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Now may not be the time to invest in senior living developments in Houston, but one investment professional says just wait.

More opportunities could be available for developers who stay patient in Houston’s senior living sector, which has been overbuilt in some parts of the Bayou City, according to Aron Will, vice chairman of debt and structured finance in senior housing at CBRE’s Houston office.

Lenders have recently tightened capital to one-off developers wanting to invest in the senior living space. Instead, more established developers are receiving capital for these types of projects, Will said. That means a balance could return in the next few years for overbuilt submarkets like Houston.

As Houston’s population grows, demand could return.

“On the five-year time horizon, I still think the space has a lot of legs and a lot of merit, specifically in Texas and specifically in Houston,” Will said. “It’s overwhelmingly positive.”

Houston is fairly late in the development cycle for senior housing, Will said. Suburban Houston has plenty of quality independent living, assisted living and memory care facilities, but perhaps less so on the independent side due to trends of people gravitating toward assisted living and memory care, he said.

Overbuilding for senior housing in the suburbs is in part due to the low barriers to entry where developers have access to cheaper dirt and excess land.

However, it may not be the best decision to write off the Houston market, which has a growing population of nearly 7 million people, Will said. And there are still pockets of suburban Houston with some opportunity for development.

In terms of capital, the senior living market has shifted from REIT-driven to a private equity-centric market. There’s currently a lot of dedicated capital in the space — whether it’s an allocation in a larger co-mingled fund or a dedicated fund that’s been raised to do nothing but invest in senior housing, Will said.

Global foreign capital has also played a significant role in the space. About 5 percent of senior living investment came from cross-border capital in 2017, but that number is expected to grow in the coming years, according CBRE’s “2018 U.S. Real Estate Market Outlook: Seniors Housing” report.

That shouldn’t be a surprise given to the yield on cost is about 9 to 10 percent compared to market rate multifamily, where 6.5 to 7 percent is more the norm.

The demand for senior living was revived in markets like Houston and across the U.S. after the recession, Will said. Between 2011 to 2016, there was a tremendous amount of activity in the space, leading to some overbuilding, Will said.

“It surpassed peak building levels of the late 1990s and early 2000s in the space nationally,” Will said. “That’s when the space was in its infancy.”

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