How Senior Living Developers Anthology, Ryan Cos. Finance new construction as lenders tighten their belts
With interest rates rising, new construction lending appears to be slowing in the senior housing sector, but that doesn’t mean debt isn’t available either.
As long as developers have the track record to ease lender concerns, they find ways to find financing for their new development projects.
The National Investment Center for Housing and Aged Care (NIC) released its Q1 2022 Lending Trends report last month, showing new construction loan closings were up from in the fourth quarter of 2021, lenders issuing just under $330 million for new construction projects in senior housing.
This is an increase of 39.4% from one quarter to the next on a comparable store basis; however, new construction loans were down from their recent post-Covid-19 peak in 3Q2021. Rising and falling lending rates in recent quarters could signal an accordion effect on the economy as the bellows contracted amid the Covid-19 pandemic expand.
Currently, the US economy is facing rising cost inflation in a variety of goods and serviceseven as other costs, such as gas prices, are falling.
US Federal Reserve Governor Chris Waller and President Jerome Powell each signaled strong support for the third 75 basis point interest rate hike this year, possibly as early as this month. For Powell, the goal is to bring US inflation rates down to 2%, something he takes very seriously in the eyes of NIC chief economist Beth Mace.
“Inflation is a tax on everyone,” Mace told Senior Housing News.
Due to inflation, consumers might adopt an ever-increasing price mindset, causing a rush to buy products now to beat expected price increases in the future.
“The Fed really wants to make sure that doesn’t happen. So to do that, it’s going to slow the economy down as much as possible,” Mace said.
As a result, lending activity is down, “which is exactly what the Fed wants,” she said.
That said, some developers are getting into new projects with construction loans, including Anthology Senior Living, which is a subsidiary of Chicago-based real estate development firm CA Ventures; and Ryan Cos., a prolific Minneapolis-based senior living developer.
Credit begins to tighten
Mace believes the new construction lending environment is tightening, the result of a cautious shift by banks to ensure their investments are as risk-averse as possible. Based on third-quarter lending data due out in October, Mace now expects construction activity and housing starts to slow.
In the second quarter of 2022, the number of units currently under construction was the lowest since 2015, she said.
“Because of this tighter lending environment, that’s translating into less housing starts, which translates into less construction,” Mace said.
Lenders like Capital Funding Group (CFG) are well aware of the need for security for the loans they make and have seen some deals fail, according to CFG Managing Director, Senior Housing, Kenneth Assiran.
“You have higher tariffs, higher operating costs and higher construction costs, and revenues don’t create balance with increases,” Assiran told SHN. “Trading in the right markets with high barriers to entry and strong demographics is likely to go ahead – trading in the secondary markets is likely not.”
Baltimore-based CFG in July closed a $32.9 million construction loan with Griffin Living to build a 108-person based memory care and assisted living community in Temecula, Calif. . About a month later, CFG and Griffin closed a $40 million refinance loan for an AL and memory care community based in Simi Valley, Calif.
Capital Funding Group’s confidence in Griffin Living highlights the most important aspect of new construction lending: track record. And even though the overall landscape is tightening, for developers with strong relationships and a proven track record, there’s still money for new projects.
But, once the building is built, it needs a quality operator. And CFG focuses as much on the background of the operator as on that of the developer.
“We’re really looking for developers with solid experience and a strong track record,” Assiran told SHN. “We look for really strong operators and then we scratch the surface and enter the market.”
Considering the broader economic headwinds, Assiran believes that addressing the economic challenges of the current era could become a differentiator for strong developers.
“There are a lot of headwinds right now for developers,” he said. “But there is a contrary vision. [Developers] who get things done during this time are likely to open the doors with less competition, as there will be fewer departures at all levels.
History alleviates worries
Although lenders are more cautious, senior real estate developers with strong relationships and solid track records are not deterred by the current state of the debt market for new construction.
“There are certainly some notable lenders who have pulled out over the last two months, I would say, [but] I don’t think it’s had a widespread negative effect on the industry,” Joe Marinelli, vice president of acquisitions and capital markets for Anthology Senior Living, told Senior Housing News.
Marinelli, vice president of acquisitions and capital markets at Anthology Senior Living, thinks there are plenty of opportunities. “We have entered into seven new construction contracts since July 2021… five of which were in the second half of 2021, and two have been entered into since the start of the year,” he said.
Anthology recently entered into a new construction contract to build a 206-unit luxury IL, AL and memory care community in the Portland, Oregon suburb of Beaverton.
Anthology’s type of pain and better senior living community is either 90-120 unit AL care and memory communities or 150-200 unit IL, AL care and memory communities. Despite a typical preference for the community type, the company still aims to diversify its portfolio.
The other new Anthology development that closed earlier this year will be a 120-unit independent living community in the Seattle area, a “very high barrier to entry” location, according to Marinelli.
Market demographics for all of Anthology’s new development projects match Assiran’s observations.
In addition to Seattle and Portland, Anthology’s new development projects are in or near: Boston; Miami; Austin, TX; and Dallas.
Being smart about both location and operating partners is top of mind for Minneapolis-based senior living development company Ryan Companies.
When it comes to future development plans, Ryan is “trying to be smart about where we’re going and making sure we’re as strict about our underwriting and…not just doing business for the sake of it.” doing business,” Anders Pesavento, senior vice president of capital markets at Ryan Companies, told Senior Housing News.
“We have been very fortunate to have very strong local, regional and national banking relationships and we have not been limited in the transactions we do because of this capital,” Pesavento added.
That said, Ryan is changing the way he underwrites, taking into account the higher interest rates and the additional cost those rates will have on the overall development budget. To do this, Ryan must be confident with the rental rates in the underwriting and with his operational partners in order to execute the strategy put in place.
“At the end of the day, [the key] stands behind what you say you are going to do,” Pesavento said.