Senior housing is a tough, yet rewarding market


By ,
Ask a Lender
September 27, 2017


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Key Points

About senior housing

  • The market encompasses varied types of property.
  • Demand is strong and only just beginning to grow.
  • A variety of programs offer mortgages with attractive terms.
  • A lack of experience is a substantial barrier to entering the industry.

The numbers — in terms of population demographics and potential financial return — make senior housing a tempting sector, but it's a complicated and highly specialized area where lenders put a premium on a borrower's background and expertise.

The size of the baby-boom generation and the fact that boomers are reaching Social Security age are often cited in predictions of strong growth in the senior-housing market. Based on population and occupancy trends, the National Investment Center for Seniors Housing and Care (NIC) forecasts that there will be a need for 30,000 new senior-housing units per year in the U.S. through 2020 — a figure more than 60 percent higher than the number of units completed in the 12 months ended Sept. 30, 2015.

That's substantial growth for the senior-housing market, but the NIC says there's a bigger spike on the horizon, beginning a decade from now. People are finding ways to stay in their homes longer, and the real influx of new senior-housing residents will hit when the first of the baby-boomers turn 80, in 2026.

Diverse property types

By way of definition, senior housing encompasses a variety of dwellings. Lenders fund mortgages for assisted-living facilities, skilled-nursing centers, memory-care communities, and retirement and nursing homes, among other housing types. Sometimes a single facility offers more than one type of senior housing as part of a continuum of care.

Historically, the properties have been good investments, according to the NIC. It's analysis of total return by property types shows senior housing as the top-performing real estate sector over the 10 years ending in third-quarter 2015, outpacing the apartment, hotel, industrial, office and retail sectors.

Banks and nonbank lenders fund senior-housing projects, and a variety of government programs support senior-housing mortgages. The Federal Housing Administration offers mortgage insurance on senior-housing loans through a program called Section 232. The Small Business Administration includes senior housing among the types of properties eligible for its 504 and 7 (a) loan programs.

Also, the government-sponsored entities Fannie Mae and Freddie Mac bolstered the lending market in 2015 by purchasing senior-housing loans worth $2.7 billion and $2.5 billion, respectively. The totals represented increases of 80 percent for Fannie Mae and 108 percent for Freddie Mac, compared with their 2014 totals.

Good terms, tough entry

The loans on senior-housing properties can be attractive. Fannie Mae and Freddie Mac senior-housing mortgage programs offer fixed- and variable-rate loans, with loan-to-value ratios of up to 75 percent and 30-year loan terms and amortization. Government-sponsored enterprises Fannie and Freddie place added restrictions on loans for memory-care facilities, and both emphasize the importance of borrowers having extensive experience owning or operating senior-housing facilities.

Experience, or lack of it, is a common roadblock for those attempting to enter the market, even those that are otherwise financially qualified for a commercial mortgage. The borrowers' professional background is a lender’s primary consideration when looking at the operation of a senior-housing facility, says Chris Honn, former manager of Fannie Mae's senior-housing activity. That includes not only the experience level of owners and executive directors, but also their ability to recruit experienced caregivers, chefs and food-service managers.

Proof of proper licensing is important to lenders also, as is borrowers' familiarity with state regulations focused on senior-care facilities and their ability to obtain comprehensive professional and general liability insurance coverage.

"This is a highly specialized industry," Honn says. "Senior housing is a highly intensive operational business that happens to take place in commercial real estate."


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