April 11, 2025 • 23 mins
Senior housing faces a "double whammy" of challenges from dramatic interest rate increases and persistent tariffs on construction materials, yet demographic trends still make it an incredibly strong long-term investment opportunity.
• Interest rates have jumped 200-300 basis points higher than pre-pandemic levels, significantly increasing the cost of capital
• Construction material costs have risen 15-25% due to tariffs, particularly affecting specialized components needed in senior living
• Transaction volumes have dropped 35-40% as buyers seek discounts while sellers remain anchored to pre-interest rate hike valuations
• New construction starts are down 45% from their peak, limiting new supply through at least 2025-2026
• By 2040, the 80+ population will double from 12 million to over 24 million people, creating overwhelming demand
• Secondary markets offer cap rates 75-150 basis points higher than primary markets, providing a cushion in higher interest environments
• Needs-based care models like memory care show greater resilience due to stronger pricing power
• Market dislocation is creating opportunities to acquire properties at 15-25% below replacement cost
• Technology investments like AI-powered staff scheduling can save 5-8% on labor costs
• Energy independence initiatives through solar and battery storage can reduce utility expenses by 40-60%
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
AI (00:07):
So it sounds like the message here is that, while
there are definitely somechallenges, the long-term
outlook for senior housing isactually quite strong.
Absolutely.
Those demographic trends arejust too powerful to ignore.
And this current marketdislocation could create some
really unique opportunities forthose who are paying attention.
Exactly, it's about having thatlong-term perspective.
(00:27):
Right.
And really understanding thosefundamental drivers of demand.
I think it's clear that, whilethe industry is facing some
headwinds, those fundamentaldrivers of demand remain
incredibly strong.
Absolutely Right, because thisisn't just some niche industry.
No, it's not.
This is something that affectsall of us.
It does yeah, because we're allgetting older.
John Hauber (00:55):
Welcome to the Senior Housing Investors Podcast
.
If you are an owner operator,investor, developer or buyer of
senior housing, you've come tothe right place.
The best way to stay connectedwith us is to sign up for our
weekly newsletter athavenseniorinvestmentscom.
This podcast doesn't existwithout you, our community.
(01:17):
Thank you for listening andreach out to us anytime.
And reach out to us anytime.
AI (01:27):
Okay, so you sent over this report on senior housing.
Speaker 2 (01:31):
Yeah.
AI (01:34):
Senior housing in a high-cost economy, navigating
interest rates and tariffs.
Yeah.
And it's quite the read.
So that's what we're going tounpack right now.
This is a deep dive, for sure.
So, right off the bat, the thingthat really jumps out at me is
this idea of the double whammy.
Absolutely.
You've got this reallysignificant increase in interest
(01:55):
rates.
Right.
We're talking 200, 300 basispoints higher than before the
pandemic.
Right Two to three percentagepoints.
Two to three percentage points.
Yeah.
Big jumps.
That's a big deal.
And then on top of that, you'vegot this persistent issue with
tariffs Right that have drivenup material costs.
Yes, something like 15 to 25percent.
Absolutely, and it's a toughsituation for senior housing in
(02:17):
particular.
Yeah, so let's break this down.
Let's start with the interestrate piece.
Okay, because it's not just,you know, some abstract
financial concept, right?
This has a very real impact onthe cost of capital for these
senior housing projects, exactlyWhether you're talking about a
new development or refinancingan existing property.
It affects everything, yeah.
(02:38):
Borrowing money is just muchmore expensive.
Yeah.
So what happens is you havethis thing called cap rate
expansion.
Okay.
And it's kind of a ripple effectfrom those higher borrowing
costs.
Okay, so essentially a propertythat generates the same amount
of income before is now worthless because investors want a
higher return to kind of offsetthat risk.
(02:59):
Right.
They need to be compensated forthat.
Exactly, and the reportspecifically mentions a
potential shift from a 5.5% caprate back in 21 to 7% or even
higher today.
Okay, so that's a prettysignificant shift.
Yeah, you can see how thosehigher interest rates are
putting a damper on propertyvalues.
Yeah, it's like the price ofentry has just gone up, making
(03:20):
it much harder to make dealswork financially.
Exactly, and what we're seeingnow is this gap emerging between
buyers and sellers.
You know, sellers are kind ofanchored to those pre-interest
rate hike valuations.
Right, they're thinking back tothe good old days.
Exactly While buyers are havingto factor in this new reality.
Yeah, this new reality, yeah.
(03:41):
This more expensive landscape.
How do you bridge that divide?
Well, the report points to anincrease in deal.
Restructuring.
Okay.
So you're seeing more and morebuyers and sellers having to get
creative.
Yeah.
Finding that middle ground, sotransactions can actually move
forward.
Right.
So they have to kind of come tosome kind of agreement.
Yeah, they got to make it worksomehow.
(04:02):
Okay, so we've talked about theinterest rate side of things,
right.
Yeah, they got to make it worksomehow.
Okay, so we've talked about theinterest rate side of things
Right.
Now let's dive into thosetariffs, because they seem to be
sticking around.
Yeah, it seems like those globaltensions are keeping those
taxes on imported constructionmaterials really high.
Yeah, and what's interesting isthat it seems like senior
housing is getting hitespecially hard.
It is because, unlike a typicalapartment building, you know
(04:24):
senior living communities, theyoften need these very
specialized components yeah,higher grade finishes to meet
all those specific needs of theresidents.
Right, You're thinking aboutthings like grab bars and
specialized flooring to preventfalls, Right?
And you know commercial gradekitchens for the dining services
.
It all adds up.
Exactly, and the report actuallygives some really stark
(04:44):
examples of how much those costshave junked.
Yeah, we're talking 15 to 25percent above pre-tariff levels.
For things like For things likesteel, aluminum, electrical
components, HVAC systems, eventhe furniture that goes in those
residence suites.
