AN INDUSTRY PERSPECTIVE
A CONVERSATION WITH MEL GAMZON
I’M SPEAKING TODAY WITH MEL GAMZON, SENIOR MANAGING DIRECTOR OF SENIOR HOUSING INVESTMENT ADVISORS, SO WE CAN GET AN INFORMED PERSPECTIVE ON THE STATE OF THE SENIORS HOUSING INDUSTRY.
GOOD MORNING, MEL.
Good Morning, Steve.
MEL, AS SOMEONE WHO’S BEEN INVOLVED IN SENIORS HOUSING FOR MORE THAN 25 YEARS, WHERE ARE WE TODAY IN THE EVOLUTION OF THIS SECTOR?
Although some of us have been around this industry for a while, as a real estate sector, we’re actually still very young. In many respects, the senior housing industry has gone from childhood to adolescence at lightning speed. And I’ve seen a lot of bumps along the way. Over the years, we’ve learned many, many valuable lessons. And as a result of those lessons, industry fundamentals appear to be on solid ground. We’re now at a point where we’ve deservedly captured the attention of both the debt and equity sources.
As part of this industry-wide evolution, management and marketing systems have improved over time, and we’re generally becoming much more sensitive and responsive to the needs of our residents. This ultimately translates into higher revenue streams, more substantial profit margins and enhanced value for the underlying real estate.
WHAT'S HAPPENING IN THE WAY OF THE VELOCITY AND VALUATION OF TRANSACTIONS?
It’s clear to me that desirable real estate transactions are actually becoming more challenging to uncover and that pricing is being guided by more stringent underwriting criteria. Money is just not flooding into our sector. Some may disagree with me, but I think that this is actually a very good thing for market equilibrium in most regions. Yes, the large portfolio deals get the notoriety, but there are vast investment opportunities for smaller owners and operators. There’s also opportunity in the new generation of seniors housing product which is beginning to surface.
HOW DO YOU SEE YOUR ROLE CHANGING?
Firms such as ours will be needed to advise clients on the best methods for maximizing investment returns in this evolving climate. This will be true for both existing assets and new-build ventures.
For example, let’s take the somewhat popular auction process. Is it truly the best method to market seniors housing assets? I would say In part it depends really on where we are in the market cycle. Right now, we are seeing what I would call, "buyer fatigue;" that is, buyers are tired of the auction dance and just want to structure relationship-type transactions based upon solid dialogue between principals. More than ever, this is, and has always been, a relationship business. It's the job of my firm to use our relationships to put the right relationships together. First, we assemble the credible background information to be used by both parties; second, we directly involve the people who can actually pull the trigger. Third, we typically orchestrate the due diligence process and then, finally, we like to stay out of the way! The most important thing that we provide is our understanding of which buyers and sellers will have the right chemistry between them. We need to fully understand the purchaser or new investor’s ability to finance the deal and their true motivations: Is it just an IRR deal for them or a longer-term platform, maybe even a strategic fit. Whatever, they need to be “for real” and the deal cannot be in jeopardy of a re-trade. That’s what we get paid for!
WHAT DO YOU SEE FOR THE FUTURE, MEL?
Owners of existing, quality assets are still in a great position except the dynamics are now more evenly balanced between them and prospective new purchasers and investors. In addition to select acquisition opportunities, we will likely witness what I would call, "measured growth," not aggressive growth, for new construction. This will primarily be for prototypes which enhance the continuum, for more affordable, independent living models, for mixed-use ventures both in suburban and urban areas, and, most definitely, for new ownership formats—being condominiums and cooperatives. You know, it’s interesting, Steve, that the country has a theoretical annual demand for some 20,000 new market rate, senior housing units. Will it be realized over the next several years? My best guess is that it would be unlikely, given the overall cost associated with new construction and the ability to finance these ventures. In short, there’s lots of opportunity but, as always, only for those who understand the marketplace.
GOOD MORNING, MEL.
Good Morning, Steve.
MEL, AS SOMEONE WHO’S BEEN INVOLVED IN SENIORS HOUSING FOR MORE THAN 25 YEARS, WHERE ARE WE TODAY IN THE EVOLUTION OF THIS SECTOR?
Although some of us have been around this industry for a while, as a real estate sector, we’re actually still very young. In many respects, the senior housing industry has gone from childhood to adolescence at lightning speed. And I’ve seen a lot of bumps along the way. Over the years, we’ve learned many, many valuable lessons. And as a result of those lessons, industry fundamentals appear to be on solid ground. We’re now at a point where we’ve deservedly captured the attention of both the debt and equity sources.
As part of this industry-wide evolution, management and marketing systems have improved over time, and we’re generally becoming much more sensitive and responsive to the needs of our residents. This ultimately translates into higher revenue streams, more substantial profit margins and enhanced value for the underlying real estate.
WHAT'S HAPPENING IN THE WAY OF THE VELOCITY AND VALUATION OF TRANSACTIONS?
It’s clear to me that desirable real estate transactions are actually becoming more challenging to uncover and that pricing is being guided by more stringent underwriting criteria. Money is just not flooding into our sector. Some may disagree with me, but I think that this is actually a very good thing for market equilibrium in most regions. Yes, the large portfolio deals get the notoriety, but there are vast investment opportunities for smaller owners and operators. There’s also opportunity in the new generation of seniors housing product which is beginning to surface.
HOW DO YOU SEE YOUR ROLE CHANGING?
Firms such as ours will be needed to advise clients on the best methods for maximizing investment returns in this evolving climate. This will be true for both existing assets and new-build ventures.
For example, let’s take the somewhat popular auction process. Is it truly the best method to market seniors housing assets? I would say In part it depends really on where we are in the market cycle. Right now, we are seeing what I would call, "buyer fatigue;" that is, buyers are tired of the auction dance and just want to structure relationship-type transactions based upon solid dialogue between principals. More than ever, this is, and has always been, a relationship business. It's the job of my firm to use our relationships to put the right relationships together. First, we assemble the credible background information to be used by both parties; second, we directly involve the people who can actually pull the trigger. Third, we typically orchestrate the due diligence process and then, finally, we like to stay out of the way! The most important thing that we provide is our understanding of which buyers and sellers will have the right chemistry between them. We need to fully understand the purchaser or new investor’s ability to finance the deal and their true motivations: Is it just an IRR deal for them or a longer-term platform, maybe even a strategic fit. Whatever, they need to be “for real” and the deal cannot be in jeopardy of a re-trade. That’s what we get paid for!
WHAT DO YOU SEE FOR THE FUTURE, MEL?
Owners of existing, quality assets are still in a great position except the dynamics are now more evenly balanced between them and prospective new purchasers and investors. In addition to select acquisition opportunities, we will likely witness what I would call, "measured growth," not aggressive growth, for new construction. This will primarily be for prototypes which enhance the continuum, for more affordable, independent living models, for mixed-use ventures both in suburban and urban areas, and, most definitely, for new ownership formats—being condominiums and cooperatives. You know, it’s interesting, Steve, that the country has a theoretical annual demand for some 20,000 new market rate, senior housing units. Will it be realized over the next several years? My best guess is that it would be unlikely, given the overall cost associated with new construction and the ability to finance these ventures. In short, there’s lots of opportunity but, as always, only for those who understand the marketplace.