For years now, the Federal Reserve has been implying that a rise in interest rates may be on the horizon. As reported in earlier posts on Cambridge Realty Capital’s blog, the Fed’s December meeting and subsequent statements gave only clues as to the Fed’s plans leaving plenty of room for speculation.
Anticipated Interest Rate Increase
Despite the Fed’s unclear statements, many anticipate that this will be the year that the Fed does raise its federal funds interest rate, a short-term interest rate, above the current near 0% levels. Exactly when this will occur remains debatable but is anticipated no earlier than April of 2015. An interest rate increase will impact financing across all industries including real estate and senior housing financing.
Implications for Senior Housing and Long-Term Care
For those in the senior housing or long-term care industry, higher interest rates would be a mixed bag. On one hand, its would become more expensive. For some in the long-term care industry, it could tip the scales in favor of renting a facility rather than purchasing one. For those considering new construction of a facility or a senior housing development, even the possibility of an increase in interest rates could weigh in favor of securing financing and beginning construction sooner than originally anticipated.
Additionally, the interest rate increase could result in an increase in the price of certain products and services used by facilities, thereby increasing operating expenses. Though, the connection there is less direct than the connection between interest rates and costs of borrowing.
The combination impact on cost of the property investment and potentially higher operating costs will also impact valuation of senior housing and long term care properties. This in turn impacts investments and merger and acquisition action in the industry by weighing on investors’ decisions regarding if and when to invest or acquire new holdings. Moreover, the increased cost of borrowing could also slow down acquisitions, which, of course, require funding to effectuate.
Analyzing Your Position
Although some generalizations can be made, the reality is that the implications will be slightly different for all senior housing and long-term care facility owners and operators. Are you not sure what all of this means for your projects? The senior housing and healthcare facility capital professionals at Cambridge Realty Capital would be happy to discuss the implications of an interest rate rise and the timing implications if you are planning to seek financing in the coming year.
One of the benefits of using Cambridge Realty Capital is the array of financing solutions specific to the senior housing and long-term care industry. For example, for very large projects, generally $15 million and up, Cambridge might enter into a joint venture with an institutional investor in which Cambridge would supply a minority share of the capital in exchange for a commensurate equity share. On the other end of the spectrum, Cambridge also offers more traditional financing options for projects as small as $1.5 million.
