The difficult thing about development right now is that it is both a very tough time to build because of higher capital costs but also may be the time that many developers and investors need to start projects. We know, easy for us to say, especially as the Fed signals that rates are likely to stay high for longer and as the 10-year Treasury rate peaks above 4.5% again.
But the reality is that if indeed there will be a supply and demand imbalance in a couple of years, then the predevelopment work (if not shovels in the ground) has to start right now because of how long it would take to get those developments open and leased up by the time baby boomers begin turning 80. That process takes a few years, at best, and the ones that can open communities in 2026 and 2027 should be primed to succeed because they would be offering the newest thing in the neighborhood by a number of years in many markets. And they’d enjoy that luxury until the many laggards open up their shiny, new things later.
Welltower in its first quarter earnings release and business update stated it has already funded $241 million in developments in the first quarter and plans to fund an additional $660 million of development in 2024 relating to projects underway as of this March. Because of its size and lower capital costs, Welltower is one of the players best suited to development these days, and we could see a much larger development figure from it in 2025.
However, with all the demographics-is-destiny statistics out there, anyone considering new development has to be realistic about the risks of baby boomers not accepting the current seniors housing product, the average move-in age rising closer to 90, the penetration rate actually going down, the affordability factor pricing out huge swaths of seniors, and staffing issues persisting, all potentially contributing to permanently lower margins that will affect return expectations.
There are also plenty of good deals available on the M&A market too, right now, and potential conversion projects of older SNFs and AL buildings, or even vacant office spaces. If development were so easy, everyone would be doing it. But it is important that not everyone will be doing it. Look out for this month’s issue of The SeniorCare Investor to read more about it.
