After the Fed held interest rates steady following 10 consecutive increases but left the door open for potentially two additional increases this year, you can’t help but think, what has gone as planned, or as predicted, in the last several years? Very little, unfortunately. Inflation has persisted in the economy, and rates will have to remain elevated for longer than earlier projections. Sounds a little familiar to the overly optimistic predictions of a seniors housing occupancy and margin recovery, post-pandemic, which is taking longer to materialize, and may never happen in many markets. We’re just saying that a little more conservatism may be needed in people’s projections or proformas these days.
Back to the interest rates, a longer period of higher capital costs will not be a boon to M&A volume nor to property valuations, as sellers will, for the most part, only look to divest one or two properties at a time, as needed. It will continue to be a buyer’s market for value-add transactions at discounted prices. For owners of properties with variable rate debt, the defaults will unfortunately continue, putting more properties in dire financial straits on the market.
However, on the construction front, the cost of debt will continue keeping many projects from breaking ground, which bodes well for the existing operators out there trying to rebuild census and margin. And the longer we are projected to be in this high-interest rate environment, the longer developers will likely delay projects until they have some certainty of lower interest rates at the time they hope to refinance their full and stabilized property. Once that expectation is there, then the flood of new construction will commence. Or, maybe many will settle into the “new normal” of higher interest rates. After all, the industry has been there before and still saw periods of significant construction activity. We will see.
