Over that past several years the market has enjoyed extremely low-interest rates. Capitalization rates hit record lows for assisted living properties, and a seniors housing continues to outperform other asset classes with returns at 17.0% for a five-year period, according to the NCREIF Property Index (NPI).
There is no doubt that the seniors housing industry has enjoyed the fruits of the economic recovery, but with the high likelihood that interest rates will continue to increase, what impact will rising interest rates have on valuations as owners decide to sell their community?
Federal Reserve speculators are predicting an increase in commercial rates in the coming months. How much, no on can say for certain, but whispers indicate that the market will see at least three separate quarter-point hikes in 2017. Higher interest rates have the potential to push cap rates up and valuations down. Current cap rates in the seniors housing market are around 7.5% or 500 basis points above the 10-year Treasury rate. This spread is the risk premium that investors are willing to place on an assisted living investment versus the “risk-free” U.S. Treasury Bond.
To determine the valuation of a seniors housing community, one needs to divide the Net Operating Income (NOI) by the Cap rate. Assuming the risk premium of 500 bps remains, what effect will rising cap rates have on the valuation of an 110-unit seniors housing community with an NOI of $3.0 million?
For every quarter point increase in the cap rate, the valuation drops over $1.0 million. If interest rates continue to rise and the risk premium investors are willing to accept stays the same, the price an owner receives for a property could be dramatically affected.
So when is the best time to sell my Seniors Housing Community? There are two main factors in determining a community’s value, NOI and Cap Rates. As a single factor alone, interest rates will not affect cap rates, but as interest rates do go higher, a multitude of variables will collectively impact cap rates. As cap rates go up, valuations go down.
Now may be the time the opportune time to sell if an owner is considering divesting any part or all of their portfolio. For a complete analysis of how cap rates can affect your portfolio’s value, contact Jeff DeMonbrun, Senior Vice President, Zenith Capital at 206-456-4213.
Zenith is real estate investment group specializing in providing M&A advisory services, comprehensive finance, and development services for seniors housing. With over $1.7 billion in financing placed, our focus is your long-term success.
Visit www.Zenith.Capital and discover how Zenith Capital can make your ideas happen.