Wow, ok, so what does that meanfor the bigger picture, like,
how does that impact thefeasibility of these new
(05:07):
development projects?
Well, it's pretty simple whenthose raw materials become so
much more expensive, it reallysqueezes those profit margins
and projects that might havelooked promising, you know, just
a couple of years ago.
Right, they're just notfinancially feasible anymore.
So we're really facing thistwo-pronged challenge, right?
Yes, more expensive borrowingand pricier building materials,
(05:29):
right?
So how is this actually playingout in the market, both for the
developers trying to build newcommunities and for the
operators that are running theexisting properties?
Yeah, the report actually makesthis really interesting
distinction.
It calls it a bifurcated marketresponse.
Actually makes this reallyinteresting distinction.
It calls it a bifurcated marketresponse.
So we're seeing very distinctchallenges emerging for new
(05:53):
development versus theday-to-day operations of
existing senior housing.
So let's start with thedevelopers.
What are they up against?
Okay, well, basically you've gotthis perfect storm brewing.
We're talking about this 20% to30% increases in construction
costs since 2019.
Yeah, and then on top of that,you've got this much more
expensive environment to evenget the capital to build Right.
So that's a tough hurdle toclear.
(06:15):
Yeah, so what are they doingabout it?
I mean, what are some of thestrategies?
Well, one thing is they'rehaving to spend a lot more time
on value engineering.
It's basically trying to findmore cost-effective ways to
build without sacrificing thequality.
Pointing corners.
Exactly, and then they're alsoexploring alternative design
approaches to try to keep thoseprojects financially viable.
(06:37):
So it's not just about thebricks and mortar.
It sounds like Even gettingthese projects approved and
entitled is taking much longer.
Absolutely.
The report actually mentionsthat it's exceeding two years in
many cases.
Wow.
Up from the 12 to 18 months weused to see.
So all that extra time just addsmore cost, right?
Yeah, more carrying costs, morerisk, more risk.
(06:59):
It just makes everything thatmuch harder.
So it sounds like newdevelopment is facing a pretty
steep uphill battle.
It is.
But what about the existingproperties?
I mean, are they immune to allthis?
No, not at all.
They're definitely feeling thepressure too.
In what ways?
Well, for one thing, there'sthis risk of refinancing.
Okay.
You know, if you've got a loancoming due in this higher
(07:20):
interest rate environment, yourdebt service payments are
probably going to jumpsignificantly.
Yeah, so that really puts asqueeze on your cash flow.
Absolutely.
And then beyond just thefinancing side, those tariffs
are also impacting the ongoingoperations.
In what way?
Well, the cost of everything hasgone up.
Like what kind of things?
I mean everything from routinemaintenance to capital
(07:41):
improvements, replacementmedical equipment, even the
technology systems.
Wow, so it's like across theboard.
Pretty much and somebody's gotto absorb those costs right.
Right.
So is that just being passed onto residents?
Well, the report makes a reallyimportant point about that.
You know, if operators try topass all those higher expenses
directly onto the residentsthrough rent increases, they
(08:03):
could face some real occupancychallenges.
Yeah, people are in pushback, Ofcourse.
Okay, so we talked about kindof the standoff between buyers
and sellers in terms ofvaluations.
Right.
And the report actually putssome numbers to this, saying
that transaction volumes havedropped quite a bit.
They have, yeah, something like35 to 40 percent compared to
pre-pandemic levels.
(08:24):
Wow, so that's a reallysignificant slowdown.
It is and it really highlightsthat disconnect we're seeing.
You know, buyers are lookingfor those discounts to account
for that higher cost of capital,right, but sellers are still
kind of holding on to thosepre-interest rate hike
expectations.
Still thinking back to the goodold days, exactly.
So what's interesting is?
It sounds like we're actuallyseeing two separate markets
(08:46):
emerge here.
Sort of, yeah, what you mightcall a two-tiered market those
properties that happen to haveexisting debt in place at those
favorable pre-hike interestrates.
They're now commanding apremium.
So it's almost like thefinancing itself is more
important than the underlyingreal estate.
In a way, yeah, because buyersrecognize the value of being
(09:09):
able to assume that lower costfinancing.
That's fascinating.
It is.
Okay.
So with all these challenges,all these headwinds, it seems
like it would be a recipe fordisaster.
Yeah, you'd think so.
But the report actually saysthat we haven't seen widespread
distress in the sector Right.
So why is that?
Well, the key factor here is theunderlying strength of senior
(09:31):
housing.
Okay.
It's the essential nature of theservices that they provide.
Right.
People need those services.
Exactly.
They need them, regardless ofwhat's happening in the broader
economy.
It's not discretionary.
Right, but, that being said, themargin for error has definitely
narrowed.
For both operators and investors.
Yeah, absolutely.
Okay, so we've laid out all thechallenges here.
(09:52):
Right.
But now the report kind ofshifts gears and talks about
this really important concept,these long-term drivers of
demand for senior housing.
Right, it's not just somepassing trend, no, these are
fundamental shifts.
Fundamental shifts yeah.
That are only going toaccelerate.
Absolutely.
So let's dig into that a littlebit.
(10:12):
Yeah, let's talk demographics,because that seems to be the big
elephant in the room.
It is.
I mean, the numbers are justundeniable.
By the year 2030, every singlebaby boomer will be at least 65
years old.
We're talking about 73 millionpeople.
Yeah, that's a huge cohort.
It is, and what's even moreimportant for senior housing
specifically is the growth inthat 80 plus population, because
(10:34):
that's really the primedemographic for these surgeses.
So how much are we talking aboutin terms of growth there?
Well, that segment is projectedto double in size by 2040.
Wow.
From around 12 million to over24 million.
So that's more than double thedemand in less than 20 years.
Exactly, and it's important toremember that this isn't like
buying a new car or, you know,going on vacation, right, this
(10:58):
is a needs-based demand.
People need this care.
