The issuance of new permanent debt for senior living hit a new low during the second quarter, and loan volume for senior living decreased 8% from the first quarter, according to a NIC lending trends report released by NIC Analytics on Thursday.
Data for the report came from 18 lenders, including bank holding companies and banks, commercial real estate services, financial services companies, government-related sources, investment management firms, and real estate investment trusts surveyed by NIC Analytics.
NIC reported that the volume of new permanent loans for senior living $572.3 million was surpassed by nursing care ($781.3 million) for the first time since 2018. The loan volume reflected an 8% decline for senior living and a 75% increase for skilled nursing from the first quarter, according to a sample of lenders.
Factors adversely limiting the issuance of permanent debt included capital market disruptions, limited debt availability, tighter lending standards, higher interest rates, inflationary pressures, a troubled banking system, widening spreads and reduced loan proceeds, according to the report.
The issuance of mini-perm/bridge debt for senior living dropped further through the second quarter and was down 52% from the first quarter and 76% from late 2022 levels. Nursing care activity, on the other hand, remained relatively low and comparable with pre-pandemic levels.
“Borrowers are adjusting to the prevailing ‘higher for longer’ mindset, anticipating sustained rates without a potential decline in the near future,” Omar Zahraoui, principal at the National Investment Center for Seniors Housing & Care, wrote in a blog post. “While short-term debt options are limited, those available often come with increased costs and additional credit enhancements.”
New construction loan closings for senior living also remained weak in the second quarter compared with historical patterns, according to the report. As real estate investments trusts and senior living organizations have indicated so far in third-quarter earnings calls, senior living construction starts remained relatively low in the second quarter, with the number of units under construction in the 31 primary markets that NIC MAP follows near its lowest level since 2015, according to NIC MAP Vision.
Although delinquent senior living loans saw a notable increase, they remain lower than the high levels seen in the immediate aftermath of the COVID-19 pandemic in the third quarter 2020. Senior living delinquencies increased by 36% in the second quarter, compared with a 24% decline in skilled nursing-related delinquencies.
Lending environment tightens
Overall, the lending environment continued to tighten through the second quarter, limiting the availability of debt and driving borrowing costs “significantly” higher, according to the report.
The Federal Reserve bumped rates by another 0.25 percentage points in May — the 10th rate hike since March 2022 — and left open the possibility of another rate hike in December. The higher interest rate environment has led to tighter lending conditions in construction, multifamily and commercial and industrial loans, according to Zahraoui.
Feedback to NIC Analytics over the past two quarters on the senior living and nursing care environment indicated a focus on long-term relationships, with many lenders extending loans primarily to existing clients.
In addition, the ongoing increase in interest rates prompted a stronger focus on stabilized senior living and skilled nursing properties in proven markets with limited new construction, stability and strong sponsors, Zahraoui wrote. He added that the lending environment is expected to continue tightening for the remainder of the year.
