Seniors Housing Weekly Update-- Seniors Housing Acquisition Risk Premium Remains High But Consistent
April 24, 2012
Seniors Housing Acquisition Risk Premium Remains High But Consistent
Interest rates remain at historic lows, and obviously artificial lows. It is worth noting, however, that the risk premium in the acquisition market, for both skilled nursing and seniors housing, has remained relatively high. By risk premium we mean the spread between the average cap rate in any year and the average 10-year Treasury note yield. In skilled nursing, the risk premium, or spread, was 1000 basis points in 2011, almost identical to the spread in 2010 when per bed prices hit a record. In seniors housing, the risk premium in both 2010 and 2011 was 620 basis points, when both the Treasury yield and the average cap rate declined by 60 basis points in 2011. Now, in what may be a great demonstration of an efficient market, the risk premium for skilled nursing in 2011 was 250 basis points higher than in the last market peak in 2007, and for seniors housing it was also exactly 250 basis points higher in 2011 than in 2007.