Exactly, the average age whensomeone moves into assisted
living is 84.
Okay, and the vast majority,around 70%, need help with at
least two activities of dailyliving.
So these aren't things thatpeople can just put off.
No, they can't.
And if we look at the supplieslane, it seems like this high
(11:19):
cost environment is actuallyhaving a pretty significant
impact there as well.
It is the report mentions thatnew construction starts are down
dramatically by how much?
Around 45 percent from theirpeak.
Wow, that's a huge drop.
It is, and when you consider thefact that it takes, you know,
two to three years to actuallybuild one of these communities,
right, we're looking at a verylimited amount of new inventory
(11:41):
coming online.
Speaker 2 (11:42):
Right.
AI (11:43):
Through at least 2025, 2026.
So that creates a veryinteresting supply demand
dynamic.
It does.
Yeah, you've got this huge waveof demand coming, yeah, and not
a lot of new supply to meet it.
So the report also talks aboutthis concept of the sandwich
generation.
Right.
These adult children who arekind of caught in the middle.
Yeah, they're balancing theirown careers and families, and
(12:05):
then they're also having to todeal with the increasing
caregiving responsibilities fortheir aging parents.
Exactly, and and that's often areal turning point it makes
professional senior care a muchmore attractive option.
Speaker 2 (12:19):
Right.
AI (12:19):
And it could even lead to quicker move-in decisions.
Yeah, because it's not justabout the senior themselves.
Right, it's a whole familydecision.
It's a whole family dynamic.
Exactly so.
You know we've talked about allthese challenges, but I think
what's really important toemphasize here is that, despite
all that, these long-termdemographic trends are
incredibly powerful.
(12:40):
They create a really compellingcase for investing in senior
housing for those who are in itfor the long haul.
So, given this environment we'vedescribed this high-cost
environment what are some of thepractical strategies that
investors and operators can useto navigate these choppy waters?
Yeah well, the report actuallylays out some really interesting
(13:00):
approaches, and I think one ofthe key takeaways is that, you
know, the days of just relyingon maximum leverage with
floating rate debt are probablyover, at least for now.
Yeah, that sounds risky in thisenvironment.
It is so.
We're seeing a shift towardsmore conservative and more
flexible capital structures.
So what does that look like inpractice?
Well, for one thing, fixed ratedebt is becoming a lot more
(13:22):
attractive, even if the initialinterest rate might be a bit
higher.
Right, because you're locking inthat rate Exactly.
You're eliminating thatuncertainty about future
interest rate movements.
So are there any specific typesof financing that are
particularly appealing right now?
Well, the report specificallymentions financing through HUDY,
fha.
(13:43):
Okay.
The Department of Housing andUrban Development.
Okay.
Because they offer theselong-term, 35-year fixed rate
loans.
Wow, 35 years.
Yeah, and they're non-recourse.
What does non-recourse mean?
It means that if the borrowerdefaults, the lender can't
really go after their otherassets.
Oh, so it's less risky for theborrower.
Exactly, and the rates arepretty attractive too, somewhere
(14:05):
around 4.5 to 5%.
Okay, so that's significantlylower than what you'd find in
the conventional market.
Yeah, definitely, so it's a veryappealing option right now.
So for those shorter term loans,those bridge loans, yeah.
Are interest rate caps still arelevant tool?
They are, but the cost of thosecaps has definitely gone up,
right.
So what we're seeing is a lotmore negotiation around
(14:26):
extension options.
OK, so building in someflexibility.
Exactly, you got to have somewiggle room.
And what about the equity sideof things, because it seems like
that's also evolving.
It is.
We're seeing more creativesolutions like preferred equity
and mezzanine financing.
Okay, so what are those exactly?
Well, it basically helped bridgethe gap between the amount of
that senior loan and the totalproject cost, and while they
(14:49):
come with higher interest ratesyou know, somewhere in the 10 to
14% range they can still be amore cost-effective alternative
than relying solely on commonequity.
Okay, and I'm also seeing a lotmore of these joint ventures,
yes Between institutionalinvestors and experienced
operators.
Absolutely.
It makes a lot of sense in thisenvironment.
(15:09):
Yeah, because you've got theinvestors with the capital.
Right.
And then you've got theoperators with the know-how.
Expertise yeah To actually runthese communities.
So it's a win-win.
So the report also talks aboutthe need to reassess those
leverage targets.
Maybe look at some alternativesources of funding.
Yeah, things like PACE financingor tax credits.
Speaker 2 (15:28):
Okay.
AI (15:28):
Where it makes sense and then really be strategic about
those interest rate protectionstrategies.
Right those swaps and caps?
Exactly so.
It's all about finding thatsweet spot between being
adaptable in the short term andthen maintaining that financial
stability for the long haul.
So we've talked a lot about thefinancial strategies, right, but
(15:51):
what about the operational sideof things?
Yeah.
Because it seems like operatorsare also having to get pretty
creative when it comes tomanaging costs.
They are, and what's interestingis the growing emphasis on
using technology to do that.
So the report highlights theseAI-powered staff scheduling
systems that can actually save alot of money on labor costs.
(16:13):
How much are we talking?
You know, 5% to 8%.
That's significant.
It is.
And then you've got thoseadvanced building management
systems with all those smartsensors that can reduce utility
expenses, sometimes by as muchas 12% to 18%.
So it's about optimizing thoseeveryday operations.
Exactly Using technology to doit smarter.
Right, and then on theconstruction side, it seems like
(16:33):
there's a lot of interest inthose alternative building
methods.
Yeah, because those traditionalmaterials are just so expensive
now.
So we're seeing more modularand prefabricated construction
techniques.
Okay, because they can shortenthose timelines by, you know, 20
to 30 percent.
Right.
And reduce that reliance onthose imported materials.
(16:54):
Right.
And the report even mentionscross laminated timber.
What's that?
It's CLT.
