadwould be 75 to hundred basis
points between you're going inand your terminal cap rate .
Beth Mace (19:09):
So that's not very different from today then.
Zach Bowyer (19:11):
Well, I would say, I would say it's compressed, so
you're going from on averageprobably about a hundred down
to about 50 basis points, so 50basis points reduction and your
terminal cap rate. And I wouldsay for senior solving , again,
a little bit of that would,would be your, your outlook on
what's gonna happen withinterest rates over the next
five to 10 years. But then Ithink too, a lot of people will
(19:34):
point to the stronger propertymarket fundamentals where we
think occupancy's gonnacontinue to improve. We are
seeing on a lot wider scaleimprovement in operating
margins. So that's good . Andall of those things depending
on which lever you wanna pullwould point to more favorable
(19:56):
pricing on your exit.
Beth Mace (19:58):
Okay , good . How about rank growth assumptions?
So in my prior career, I spenta lot of time on rank growth
assumptions as then put intomodels. So typically we used to
see like 3% type rank growth,but in the last couple years,
according to the , some of thedata that NIC MAP Vision has,
(20:19):
we've seen a growth in wellexcess of 3%. The latest NIC
MAP Vision data shows like a 6%year over year rank growth. And
then of course it goes muchhigher and narrow depending on
who you are and where you'relocated, who's operating. So
when you make doing evaluationand making that assumption, how
do you think about rent growth?
(20:39):
Do you take into account themarket? Do you take into
account the operator? How doesthat work?
Zach Bowyer (20:44):
Absolutely, absolutely. So we're looking at
the market , we're looking atthe operator , we're looking
very closely at the rent roll ,what's being achieved in the
more recent contracts. It'schallenging though on the
valuation side, even at aproperty for example, where
maybe we are seeing six 8% rentgrow we're not gonna be able to
(21:06):
underwrite that for the longterm . We might go to four or
5% , which is extremelyaggressive from an appraiser
standpoint. But what that doesdo is when we see that strength
in operating performance, itallows us , I don't wanna use
the word aggressive, but itallows us, we'll kind of, we'll
get a little bit more room inour capital market assumptions.
(21:29):
So for our discount rate, ourcapital , our cap rate , so
that's what we do see, andmaybe this is just my
methodology and my perspective,but the banks that we're doing
valuations for, even a lot ofthe funds, will have probably
more muted long-term rentgrowth assumptions relative to
(21:49):
what we're seeing in today'smarket. But on the flip side of
that, that does reduce the riskin that when the current
performance is greater thanthat. And we'll reflect that
probably more on our capitalmarket side.
Beth Mace (22:02):
Yeah, and I think some of the rent growth that we
saw in the last year is relatedto the fact that we've been in
a highly inflationaryenvironment. There are a lot of
revenue growth that wasjustified because expenses has
gone up so much for PPE andthings like that. And I think
in social security increase, wesaw an 8.7% of social security
increase as we went intoJanuary of 2023. That's gonna
(22:23):
be 3.2% as we go into 2024. So,overall inflation has slowed
down a little bit and , um,we'll see how that translates
into rents . So when yourcrystal ball , I don't know if
you have a projection, when doyou think, or what do you think
the Fed, what , when are ratesgonna change? When is this
capital market period gonnastart to end , the turmoil
(22:44):
start to,
Zach Bowyer (22:45):
I have no idea.
Yesterday rates remained flat,so I think that was good news ,
yesterday
Beth Mace (22:54):
Being November 1st, which was when the Fed met.
Yeah. Just for , yep , yep .
Zach Bowyer (23:00):
So I really dunno . And it's a highly debated
topic and there's a lot of veryconvincing research that points
in different directions. Ithink for me, the way I
(23:20):
approach it and what I see inthe market right now it's
really, we're leaning on whatwe do now and that's the
property market fundamentals. Ithink that we're, I guess one
of the things that is, if youreally started to see a lot of
(23:50):
the stress truly at the market, which with, and that is
certainly a , a lever that canbe pulled to get that back
under control. And I thinkthere are a lot of headlines
around the stress . We'recertainly seeing , that in the
office space. But, and we canget into this if you want in
(24:12):
more detail, but I really don'tsee at least in my practice,
the level of distress inseniors housing that a lot of
the headlines might suggest .
Beth Mace (24:24):
Yep .
Zach Bowyer (24:24):
And I think as long as that's the case, I
think that the Fed will becomfortable. And , and same ,
very similar with multifamilyand valuations are certainly
impaired and returns aregetting pressed, but there's,
there's not fire sales , not atall levels that we've seen in
past recessions in terms ofwhat's happening in the real
(24:46):
estate markets. And so, until,or as long as that's not the
case, I think the Fed willstill, or I think the
expectation would be we're ,we're in this environment for,
for a little bit longer.
