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It may take a while before the transaction process itself returns to normal.

Despite the major disruptions caused by the pandemic, transactions have still been closing though at a slower pace compared to 2019. Underwriting terms for financing have generally tightened and lenders are still cautious. But as effective vaccines are being rolled out, deal-making is expected to pick up, especially in the second quarter of 2021.

“Investors are showing more confidence in the market because of the vaccine announcement,” said Ryan Maconachy, vice chairman of Healthcare and Alternative Real Estate Assets at Newmark, a commercial real estate services firm. “Stabilized properties are in a great position.”

Maconachy added that in the last two months the number of bidders for seniors housing properties, mostly private equity firms, has increased. He projects that Newmark will close deals totaling $2.5-$3 billion in the first quarter of 2021.

Transactions fell steeply in 2020, according to numbers compiled by NIC MAP^® Data Service and, Real Capital Analytics. The all-time high of 174 transactions was tallied in the fourth quarter of 2019 falling to 67 deals in the third quarter of 2020, marking a sharp slowdown in sales activity as the pandemic widened.

For now, cap rates and pricing are holding steady, according to Ben Firestone, executive managing director and co-founder at Blueprint Healthcare Real Estate Advisors. He said that pricing could dip prior to a rebound in revenue in 2021.

Investors are rethinking liability insurance on the operating expense side and scrutinizing short-term lease-up projections on the revenue side, said Firestone. “The outlook remains strong over the long term. Private, patient capital is buying right now.”

The deal-making process itself has changed, a situation unlikely to return to its pre-pandemic mode until vaccines are widely deployed, the disease subsides, and the economy picks up.

Maconachy said that a lot of the deals in 2020 were very targeted to a select group of investors that stayed in the market. Properties were not shopped to a wide array of potential buyers. As a result, the transaction process last year was somewhat streamlined, resulting in faster closings despite the drawbacks of not being able to tour properties. He added that he doesn’t expect tours to resume for at least a few months, depending on the speed of the vaccine roll-out.

Stakeholders addressed the challenges of deal-making in the COVID era at the 2020 NIC Fall Conference. The session was titled “30 Days from Start to Finish; Getting a Deal Done During the Pandemic.” The panel was led by Steve Schmidt, national director, Seniors Housing Group, Freddie Mac. Speakers included Brian Cannella, managing director, Kayne Anderson Real Estate; Lori Coombs, managing director, group head seniors housing, Wells Fargo; and Thomas Schissler, managing director, Wells Fargo Multifamily Capital.

Taking a creative spin on deal-making, the session’s format mimicked TV’s Jeopardy gameshow. Schmidt acted as the host and the panelists answered questions from categories on the game board, racking up mock dollars for correct responses.

Questions related to a Kayne Anderson transaction of six best-in-class assets in Florida. Wells Fargo and Freddie Mac provided the $233 million debt package.

Several trends emerged during the discussion. Lenders said they are focused on high-quality owners and operators. For underwriting, lenders require strong protocols to prevent disease transmission. Borrowers have been required to detail their policies and procedures around infection control. “We want to see best practices,” said Coombs.

In the case of the Florida transaction, the operator, Discovery Senior Living, was well known to the lenders. That provided a level of comfort, knowing that there would be continuity of operations.

In general, senior living occupancy has been a concern throughout the pandemic. Senior housing occupancy hit a new low of 82.1% in the third quarter of 2020, according to NIC.

Lenders are looking closely at occupancy trends. They want to know how far occupancy can decline before the borrower/operator can no longer cover the debt service.

Schmidt said that Freddie Mac has been underwriting loans with the expectation of declining occupancy. But he added that each loan is underwritten based on its own merits and situation. Even today as the virus continues to spread, Freddie Mac looks at each owner, operator, and property on an individual basis. “We underwrite accordingly,” said Schmidt.

Freddie Mac structures a 12-month debt service reserve to bridge the gap due to a drop in net operating income. A pre-funded reserve provides another layer of protection, according to Cannella at Kayne Anderson.

Inspections have been a challenge since physical visits to properties have been restricted. In the case of the Florida portfolio, Kayne Anderson had previously owned the assets and knew them well. They also reviewed engineering reports, analyzed CapEx reports, and conducted virtual inspections.

Closing the Florida transaction in 30 days was a big challenge, according to Cannella. “Tough times call for good relationships,” he said, crediting the working rapport among the parties for the speedy conclusion. As a precaution, Kayne Anderson structured a parallel short-term bridge loan in case the deal didn’t come together on time. “The dual tracking gave us the confidence to deliver for the seller and investor,” said Cannella.

Looking ahead, Schmidt said a community whose residents and staff are 90% or more vaccinated will be a strong factor in determining stabilization. “We expect to underwrite occupancy in place once a community can show it has stabilized,” he said.

The lenders agreed that seniors housing has a bright long-term outlook. But they emphasized the importance of flexibility because of the continuing uncertainty around the pandemic and how it will play out. They thought it would take some time to win back consumer confidence, but an effective vaccine will help. “Hopefully, we are on our way out,” said Cannella.