It's a domestically sourcedalternative to steel.
Interesting.
Yeah, it could be, a gamechanger.
So it's about finding those moreresilient and cost effective
solutions.
And then, beyond theconstruction itself, there's
this whole piece about managingthe ongoing supply chain.
(17:16):
Right, we're seeing moreoperators turning to group
purchasing organizations.
What are?
those.
They're GPOs.
They basically leverage thebuying power of a whole group to
get better discounts fromsuppliers.
Okay, so it's like a collectivebargaining.
Sort of yeah For senior housingoperators.
Exactly.
And then there's also this ideaof dual sourcing.
Okay.
So you're not relying on asingle supplier for those key
(17:39):
items.
So it's about creatingcompetition.
Exactly and ensuring that youknow you've got a backup if
something goes wrong.
And the report also talks aboutthose energy independence
initiatives.
Yes, things like solar panels.
Right.
Code generation independenceinitiatives yes.
Things like solar panels RightCode generation, exactly Battery
storage, all that stuff, yeah,because not only can that reduce
your utility expensessignificantly, yeah.
I mean some operators areseeing 40 to 60 percent
(18:01):
reductions Wow.
But it also gives you thatbackup power during emergencies.
Right, so it's a win-win.
Absolutely.
Okay, so it sounds like to besuccessful in this environment,
you really need a multi-prongedapproach.
You do.
Yeah, you got to be thinkingabout capital structure, cost
management, the whole nine yards.
Now the report also talks aboutthe importance of making
strategic choices.
(18:22):
Yeah.
About which markets to focus onand what types of assets to
invest in.
Location, location, location, asthey say.
So where are those savvyinvestors looking right now?
Well, the report points tosecondary and tertiary markets
as being very attractive rightnow.
Okay, so why is that?
The cap rates are significantlyhigher than in those major
(18:43):
primary markets.
How much?
higher.
We're talking 75 to 150 basispoints higher.
Wow, okay, so that's a prettysignificant difference.
It is, and it provides a nicecushion in this higher interest
rate environment.
And is it just about the caprates, or are there other
factors driving interest inthose secondary markets?
Well, a lot of those markets arealso seeing some really
(19:03):
favorable demographic trends,with people moving in from other
areas.
So the demand is there.
Exactly.
And then there's also thequestion of barriers to entry.
Ok, you know things like zoningregulations or a limited supply
of suitable land.
So that limits the competition.
It does and it can help protectagainst oversupply.
Now, what about the types ofsenior housing assets?
(19:24):
Are there any particular typesthat are more resilient in this
environment?
Well, the report highlights theinherent resilience of those
needs-based care models.
Okay.
Things like memory care andhigher acuity assisted living.
Okay, so why are those soresilient?
Because they have more pricingpower.
Okay.
(19:45):
Particularly in an inflationaryenvironment like we're seeing
now.
And are newer propertiesgenerally considered more
desirable.
They often are.
Yeah, because they tend to havemore energy efficient designs
and they probably won't need asmuch in terms of capital
expenditures in the near term.
So the report seems to suggestthat a good strategy right now
is to target those value addopportunities.
Speaker 2 (20:06):
Yeah.
AI (20:07):
In those secondary markets with strong demographics.
Speaker 2 (20:09):
Exactly.
AI (20:10):
Where you can potentially unlock value through operational
improvements.
Yeah, maybe some strategicupgrades.
Yeah, okay.
So we've talked about thechallenges, the strategies for
navigating them, yeah, but thereport ends on this note of
optimism, talking about thepotential opportunities that can
arise from all this disruption.
Right, because periods of marketdislocation like this, they can
(20:31):
create some really incredibleopportunities for long-term
investors.
So what are we talking aboutspecifically?
What kind of opportunities?
Well, one thing is the potentialfor strategic acquisitions.
Okay.
You know you might be able toacquire properties at a
significant discount.
Like how much of a discount?
15 to 25% below replacement cost.
Wow, that's pretty substantial.
(20:52):
It is, and that's because someowners might be struggling with
refinancing or just having ahard time with those tighter
margins that we talked aboutearlier.
Ok, and the report alsoanticipates a wave of
consolidation in the sector.
Yeah, probably over the nextthree to five years.
So who's going to come out ontop in that kind of environment?
three to five years.
So who's going to come out ontop in that kind of environment?
(21:13):
Well, it's likely going tofavor those larger operators
with economies of scale andstrong access to capital.
So the big guys get bigger.
Pretty much yeah, and they'll beable to use that to expand
their market share.
And it's also worth rememberingthat these high interest rates
and tariffs, right, they're notgoing to last forever.
Exactly At some point.
Inflation is going to moderate,right Interest rates are going
to normalize, and that could bea huge boon for those who invest
(21:35):
now.
Right, because they canrefinance later on.
Exactly At those more favorableterms.
OK, so beyond just the purelyfinancial aspect, yeah, there's
also this, this idea of thesocial impact of senior housing.
Right.
And the report mentions thatthere's increasing interest from
impact investors.
Yeah, they're specificallylooking to align their capital
(21:56):
with investments that are makinga positive difference.
Right, so it's not just aboutthe bottom line.
It's not just about the money,yeah.
So it sounds like the messagehere is that, while there are
definitely some challenges, yeah.
The long-term outlook forsenior housing is actually quite
strong.
Absolutely.
Those demographic trends arejust too powerful to ignore.
And this current marketdislocation could create some
(22:18):
really unique opportunities forthose who are paying attention.
Exactly, it's about having thatlong-term perspective and really
understanding those fundamentaldrivers of demand.
Well, this has been a reallyfascinating deep dive into the
current state of senior housinginvestment.
Yeah, a lot to unpack.
Yeah, we've covered a lot ofground here.
We have.
And I think it's clear that,while the industry is facing
(22:40):
some headwinds, thosefundamental drivers of demand
remain incredibly strong.
Absolutely.