Beth Mace (24:59):
Yeah, I mean, my viewpoint is that we're in
higher for longer as the Fedhas been saying, and I think
there will be a time probablysometime in 2024 where rates
will come down, but we'recertainly not going back to
like a 0% interest rateenvironment again. Yeah, I
mean, if they had to settleback down, I would think in the
three to 4% range from maybetoday's five to quarter percent
(25:21):
range, but a lot of things haveto happen for that, to her
foremost of mine that would beinflation has to really get
down to that 2% target that thefed's seeking. So Zach , I know
you , Cushman you guys track ,l oan a nd loan levels a nd l
oan maturities, and you and I have shared data that looks a t
low maturities coming forsenior housing in the next,
(25:43):
this year and next. And I thinkwhat's the latest value h ub on
that, and how do you thinkthat's gonna play out?
Zach Bowyer (25:49):
Yeah, so we're up now, so in for seniors housing,
low maturities, we're tracking18 billion in low mat that are
set to come due over the nexttwo years.
Beth Mace (26:03):
So that's, that's the rest of 23 and 24 or 24 and
Zach Bowyer (26:07):
25, 24, 25, yes .
Or 25. I don't know the ratiofor seniors housing for
multifamily, I think offmemory, I know this is being
recorded, but don't quote me onit . I think about 40% of the
maturing debt is floating ratemortgages.
Beth Mace (26:27):
Just for perspective, I think that
multifamily is like 250 billion, right?
Zach Bowyer (26:31):
I t's, yeah. A nd t hen I t hink w hat, w here i
s t hat? I 've g ot t he numberoverall.
Beth Mace (26:39):
For like the overall commercial real estate. The
senior housing is fairlyrelatively small segment. So ,
relative to the amount of loansthat are maturing across all
commercial real estate, small,but for our industry that $18
billion over 24 and 25 issignificant. So yeah ,
Zach Bowyer (26:59):
We're tracking 90 billion overall for all
commercial real estate justwithin the next 15 months.
Beth Mace (27:04):
So , and that includes office
Zach Bowyer (27:07):
That Yes, that's all, all asset classes.
Beth Mace (27:10):
Wow, okay. So, and that's 15 months and we're
looking at 18 billion for twoyears in senior housing . Yeah.
S o, is that g onna, cause youthink, i s those loans mature
and it becomes more difficultfor some operators and owners
to refinance because rates arehigher. Some of those are
adjustable rates and theyrequire caps, interest rate
(27:32):
caps, and there's also typically lower proceeds. So if
you look at that makes it adifficult time to refinance
right now for some operators atleast. So how is that gonna
affect the market, do youthink? And will that have an
impact on valuations as well?
Zach Bowyer (27:52):
I mean, we think it will , and we think it'll,
we think there's potential tomaybe even bring some clarity
to the market , f or better orworse, I think that t hose l
oan m at are gonna force peopleto make tough decisions. The
banks are are gonna say, look,we need t o move some of this p
(28:13):
aper. And I think as aninvestor, y ou're g onna m ake
t he tough decision. Do we wanna do a cash i n refinance?
And what does that do to ourinvestment returns, or do we
wanna go ahead and take ourloss. And I think that you will
(28:36):
see more properties come tomarket. I think some people
will stay in for variousreasons. We are though.
Interesting. We have a lot ofcalls with appraisal
departments at various banksand it still is really hard to
get a pulse on what directionthat's gonna go. We're hearing
that a lot of banks are stillwilling to extend and work with
(29:01):
their borrowers. I I think thatin the larger commercial real
estate bond , again, despitethe headlines that we're
reading about seniors housingit's a smaller percentage of
their book. And from anoperating standpoint , it's
(29:24):
not, it could be worse. So Ireally don't know . I mean,
that was kind of our thoughtthat those maturing loans would
really force a market again andhelp bring that disconnect
between buyers and sellerstogether. Give a little bit
more certainty in pricing. Andmaybe that will happen. We'll ,
(29:45):
time will tell at to as to whatlevel.
Beth Mace (29:49):
So that could be a catalyst to get the transaction
market moving again. What mightbe other things, I mean, my
expectation is that NIC MAPVision had data in terms of
transaction volumes through thethird quarter. It was pretty
weak relative to what we hadseen in prior years. So the
expectation is that things willstart to move more in 2024
(30:09):
buyers and sellers that bid askspread will start to narrow.
There'll be a little bit moretransparency in the market.
Some of the closed end , equityfunds are gonna have to sell
because they can't extend theirlife any longer. There is some
degree of people needing tosell because they're investors
want their returns, they wanttheir cash back , they wanna
reinvest. So what might beother catalysts you think to
(30:33):
get that transaction marketmoving
Zach Bowyer (30:37):
In addition to the points that you just made? I
really don't know .
Beth Mace (30:43):
Are you seeing like any cash deals that people are
trying to get off their
Zach Bowyer (30:47):
Cash deals, but there's, I would long the
transactions that we're seeingI I'd three different buckets .
So on the distress side wherewe're seeing, a lot, like the
number one question I got askedNIC, are you seeing a lot of
distress and where's thepricing on that distress? And
the distress that we're seeingis probably at the larger scale
(31:11):
with the largest discount areolder properties, B minus,
investment BC class that werenot performing prior to Covid.
