Should Cap Rates Go Lower?

Two major REIT CEOs can see seniors cap rates moving below multifamily for the first time.

The Big Two REITs have reported their second earnings, and while occupancy and labor costs certainly remain an issue for their operating partners, there was one funny comment that came out of the calls. Well, funny if you get your kicks from these sorts of things the way I do.

Apparently, Welltower CEO Tom DeRosa and Ventas CEO Debbie Cafaro see eye to eye on at least one thing. As one analyst joked, they both apparently agree that seniors housing cap rates should be lower than multifamily, and I think they were even talking about assisted living. The reason? Because demand will do nothing but grow, meaning from a long-term risk perspective, they will weather storms better than multifamily, and maybe better than anything else.

Not so fast. There is a huge difference between market risk based on demand, and risk based on operational intensity. The operational risk, mostly labor costs and supply, but also future regulations, should not be discounted. And while we weathered the Great Recession storm well, the next one will most likely be different, with different economic impacts. The only sector where I can see cap rates going below multifamily is the active adult area, but you will have to read the August issue to see why.

 

 

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