DALLAS – Bolstered by demographic trends and low interest rates, continuing care retirement communities are back in growth mode eight years after the housing market collapse, experts say.
"There's been more growth in senior housing than in residential housing in general," said Beth Mace, chief economist and director of capital markets research at the National Investment Center for Seniors Housing and Care. "We've seen growth in supply in the last two years, but demand has been largely able to keep up."
The two categories of CCRCs are generally identified as "independent living" and "assisted living." Assisted living is designed for residents who need more help with daily tasks or medical care. Mace's organization tracks development of the two types of housing in 31 metropolitan areas.
The top markets for independent living facilities are Houston, Atlanta, Kansas City, Dallas, Washington and San Antonio, which account for 50% of construction, Mace said.
For assisted living, the top markets are Phoenix, Atlanta, Detroit, Minneapolis, Dallas and Chicago, she said.
Among the lowest growth markets are San Diego, Riverside, Calif., and Baltimore, which Mace attributes to factors such as stricter zoning, state entitlement laws and the cost of land.
Occupancy rates fell from a peak of 91.4% in 2007 to a low of 86.9% in the first quarter of 2010, Mace said. The most recent occupancy rate reported in 2016 was 89.7%, down slightly from the 90% threshold in 2015.
"That drop in occupancy rate after 2007 wasn't just because of demand," Mace said. "There had been a lot of building."
"What we saw was that senior housing was recession resilient but it wasn't recession proof," Mace said. "Rents went flat, but they didn't go negative."
S&P Global Ratings analyst Brian Williamson said the senior housing market did not see the immediate crash that hit the general residential sector.
"It took about an 18-month time frame before it hit," Williamson said. "There was a stagnant period for about two years. By 2012, we started seeing some stabilization."
The health of the CCRC market is closely aligned with the general housing market, according to Jonathan Leatherberry, attorney at the law firm Bracewell, where he specializes in bond counsel, underwriter counsel and related duties.
"Anytime you have strong housing demand, you will have strong senior housing demand," Leatherberry said. "When you have a strong housing market and residents are able to receive top dollar for their homes, it makes it easier to transition into a senior living facility."
In Texas, where Leatherberry works, the housing market is softening in Houston due to energy doldrums but booming in Dallas.
The record low rates in the muni market have prompted issuers to refinance bonds sold during or immediately after the 2008 housing market collapse, he said.
"We're seeing a lot of advance refundings," Leatherberry said. "In 2008, 2009, and 2010, we were doing deals in the 8% and 9% range. If you had a project that you had to go with, you were stuck with that. In 2011 and 2012, rates were starting coming down."
The day after Britain voted to leave the European Union, Leatherberry received calls from financial institutions wanting to do refunding deals.
"We're still at all-time lows," Leatherberry said. "Right now, the underwriters and the borrowers are pushing to get to market as quickly as possible."
When the major banks abandoned the senior housing market after the recession, the field was increasingly left to firms that focus on CCRC bonds.
The top players include Ziegler Capital Markets, HJ Sims, Piper Jaffray, and BB&T Capital. With the improving market, other banks are moving back into the sector.
Wells Fargo created a specialty business group focused on financing senior housing facilities. Business has ramped up significantly since the formation of Wells Fargo Senior Housing Finance, according to The American Banker. Originations last year more than doubled those in 2014.
Debt issuance for the first half of 2016 is up more than 3%, according to Ziegler Capital Markets.
"With the next interest rate hike expected to take place later this year, providers have taken advantage of the still low interest rates and it shows in the mid-year totals," Cathy Owen, Ziegler assistant vice president for senior living research, wrote in a recent report.
Surprisingly, refundings decreased 41% during the first six months of this year, but Ziegler said that could be because issuers have exhausted their refunding opportunities. In the first half of 2015, refundings were slightly more than $1.028 billion, up 74% from the same period in 2014.
New money issuance in the first half of 2016 was slightly above at $966 million, compared to the $826 million issued for project financings during the same period last year, Owen reported.
Organizations with fixed-rate debt issued in 2004-2006 are refinancing with fixed rates that are more than 200 basis points below where they were 10 years ago for many rated and non-rated credit categories, Owen said.
"As we have seen in the last few years and as expected this year, much of the bond financing volume in the first half of 2016 has taken the form of fixed-rate issues rather than letter of credit-backed variable rate demand bonds," she said.
Among fixed-rate CCRC issues, rated borrowers made up roughly 48% of the volume, slightly less than the 50% share for rated issuance in 2015, Owen said. Rated issues have ranged from 30% to 40% in recent years, she said.
For investors, the CCRC bonds are generally viewed as high-yield issues, according to Triet Nguyen, head of credit for NewOak Capital, an independent credit advisory firm.
"CCRC bonds have been an important sector of the high-yield muni market for decades," Nguyen said. "They have also been among some of the riskiest types of municipal bonds and, as such, belong only in the portfolios of high-yield muni institutional investors or investors with a high degree of risk tolerance.
Nguyen said the CCRC sector is benefiting from the strong rebound in the housing market. "Underwriters have also come up with innovative security structures designed to significantly reduce the leverage on the facilities in the early years," he said. "From a technical standpoint, the sector is also benefiting from the ongoing search for income in a low-rate, tight credit spread environment," he said.
A recent
"Much of the growth will occur among retirement-aged population with the number of households age 70 and over projected to rise by more than 8 million, or more than 40%," the report said. "The increases will push up the share of older households from 16% in 2015 to about 21% in 2025."
In its outlook for 2016, Fitch Ratings anticipated a stable environment for CCRC ratings.
"More CCRCs are likely to pursue major renovation or expansion projects next year with favorable access to capital to remain in place," said Fitch senior director Jim LeBuhn. "Negative rating actions in the sector will be concentrated among CCRCs that take out significant amounts of debt to finance renovation or expansion plans."
While Fitch expects CCRC operations to remain stable, external factors such as a significant downturn in the equity or fixed-income markets or a material change to or reduction in reimbursement by Medicare for post-acute rehabilitation services could pressure margins."