So what I would say to you, thelistener, you know, think about
those long term implications ofthis demographic shift.
You know how is it going toreshape the way we think about
senior care and investing inthis sector?
(23:01):
Right, because this isn't justsome niche industry.
No, it's not.
This is something that affectsall of us.
It does yeah, because we're allgetting older.
Yeah.
So how do we balance thoseshort-term economic pressures
with the undeniable needs of anaging population?
That's the million dollarquestion.
It's a lot to think about.
It is Well, until next time.
Until our next deep dive.
Yeah, yeah.
(23:22):
Thanks for listening.
Thank you you.
So it sounds like the message here is that, while
there are definitely somechallenges, the long-term
outlook for senior housing isactually quite strong.
Absolutely.
Those demographic trends arejust too powerful to ignore.
And this current marketdislocation could create some
really unique opportunities forthose who are paying attention.
Exactly, it's about having thatlong-term perspective.
(00:27):
Right.
And really understanding thosefundamental drivers of demand.
I think it's clear that, whilethe industry is facing some
headwinds, those fundamentaldrivers of demand remain
incredibly strong.
Absolutely Right, because thisisn't just some niche industry.
No, it's not.
This is something that affectsall of us.
It does yeah, because we're allgetting older.
John Hauber (00:55):
Welcome to the Senior Housing Investors Podcast
.
If you are an owner operator,investor, developer or buyer of
senior housing, you've come tothe right place.
The best way to stay connectedwith us is to sign up for our
weekly newsletter athavenseniorinvestmentscom.
This podcast doesn't existwithout you, our community.
(01:17):
Thank you for listening andreach out to us anytime.
And reach out to us anytime.
AI (01:27):
Okay, so you sent over this report on senior housing.
Speaker 2 (01:31):
Yeah.
AI (01:34):
Senior housing in a high-cost economy, navigating
interest rates and tariffs.
Yeah.
And it's quite the read.
So that's what we're going tounpack right now.
This is a deep dive, for sure.
So, right off the bat, the thingthat really jumps out at me is
this idea of the double whammy.
Absolutely.
You've got this reallysignificant increase in interest
(01:55):
rates.
Right.
We're talking 200, 300 basispoints higher than before the
pandemic.
Right Two to three percentagepoints.
Two to three percentage points.
Yeah.
Big jumps.
That's a big deal.
And then on top of that, you'vegot this persistent issue with
tariffs Right that have drivenup material costs.
Yes, something like 15 to 25percent.
Absolutely, and it's a toughsituation for senior housing in
(02:17):
particular.
Yeah, so let's break this down.
Let's start with the interestrate piece.
Okay, because it's not just,you know, some abstract
financial concept, right?
This has a very real impact onthe cost of capital for these
senior housing projects, exactlyWhether you're talking about a
new development or refinancingan existing property.
It affects everything, yeah.
(02:38):
Borrowing money is just muchmore expensive.
Yeah.
So what happens is you havethis thing called cap rate
expansion.
Okay.
And it's kind of a ripple effectfrom those higher borrowing
costs.
Okay, so essentially a propertythat generates the same amount
of income before is now worthless because investors want a
higher return to kind of offsetthat risk.
(02:59):
Right.
They need to be compensated forthat.
Exactly, and the reportspecifically mentions a
potential shift from a 5.5% caprate back in 21 to 7% or even
higher today.
Okay, so that's a prettysignificant shift.
Yeah, you can see how thosehigher interest rates are
putting a damper on propertyvalues.
Yeah, it's like the price ofentry has just gone up, making
(03:20):
it much harder to make dealswork financially.
Exactly, and what we're seeingnow is this gap emerging between
buyers and sellers.
You know, sellers are kind ofanchored to those pre-interest
rate hike valuations.
Right, they're thinking back tothe good old days.
Exactly While buyers are havingto factor in this new reality.
Yeah, this new reality, yeah.
(03:41):
This more expensive landscape.
How do you bridge that divide?
Well, the report points to anincrease in deal.
Restructuring.
Okay.
So you're seeing more and morebuyers and sellers having to get
creative.
Yeah.
Finding that middle ground, sotransactions can actually move
forward.
Right.
So they have to kind of come tosome kind of agreement.
Yeah, they got to make it worksomehow.
(04:02):
Okay, so we've talked about theinterest rate side of things,
right.
Yeah, they got to make it worksomehow.
Okay, so we've talked about theinterest rate side of things
Right.
Now let's dive into thosetariffs, because they seem to be
sticking around.
Yeah, it seems like those globaltensions are keeping those
taxes on imported constructionmaterials really high.
Yeah, and what's interesting isthat it seems like senior
housing is getting hitespecially hard.
It is because, unlike a typicalapartment building, you know
(04:24):
senior living communities, theyoften need these very
specialized components yeah,higher grade finishes to meet
all those specific needs of theresidents.
Right, You're thinking aboutthings like grab bars and
specialized flooring to preventfalls, Right?
And you know commercial gradekitchens for the dining services
.
It all adds up.
Exactly, and the report actuallygives some really stark
(04:44):
examples of how much those costshave junked.
Yeah, we're talking 15 to 25percent above pre-tariff levels.
For things like For things likesteel, aluminum, electrical
components, HVAC systems, eventhe furniture that goes in those
residence suites.
Wow, ok, so what does that meanfor the bigger picture, like,
how does that impact thefeasibility of these new
(05:07):
development projects?
Well, it's pretty simple whenthose raw materials become so
much more expensive, it reallysqueezes those profit margins
and projects that might havelooked promising, you know, just
a couple of years ago.
Right, they're just notfinancially feasible anymore.
So we're really facing thistwo-pronged challenge, right?
Yes, more expensive borrowingand pricier building materials,
(05:29):
right?
So how is this actually playingout in the market, both for the
developers trying to build newcommunities and for the
operators that are running theexisting properties?
