Key Takeaways

  • After a strong first half of 2022, lending and sales volume decelerated in the second half, hindered by rising interest rates.
  • In the debt capital markets, increased FHA LEAN firm commitment volume in the third quarter was a highlight, but GSE, bank, and non-bank private lender volumes decreased as rising interest rates and tighter monetary policy became obstacles to underwriting and risk taking.
  • Investors continued to concentrate on the needs-based end of the senior housing continuum. Demand for and pricing of assisted living (AL) assets was constructive in the second half, while average prices of independent living (IL) and memory care units appeared to soften.
  • Seniors housing cap rates based on sales and refinancing transactions held firm in the third quarter, nonetheless. The value weighted average cap rate of third quarter seniors housing transactions was 5.46%, down from 5.63% during 2Q22. Going in yields appeared to rise as much as 20 basis points, however, in thin 4Q22 trades.
  • Risk appetite waned toward yearend, sending lending and acquisition volume lower. Transaction velocity is likely to remain in a low gear until volatility in the credit markets subsides and the outlook for the economy and monetary policy is clearer.     

With strong demographic tailwinds at its back and the pandemic largely behind it, the seniors housing and care industry made incremental progress in the first half of 2022. Property performance steadily improved, and equity and debt capital flowed more freely into the sector, attracted by a compelling backstory and higher initial yields than were available in the multifamily sector.

Conditions in the second half of the year were more challenging. High inflation, rising wage rates, and labor shortages complicated the operating environment, just as tight monetary policy, interest rates, and volatile capital markets made managing the capital stack and financing acquisitions more difficult. As Lument’s seniors housing banker Doug Harper put it, “The tight labor market has been an operational challenge for the industry, making it difficult to recruit and retain staff. However, demand has recaptured much of the occupancy lost during the pandemic and pricing has been robust, helping to keep pace with inflation.”

Looking ahead to 2023, he commented, “While recent capital market conditions added still more stress to senior living owner/operators, elevating debt interest costs and reducing access to liquidity, we are confident conditions will improve in 2023. Lower inflation and term interest rates bode well for the senior living industry, which is poised for growth and additional success given the need for quality care and favorable demographic trends ahead.”

Indeed, the performance outlook for 2023 holds promise, but it is not without uncertainties. As Harper mentioned, the operational headwinds and capital market challenges encountered during the second half of 2022 will linger. The following will examine conditions in the capital markets observed in the second half and consider the industry’s prospects for 2023.

MHC shipments have increased 12% from 2020 to 2021, with 112,882 manufactured homes produced in 2022 alone.
Manufactured Housing Institute

Debt Capital Markets

The flow of debt capital to seniors housing operators remained constructive in the third quarter, and critical underwriting criteria were relatively stable. Nevertheless, government agency and conventional permanent lending volumes were limited by a combination of the residual effects of Covid-19 on property cash flows and rising interest rates, which contrived to make satisfying programmatic underwriting guidelines challenging. As a result, lenders with more flexible terms gained market share.

All classes of debt providers grew more risk averse later in the year. Diminishing liquidity in the capital markets, rising rates, and growing concerns about a 2023 recession led many lenders to close their books earlier than usual and the usual rush of deals at yearend never materialized. Consequently, volume declined in the fourth quarter by 20% or more.


U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) loans remained a stable source of long-term, fixed rate debt to the seniors housing sector and the bedrock for skilled nursing and intermediate care facilities. The impact of Covid-19 on facility operations held volume down through spring 2022, as many operators with bridge or bank mini-perm loans on the books were unable to satisfy the performance requirements for HUD/FHA LEAN 232 mortgage products, but firm commitments bounced back over the summer as the end of the government’s fiscal year approached.

Firm commitments for FHA Sec. 232 loans totaled $597 million during the third quarter of 2022, respective 62% and 18% increases from the second and first quarters. The FHA also increased commitments to AL facilities and board and care homes from $208 million in 2Q22 to $275 million during 3Q22, a 32% sequential quarter gain.

Interest rates increased and pricing spreads widened for FHA permanent debt, however, a trend accentuated by the long duration of FHA loans. The average coupon interest rate of refinance and converted construction loans priced in the fourth quarter was 5.18%, according to data from Trepp, Inc., compared to 4.33% and 3.43% during 3Q22 and 2Q22, respectively. Comparable pricing spreads for all FHA project loans averaged 1.99% in the fourth quarter, up from 1.91% and 1.73% in 3Q22 and 2Q22.

Although the FHA stepped on the firm commitment accelerator after mid-year, the actual sale of Ginnie Mae mortgage-backed securities (MBS) and FHA loans declined, reflecting adverse interest rate movements and capital markets volatility. Trepp data indicate that sales of all FHA loans and securitized products dropped from $835 million in the second quarter to $504 million in the third, a 40% decline, and further to $471 million in the fourth quarter.

