Texas Real Estate Business

FEB 2018

Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.

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18 • February 2018 • Texas Real Estate Business www.REBusinessOnline.com SUNNY OUTLOOK FOR SENIORS HOUSING FINANCE An interview with John Randolph, vice president of KeyBank's healthcare group, reveals that while development of seniors housing product in Texas is robust, the market remains on solid footing. Interview by Taylor Williams O ne would think that, for devel- opers of any type of commercial real estate in today's market, the decision on whether to do a project in Texas or to not do a project in Texas would be clear-cut, all other factors be- ing equal. In addition to offering a soft regula- tory environment and ample land for development, the state's torrid job and population growth for the better part of the last decade gives it the demo- graphic appeal that virtually all de- velopers covet. And while every proj- ect has its own unique requirements, there's no question that Texas has the fundamentals that drive real estate ex- pansion. Development of product in the Texas seniors housing space — a segment wherein the relationship between de- veloper and operator is as close as that between the hammer and nail — has been a beneficiary of these circum- stances. "Overall, the general health and sta- bility of the Texas economy is driving a growing interest from the seniors hous- ing market," says John Randolph, who serves as vice president of Cleveland- based KeyBank's healthcare group. "This holds particularly true in terms of population growth, median income and household values." But before there can be development, there must be lending. And the robust development pipeline for seniors hous- ing properties in Texas — particularly in Dallas and Houston — suggests that lenders view the supply-demand bal- ance as relatively in check. And most signs seem to point to that trend con- tinuing over the course of 2018. Texas Real Estate Business asked Ran- dolph to elaborate on the factors that are shaping the debt and equity market for seniors housing product in Texas. His edited responses are as follows: Texas Real Estate Business: There are concerns that the Dallas market is moving toward being overbuilt. What is KeyBank's current strategy as far as development financing in this market is concerned, and how does it match up against operat- ing strategies for other major Texas markets in which the firm is active? Randolph: There's a significant amount of activity occurring in Dal- las. According to recent NIC Map data, Dallas is the fourth-most active market for volume of new construc- tion behind Chicago, Atlanta and New York. Houston comes in at No. 6 on that list. That means there are two major markets in Texas where we're seeing a significant amount of activity on the construction side. When it comes to how we ap- proach development financing in this market, we look for some form of uniqueness in the project and what competitive advan- tage that translates into. We underwrite the risks based on who the operator is, their background and how well capi- talized they are. TREB: Generally speaking, acqui- sitions of seniors housing properties by institutional in- vestors were down in 2017. What have been the key drivers behind this trend, and is KeyBank now see- ing more non-institutional borrow- ers? Randolph: Given where the cap rates for many independent living and assisted living assets have been trading recently, it can be tough in the current market for institutional investors to meet the investment re- turn hurdles. However, investors of all types can generally find more yield in skilled nursing assets, which is why there's been more robust activity within that sector from the standpoint of institu- tional investors. TREB: Compared to 2017, do you expect your production of seniors housing loans to increase, decrease or essentially remain the same in 2018? Randolph: Generally speaking, we anticipate our seniors housing loan production to increase relative to 2017. We currently have a very robust pipeline, which is ahead of where we were this time last year. Due in large part to the strong demographics in the Texas market, we're seeing more capital move into the space. Much of this activity stems from the efforts of investors and developers that want to get in front of the looming increase in the number of baby boomers enter- ing the market. TREB: Can you provide a rough breakdown of your loan types for seniors housing properties in Texas by percentage — what percentage development, what percent acquisi- tion, what percent refinance, etc.? Randolph: Our breakdown of loan types in Texas is consistent with our seniors financing across the rest of the U.S. That is to say, new devel- opment projects make up a smaller portion of our loans, the majority of which involve refinances of existing assets or acquisitions. This trend is Ground-up development of seniors housing product is booming in Texas, but improvement and expansionary projects are also heating up. Signature Pointe on the Lake in Dallas, which offers independent and assisted living units, will undergo renovations this year. One of the more recent developments to hit the market, Legacy at Crystal Falls in Leander, a northern suburb of Austin, was completed in 2015. Built by Cadence McShane Construction, the property features 82 assisted living and memory care units. John Randolph KeyBank

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