Yeah, the report actually makesthis really interesting
distinction.
It calls it a bifurcated marketresponse.
Actually makes this reallyinteresting distinction.
It calls it a bifurcated marketresponse.
So we're seeing very distinctchallenges emerging for new
(05:53):
development versus theday-to-day operations of
existing senior housing.
So let's start with thedevelopers.
What are they up against?
Okay, well, basically you've gotthis perfect storm brewing.
We're talking about this 20% to30% increases in construction
costs since 2019.
Yeah, and then on top of that,you've got this much more
expensive environment to evenget the capital to build Right.
So that's a tough hurdle toclear.
(06:15):
Yeah, so what are they doingabout it?
I mean, what are some of thestrategies?
Well, one thing is they'rehaving to spend a lot more time
on value engineering.
It's basically trying to findmore cost-effective ways to
build without sacrificing thequality.
Pointing corners.
Exactly, and then they're alsoexploring alternative design
approaches to try to keep thoseprojects financially viable.
(06:37):
So it's not just about thebricks and mortar.
It sounds like Even gettingthese projects approved and
entitled is taking much longer.
Absolutely.
The report actually mentionsthat it's exceeding two years in
many cases.
Wow.
Up from the 12 to 18 months weused to see.
So all that extra time just addsmore cost, right?
Yeah, more carrying costs, morerisk, more risk.
(06:59):
It just makes everything thatmuch harder.
So it sounds like newdevelopment is facing a pretty
steep uphill battle.
It is.
But what about the existingproperties?
I mean, are they immune to allthis?
No, not at all.
They're definitely feeling thepressure too.
In what ways?
Well, for one thing, there'sthis risk of refinancing.
Okay.
You know, if you've got a loancoming due in this higher
(07:20):
interest rate environment, yourdebt service payments are
probably going to jumpsignificantly.
Yeah, so that really puts asqueeze on your cash flow.
Absolutely.
And then beyond just thefinancing side, those tariffs
are also impacting the ongoingoperations.
In what way?
Well, the cost of everything hasgone up.
Like what kind of things?
I mean everything from routinemaintenance to capital
(07:41):
improvements, replacementmedical equipment, even the
technology systems.
Wow, so it's like across theboard.
Pretty much and somebody's gotto absorb those costs right.
Right.
So is that just being passed onto residents?
Well, the report makes a reallyimportant point about that.
You know, if operators try topass all those higher expenses
directly onto the residentsthrough rent increases, they
(08:03):
could face some real occupancychallenges.
Yeah, people are in pushback, Ofcourse.
Okay, so we talked about kindof the standoff between buyers
and sellers in terms ofvaluations.
Right.
And the report actually putssome numbers to this, saying
that transaction volumes havedropped quite a bit.
They have, yeah, something like35 to 40 percent compared to
pre-pandemic levels.
(08:24):
Wow, so that's a reallysignificant slowdown.
It is and it really highlightsthat disconnect we're seeing.
You know, buyers are lookingfor those discounts to account
for that higher cost of capital,right, but sellers are still
kind of holding on to thosepre-interest rate hike
expectations.
Still thinking back to the goodold days, exactly.
So what's interesting is?
It sounds like we're actuallyseeing two separate markets
(08:46):
emerge here.
Sort of, yeah, what you mightcall a two-tiered market those
properties that happen to haveexisting debt in place at those
favorable pre-hike interestrates.
They're now commanding apremium.
So it's almost like thefinancing itself is more
important than the underlyingreal estate.
In a way, yeah, because buyersrecognize the value of being
(09:09):
able to assume that lower costfinancing.
That's fascinating.
It is.
Okay.
So with all these challenges,all these headwinds, it seems
like it would be a recipe fordisaster.
Yeah, you'd think so.
But the report actually saysthat we haven't seen widespread
distress in the sector Right.
So why is that?
Well, the key factor here is theunderlying strength of senior
(09:31):
housing.
Okay.
It's the essential nature of theservices that they provide.
Right.
People need those services.
Exactly.
They need them, regardless ofwhat's happening in the broader
economy.
It's not discretionary.
Right, but, that being said, themargin for error has definitely
narrowed.
For both operators and investors.
Yeah, absolutely.
Okay, so we've laid out all thechallenges here.
(09:52):
Right.
But now the report kind ofshifts gears and talks about
this really important concept,these long-term drivers of
demand for senior housing.
Right, it's not just somepassing trend, no, these are
fundamental shifts.
Fundamental shifts yeah.
That are only going toaccelerate.
Absolutely.
So let's dig into that a littlebit.
(10:12):
Yeah, let's talk demographics,because that seems to be the big
elephant in the room.
It is.
I mean, the numbers are justundeniable.
By the year 2030, every singlebaby boomer will be at least 65
years old.
We're talking about 73 millionpeople.
Yeah, that's a huge cohort.
It is, and what's even moreimportant for senior housing
specifically is the growth inthat 80 plus population, because
(10:34):
that's really the primedemographic for these surgeses.
So how much are we talking aboutin terms of growth there?
Well, that segment is projectedto double in size by 2040.
Wow.
From around 12 million to over24 million.
So that's more than double thedemand in less than 20 years.
Exactly, and it's important toremember that this isn't like
buying a new car or, you know,going on vacation, right, this
(10:58):
is a needs-based demand.
People need this care.
Exactly, the average age whensomeone moves into assisted
living is 84.
Okay, and the vast majority,around 70%, need help with at
least two activities of dailyliving.
So these aren't things thatpeople can just put off.
No, they can't.
And if we look at the supplieslane, it seems like this high
(11:19):
cost environment is actuallyhaving a pretty significant
impact there as well.
It is the report mentions thatnew construction starts are down
dramatically by how much?
Around 45 percent from theirpeak.
Wow, that's a huge drop.
It is, and when you consider thefact that it takes, you know,
two to three years to actuallybuild one of these communities,
right, we're looking at a verylimited amount of new inventory
(11:41):
coming online.