Fannie Mae/Freddie Mac

The government sponsored enterprises (GSEs) remained active lenders for IL and AL properties (especially during 2Q22, when securitized GSE volume rose to nearly $500 million), but a combination of post-pandemic occupancy, cash flow constraints, and the GSE’s programmatic underwriting guidelines limited lending volume. Securitized loan data from Trepp and other sources indicate that third quarter GSE MBS sales decreased by about 27% sequentially to $365 million and dropped another 43% to $208 million in the fourth quarter.[1]

Higher loan rates contributed to lower lending volumes. Average securitized Fannie Mae and Freddie Mac loan interest rates increased from 4.91% in the second quarter to 5.13% in the third quarter. Rates continued to climb, and pricing spreads widened in the fourth quarter, sending the average note rate soaring to 5.77%.

Still, higher loan interest costs made meeting debt service coverage requirements more difficult. Consequently, the average loan-to-value (LTV) ratio of GSE seniors housing loan production declined in the third quarter, slipping from an average of 63.4% in the second quarter to 62.1%, a small reduction in average debt service coverage ratio (DSCR) from 1.42 times to 1.39 notwithstanding.

This trend accelerated in the fourth quarter, an outgrowth of a more cautious risk appetite among lenders and reduced liquidity in the capital markets toward yearend. The average LTV of known GSE executions fell to 55.0%, and the average DSCR gapped higher from 1.39 times to 1.47.

Banks and Non-Bank Lenders

As rising interest rates rendered fixed rate, permanent financing more difficult to obtain, seniors housing borrowers relied to a greater degree on shorter-term, mostly variable rate mini-perm loans from banks. Banks made considerable gains in market share for acquisition loans, gaining competitive advantage by providing greater leverage than programmatic lenders and by using their balance sheet lending capacity to provide funding commitments within the short time frames typical of the contemporary property market.

Still, currently available data indicate that banks and non-bank private lenders, too, tightened lending criteria and reduced risk appetite after mid-year as rates rose and liquidity in the capital markets diminished. Moreover, the sharp rise in short-term interest rates, particularly SOFR, made bank floating rate debt less attractive to seniors housing borrowers. As a result, Real Capital Analytics (RCA) records suggest that bank seniors housing and nursing care lending peaked in the spring and declined by as much as 50% sequentially in the third quarter, and perhaps another 20% during 4Q22.  

Mergers, Acquisitions, Property Markets, and Property Values

Encouraged by steady occupancy improvement from pandemic lows, brisk rent growth, and demographic momentum, buyers were eager to put capital to work in the first half of 2022. Expansion-minded operators shifted emphasis away from new construction toward acquiring existing properties at prices below replacement cost. Second quarter gross proceeds totaled at least $2.9 billion, the largest spring quarter gross since 2015, and an increase of roughly $1 billion over first quarter sales.

Seniors housing transaction volume moderated after mid-year, however, hindered by rising debt and equity costs and ebbing risk appetite among investors and equity providers. Acquisition proceeds in the third quarter slid to $2.1 billion, 81% of which was closed by the end of August.

Fourth quarter transaction trends followed along a similar path. Trade data published in early January indicate sales volume dipped again to about $910 million, likely the smallest single quarter tally recorded since 3Q20. Closed transactions were concentrated in the needs-based segments of the market with growing emphasis on the memory care sector. Although IL units make up about 43% of the senior housing units surveyed by the National Investment Center for Seniors Housing & Care MAP data service, IL space accounted for only 15% of units acquired in fourth quarter, the remaining portion divided between AL (65%) and memory care (20%).

With respect to cap rates, implied cap rates derived from securitized loan underwriting data, including loan refinances, averaged 5.53% in the second quarter and 5.46% in the third quarter. The seniors housing cap rate index published by RCA was closely aligned with the implied rates on 5.7% and 5.5%, respectively. Cap rates appeared to rise in thin fourth quarter trade. The average underwritten transaction cap rate increased to 5.68% in the fourth quarter, while the RCA cap rate index inched less than one-tenth percent higher from the 3Q22 level.


Although debt and equity transaction velocity decelerated in late 2022, the fundamentals that attracted capital to the industry earlier in the year – compelling demographic driven demand, firming rent and occupancy trends, and operator consolidation – remain in place. Lender and investor confidence dimmed late in the year, however, and will only recover gradually as the outlines of prospective economic growth and monetary policy become clearer. 

The decrease in transaction activity is attributable to exogenous events, like inflation, interest rates, labor market supply and demand imbalances, and monetary policy. When these issues are resolved – and many analysts expect that matters are likely to begin to improve after mid-year 2023 – the positive momentum observed during the first half 2022 is likely to return.

[1] Freddie Mac loans are recorded only when securitized and sold. The actual volume of Freddie Mac loans originated in 4Q22 may be greater than the securitized amount.