TEXAS SNAPSHOT, JUNE 2012

DALLAS SENIORS HOUSING MARKET

Following a near record level of seniors housing transactions nationally in 2011, the Dallas/Fort Worth seniors housing market has continued to plow ahead through the Great Recession, supported by positive job growth from the aged child, strong demographics and a resilient housing market. This resilience has led DFW to become one of the most sought after seniors housing investment and development markets in the country for institutional quality investors looking to hedge risk in their portfolio.

Like in most major metros, Dallas saw a significant pullback from renters through 2009 and 2010 in the independent living product, primarily caused by seniors’ inability to sell their homes, combined with 2,550 units of new construction coming on line. This created significant softness in the suburban markets (Plano, Frisco and McKinney) during the downturn, but all have gained momentum as the economy and housing market has strengthened. From 2008 to 2010, the overall independent living occupancy dropped across the Metroplex from 86.1 percent to 83.0 percent, but has recovered to approximately 85.7 percent through the absorption of 803 units during the past four quarters.

“We expect to continue to see positive absorption and rent growth in the DFW Metroplex during the next 12 to 18 months due to lack of any significant new supply coming on line,” says Ryan Maconachy, managing director of HFF’s seniors housing platform. “The same suburban markets in Collin and Denton counties that struggle to lease-up and absorb all of the inventory that hit the market at the same time have seen year-over-year rent growth near 3.5 percent with very little new inventory on the horizon.”

All indicators are pointing towards continued growth and improved performance for seniors housing communities the DFW.

Assisted living and memory care has been a significant area of focus for investors and developers during the past 24 months, having performed very well through the recession even while trying to absorb several new communities that opened their doors during the heart of the downturn. Feedback from owners and operators suggests that the needs-based nature of the assisted living product allowed for the continued influx of new residents to communities, even in the event that their houses couldn’t sell quickly or at the price they would have liked to see.

“There comes a point when someone needs to move into an assisted living community, either due to their physical condition or the inability for family members to care for their loved one due to their high acuity,” says Chad Lavender, director of HFF’s seniors housing team. “Overall occupancies in the Metroplex have not been the strongest in the country, but the economic drivers bringing aged children with their parents and jobs to Texas aren’t showing any signs of easing up.”

Following the July 2011 announcement from the Center for Medicare & Medicaid Services (CMS) cutting Medicare rates by 11.1 percent over FY 2010 rates, the skilled nursing industry was in a state of uncertainty. The goal of the cuts by CMS was to try and re-align Medicare costs after it surged upward following CMS’ update of the RUG-IV reimbursement classification system. CMS has stressed that the cuts to Medicare from the FY 2011 levels resulted in reimbursement rates still 3.4 percent higher than FY 2010, but that is little comfort for owners and operators who purchased properties that were developed based on the new RUG-IV rates. Average skilled nursing occupancies across DFW have dropped 400 basis points since 2008, currently sitting at around 76 percent. According to recent announcements suggesting further cuts to Medicare in 2014 under the Budget Control Act, an Avalere Health report estimates that Texas-run nursing homes will have to absorb approximately $51 million of cuts across the state.

With an improving economy in Texas comes new development. Several major projects are under way in DFW, including Belmont Village’s newest project in Turtle Creek. The 201-unit French-provincial style mid-rise will offer independent and assisted living, along with Alzheimer’s care. The project broke ground in early 2012 and is expected to open during the summer of 2013. Owners and developers of seniors housing communities alike will be watching Belmont Turtle Creek’s performance closely to see how the market responds to a high-end rental community in the current economic environment. All bets from the seniors housing community are that the irreplaceable location and quality of Belmont’s product will translate to a high velocity lease-up with near record rates for Dallas and Texas as a whole.

The acquisitions market in DFW continues to be strong with several high-profile trades occurring in late 2011 and early 2012. The combination of excellent growth and income demographics, low cost of capital and recently raised equity funds focused on seniors housing for many of the private equity shops and REIT’s have led to record pricing for assets in the Metroplex. The acquisition of the Isle at Watermere in Southlake and the purchase of Sunrise Senior Living’s Plano location by an equity fund and a private REIT, respectively, are two recent transactions that have caught the eye of investors and owners around town.

“DFW and Texas continue to be at or near the top of our client’s wish list for new development and acquisitions opportunities,” added Maconachy. “And with the possibility of a change in capital gains in 2013, we expected 2012 to be a very active transactional market in Texas and across the U.S.”

— Ryan Maconachy and Chad Lavender, seniors housing specialists with HFF’s Dallas office

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