Speaker 2 (11:42):
Right.
AI (11:43):
Through at least 2025, 2026.
So that creates a veryinteresting supply demand
dynamic.
It does.
Yeah, you've got this huge waveof demand coming, yeah, and not
a lot of new supply to meet it.
So the report also talks aboutthis concept of the sandwich
generation.
Right.
These adult children who arekind of caught in the middle.
Yeah, they're balancing theirown careers and families, and
(12:05):
then they're also having to todeal with the increasing
caregiving responsibilities fortheir aging parents.
Exactly, and and that's often areal turning point it makes
professional senior care a muchmore attractive option.
Speaker 2 (12:19):
Right.
AI (12:19):
And it could even lead to quicker move-in decisions.
Yeah, because it's not justabout the senior themselves.
Right, it's a whole familydecision.
It's a whole family dynamic.
Exactly so.
You know we've talked about allthese challenges, but I think
what's really important toemphasize here is that, despite
all that, these long-termdemographic trends are
incredibly powerful.
(12:40):
They create a really compellingcase for investing in senior
housing for those who are in itfor the long haul.
So, given this environment we'vedescribed this high-cost
environment what are some of thepractical strategies that
investors and operators can useto navigate these choppy waters?
Yeah well, the report actuallylays out some really interesting
(13:00):
approaches, and I think one ofthe key takeaways is that, you
know, the days of just relyingon maximum leverage with
floating rate debt are probablyover, at least for now.
Yeah, that sounds risky in thisenvironment.
It is so.
We're seeing a shift towardsmore conservative and more
flexible capital structures.
So what does that look like inpractice?
Well, for one thing, fixed ratedebt is becoming a lot more
(13:22):
attractive, even if the initialinterest rate might be a bit
higher.
Right, because you're locking inthat rate Exactly.
You're eliminating thatuncertainty about future
interest rate movements.
So are there any specific typesof financing that are
particularly appealing right now?
Well, the report specificallymentions financing through HUDY,
fha.
(13:43):
Okay.
The Department of Housing andUrban Development.
Okay.
Because they offer theselong-term, 35-year fixed rate
loans.
Wow, 35 years.
Yeah, and they're non-recourse.
What does non-recourse mean?
It means that if the borrowerdefaults, the lender can't
really go after their otherassets.
Oh, so it's less risky for theborrower.
Exactly, and the rates arepretty attractive too, somewhere
(14:05):
around 4.5 to 5%.
Okay, so that's significantlylower than what you'd find in
the conventional market.
Yeah, definitely, so it's a veryappealing option right now.
So for those shorter term loans,those bridge loans, yeah.
Are interest rate caps still arelevant tool?
They are, but the cost of thosecaps has definitely gone up,
right.
So what we're seeing is a lotmore negotiation around
(14:26):
extension options.
OK, so building in someflexibility.
Exactly, you got to have somewiggle room.
And what about the equity sideof things, because it seems like
that's also evolving.
It is.
We're seeing more creativesolutions like preferred equity
and mezzanine financing.
Okay, so what are those exactly?
Well, it basically helped bridgethe gap between the amount of
that senior loan and the totalproject cost, and while they
(14:49):
come with higher interest ratesyou know, somewhere in the 10 to
14% range they can still be amore cost-effective alternative
than relying solely on commonequity.
Okay, and I'm also seeing a lotmore of these joint ventures,
yes Between institutionalinvestors and experienced
operators.
Absolutely.
It makes a lot of sense in thisenvironment.
(15:09):
Yeah, because you've got theinvestors with the capital.
Right.
And then you've got theoperators with the know-how.
Expertise yeah To actually runthese communities.
So it's a win-win.
So the report also talks aboutthe need to reassess those
leverage targets.
Maybe look at some alternativesources of funding.
Yeah, things like PACE financingor tax credits.
Speaker 2 (15:28):
Okay.
AI (15:28):
Where it makes sense and then really be strategic about
those interest rate protectionstrategies.
Right those swaps and caps?
Exactly so.
It's all about finding thatsweet spot between being
adaptable in the short term andthen maintaining that financial
stability for the long haul.
So we've talked a lot about thefinancial strategies, right, but
(15:51):
what about the operational sideof things?
Yeah.
Because it seems like operatorsare also having to get pretty
creative when it comes tomanaging costs.
They are, and what's interestingis the growing emphasis on
using technology to do that.
So the report highlights theseAI-powered staff scheduling
systems that can actually save alot of money on labor costs.
(16:13):
How much are we talking?
You know, 5% to 8%.
That's significant.
It is.
And then you've got thoseadvanced building management
systems with all those smartsensors that can reduce utility
expenses, sometimes by as muchas 12% to 18%.
So it's about optimizing thoseeveryday operations.
Exactly Using technology to doit smarter.
Right, and then on theconstruction side, it seems like
(16:33):
there's a lot of interest inthose alternative building
methods.
Yeah, because those traditionalmaterials are just so expensive
now.
So we're seeing more modularand prefabricated construction
techniques.
Okay, because they can shortenthose timelines by, you know, 20
to 30 percent.
Right.
And reduce that reliance onthose imported materials.
(16:54):
Right.
And the report even mentionscross laminated timber.
What's that?
It's CLT.
It's a domestically sourcedalternative to steel.
Interesting.
Yeah, it could be, a gamechanger.
So it's about finding those moreresilient and cost effective
solutions.
And then, beyond theconstruction itself, there's
this whole piece about managingthe ongoing supply chain.
(17:16):
Right, we're seeing moreoperators turning to group
purchasing organizations.
What are?
those.
They're GPOs.
They basically leverage thebuying power of a whole group to
get better discounts fromsuppliers.
Okay, so it's like a collectivebargaining.
Sort of yeah For senior housingoperators.
Exactly.
And then there's also this ideaof dual sourcing.