And so the banks are the banksare liquidating those and very,
very significant discount onthose properties. A lot of them
, however, are being purchasedfor some alternate use and
(31:34):
their behavioral health or, youknow, but, but massively
discounted. Right. And, but Iwould even, I would question as
even if the best operator couldgo in and get a healthy margin
outta those properties, right?
So those are easy ones. Thebanks and investors are moving
away from those.
Beth Mace (31:53):
So in those repositionings, are you seeing,
there's a lot of talk abouttaking some of those properties
and repositioning them formiddle market. Have you seen
any of that yet?
Zach Bowyer (32:01):
I haven't seen much middle market. I haven't
seen most of it is some sort ofsmaller medical office,
behavioral health, somethingalong those lines, even just
buying it for the dirt and, andholding it. But I would go, I
would say, and these aresmaller, smaller properties,
(32:22):
again. I think that you wouldjust, you would be hard to get
a margin outta them with areally great operator , then
the next bucket would be , andwe're not seeing a whole bunch
of this, but what we're seeingwould be, say , 10 year and
(32:48):
newer vintage that, took apretty big occupancy hit during
covid and just hasn't been ableto recover. So we're seeing a
little bit of that and orproperties that were recently
delivered , maybe on the tailof covid or recently entered in
lease up and just can't getover that hurdle at enough
(33:13):
time. And those are coming tomarket and , and being
discounted. I would say thatfor the very limited volume
that we're seeing there,probably a discount of 70 cents
on the dollar, I think onaverage. But anything that's
and there's something involvedthere that's really kind of
(33:35):
forcing that sale . I think ifpeople have capital, then
they're gonna lease up theproperty . I think that even
with stabilized propertieswhere say you're reaching your
investment , you need to sell ,I think right now people are
doing everything they can tonot sell just because of that ,
(33:55):
that disconnect. And whatbuyers are willing to pay.
Beth Mace (34:00):
Alright , so that's on the seller side. On the
buyer side , there's some ,large institutional investors
out there, pension fund moneythat came through. There's the
public REITs that are outthere, the private REITs that
are out there. Any sense ofwhat the buyer profile is like
as we go into 2024 versus wherewe've been? Or has it changed
(34:21):
at all? Maybe not.
Zach Bowyer (34:22):
I think right now, so again, going back to our
survey, what we saw in terms ofthe two most prevalent
strategies for investors wascore plus and then
opportunistic.
Beth Mace (34:35):
Oh , okay.
Zach Bowyer (34:35):
So I think that there are core plus investors
for stabilized Class Aproperties. I think the pricing
on that is gonna be rightaround a seven cap . I'll still
get emails from brokers andother investors asking if we
can support anything below aseven cap. I'm not sure we can
in this environment.
Beth Mace (34:56):
Yeah .
Zach Bowyer (34:57):
But those numbers are at least I guess you could
assume are being discussed.
Beth Mace (35:05):
And then on the opportunistic side ,
Zach Bowyer (35:07):
Thank you. And then on the opportunistic side,
I think that's where there'sstill a big buyer seller
spread. I think there'scertainly a lot of capital,
probably more dry powder thanwe've ever seen. Not only for
seniors , but commercial realestate as a whole . Right now ,
I think the most recent data isabout two 70 billion , dry
(35:30):
powder on the sideline. A lotof that is opportunistic. And
that also applies to seniors .
I think those investors,they're seeing a lot of deals.
They're willing to make lowoffers, but they're also
willing to move to the next onebecause their sentiment is
there's a lot more behind thisdeal.
Beth Mace (35:49):
Okay. So in wrapping up a bit, if you had a one or
two sentence just , one or twominute description of where you
think we are , can you give usyour view? It may look at
market fundamentals versuscapital market stresses and
things like that.
Zach Bowyer (36:04):
Well, that's exactly it. The senior living
sector, it's at a veryinteresting inflection point.
Property market fundamentalsare stronger than ever with
even stronger seculartailwinds. Construction starts
are at an all time low , and Ithink the market still
underestimates the magnitude ofdemand that's literally at the
(36:28):
doorstep . On the other hand,as you mentioned, we're
enduring one of the morechallenging capital market
environments. The rising costof debt, lack of liquidity in
the debt markets is certainlystressing short-term
valuations. Valuations, I thinkthey will reset. Operating
margins will improve andcapital will be recycled in
(36:52):
today's market. However, it'sall about the basis.
Beth Mace (36:56):
Very good. All right , Zach , thanks so much. I
really appreciate you takingtime and I'm sure our listeners
will really enjoy this podcast.
It's been really informative. Ilove the discussion and
comparing multifamily to seniorhousing and your summary marks
and the details as well. Sothanks very much. Appreciate
it.
Zach Bowyer (37:11):
Thank you, Beth.
You're the best . It's always apleasure.
Beth Mace (37:14):
Alright , thanks sir .
Zach Bowyer (37:15):
Bye-Bye.
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