Okay.
So you're not relying on asingle supplier for those key
(17:39):
items.
So it's about creatingcompetition.
Exactly and ensuring that youknow you've got a backup if
something goes wrong.
And the report also talks aboutthose energy independence
initiatives.
Yes, things like solar panels.
Right.
Code generation independenceinitiatives yes.
Things like solar panels RightCode generation, exactly Battery
storage, all that stuff, yeah,because not only can that reduce
your utility expensessignificantly, yeah.
I mean some operators areseeing 40 to 60 percent
(18:01):
reductions Wow.
But it also gives you thatbackup power during emergencies.
Right, so it's a win-win.
Absolutely.
Okay, so it sounds like to besuccessful in this environment,
you really need a multi-prongedapproach.
You do.
Yeah, you got to be thinkingabout capital structure, cost
management, the whole nine yards.
Now the report also talks aboutthe importance of making
strategic choices.
(18:22):
Yeah.
About which markets to focus onand what types of assets to
invest in.
Location, location, location, asthey say.
So where are those savvyinvestors looking right now?
Well, the report points tosecondary and tertiary markets
as being very attractive rightnow.
Okay, so why is that?
The cap rates are significantlyhigher than in those major
(18:43):
primary markets.
How much?
higher.
We're talking 75 to 150 basispoints higher.
Wow, okay, so that's a prettysignificant difference.
It is, and it provides a nicecushion in this higher interest
rate environment.
And is it just about the caprates, or are there other
factors driving interest inthose secondary markets?
Well, a lot of those markets arealso seeing some really
(19:03):
favorable demographic trends,with people moving in from other
areas.
So the demand is there.
Exactly.
And then there's also thequestion of barriers to entry.
Ok, you know things like zoningregulations or a limited supply
of suitable land.
So that limits the competition.
It does and it can help protectagainst oversupply.
Now, what about the types ofsenior housing assets?
(19:24):
Are there any particular typesthat are more resilient in this
environment?
Well, the report highlights theinherent resilience of those
needs-based care models.
Okay.
Things like memory care andhigher acuity assisted living.
Okay, so why are those soresilient?
Because they have more pricingpower.
Okay.
(19:45):
Particularly in an inflationaryenvironment like we're seeing
now.
And are newer propertiesgenerally considered more
desirable.
They often are.
Yeah, because they tend to havemore energy efficient designs
and they probably won't need asmuch in terms of capital
expenditures in the near term.
So the report seems to suggestthat a good strategy right now
is to target those value addopportunities.
Speaker 2 (20:06):
Yeah.
AI (20:07):
In those secondary markets with strong demographics.
Speaker 2 (20:09):
Exactly.
AI (20:10):
Where you can potentially unlock value through operational
improvements.
Yeah, maybe some strategicupgrades.
Yeah, okay.
So we've talked about thechallenges, the strategies for
navigating them, yeah, but thereport ends on this note of
optimism, talking about thepotential opportunities that can
arise from all this disruption.
Right, because periods of marketdislocation like this, they can
(20:31):
create some really incredibleopportunities for long-term
investors.
So what are we talking aboutspecifically?
What kind of opportunities?
Well, one thing is the potentialfor strategic acquisitions.
Okay.
You know you might be able toacquire properties at a
significant discount.
Like how much of a discount?
15 to 25% below replacement cost.
Wow, that's pretty substantial.
(20:52):
It is, and that's because someowners might be struggling with
refinancing or just having ahard time with those tighter
margins that we talked aboutearlier.
Ok, and the report alsoanticipates a wave of
consolidation in the sector.
Yeah, probably over the nextthree to five years.
So who's going to come out ontop in that kind of environment?
three to five years.
So who's going to come out ontop in that kind of environment?
(21:13):
Well, it's likely going tofavor those larger operators
with economies of scale andstrong access to capital.
So the big guys get bigger.
Pretty much yeah, and they'll beable to use that to expand
their market share.
And it's also worth rememberingthat these high interest rates
and tariffs, right, they're notgoing to last forever.
Exactly At some point.
Inflation is going to moderate,right Interest rates are going
to normalize, and that could bea huge boon for those who invest
(21:35):
now.
Right, because they canrefinance later on.
Exactly At those more favorableterms.
OK, so beyond just the purelyfinancial aspect, yeah, there's
also this, this idea of thesocial impact of senior housing.
Right.
And the report mentions thatthere's increasing interest from
impact investors.
Yeah, they're specificallylooking to align their capital
(21:56):
with investments that are makinga positive difference.
Right, so it's not just aboutthe bottom line.
It's not just about the money,yeah.
So it sounds like the messagehere is that, while there are
definitely some challenges, yeah.
The long-term outlook forsenior housing is actually quite
strong.
Absolutely.
Those demographic trends arejust too powerful to ignore.
And this current marketdislocation could create some
(22:18):
really unique opportunities forthose who are paying attention.
Exactly, it's about having thatlong-term perspective and really
understanding those fundamentaldrivers of demand.
Well, this has been a reallyfascinating deep dive into the
current state of senior housinginvestment.
Yeah, a lot to unpack.
Yeah, we've covered a lot ofground here.
We have.
And I think it's clear that,while the industry is facing
(22:40):
some headwinds, thosefundamental drivers of demand
remain incredibly strong.
Absolutely.
So what I would say to you, thelistener, you know, think about
those long term implications ofthis demographic shift.
You know how is it going toreshape the way we think about
senior care and investing inthis sector?
(23:01):
Right, because this isn't justsome niche industry.
No, it's not.
This is something that affectsall of us.
It does yeah, because we're allgetting older.
Yeah.
So how do we balance thoseshort-term economic pressures
with the undeniable needs of anaging population?
That's the million dollarquestion.
It's a lot to think about.
It is Well, until next time.
Until our next deep dive.
Yeah, yeah.
(23:22):
Thanks for listening.
Thank you you.
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