Craig S. Jones: Seniors housing finance will have a decidedly vanilla flavor in the future.

When real estate finance finally settles down after this year's subprime turbulence, underwriting for seniors housing will seem downright bland compared with the recent past. That's the conclusion of Craig S. Jones, senior managing director of Columbus, Ohio-based RED Capital, a specialist in seniors housing finance. RED is the country's largest Fannie Mae DUS seniors housing lender and the third-ranked FHA health care lender.

It isn't so much that seniors housing finance will observe strict new rules going forward, Jones says. Rather, he expects practices to revert to what they were before the days of exceptionally cheap capital on easy terms. NREI spoke with Jones about the future of seniors housing finance.

NREI: How has underwriting changed in seniors housing?

Jones: It seemed like everyone was pushing the box regarding loan-to-value and debt service coverage and insurance. What's going to happen now is that underwriting is going to tighten back to what it used to be, or maybe even a little more strict.

NREI: What's next for seniors housing cap rates?

Jones: Seniors housing cap rates are going up for now. The availability of capital has been curtailed — there's still some debt financing available, but the extra-high leverage available through CMBS and CDO products for all types of real estate classes is over, so we've seen a peak in prices for a while. The pressure that was driving prices up has backed off.

NREI: Will the mid-September rate cut by the Federal Reserve affect cap rates?

Jones: It's hard to see what the Fed's rate cut is going to do. It looks initially like there's going to be a steeper yield curve, but the jury's out on what the new rate means. In any case, the cut is really about other, more macroeconomic considerations. It might have some impact on real estate lenders, but the curtailment of cheap capital is a much more important factor in pricing in the seniors housing market.

Seniors housing prices were out of whack because private equity had access to cheap capital. Now risk premiums are back, and we're getting back to financing fundamentals in seniors housing and, in fact, across the real estate industry.

NREI: How do you assess the fundamentals of the seniors housing industry?

Jones: The underlying fundamentals of the seniors housing business are strong. There hasn't been a lot of development lately, and if anything there may now be more demand than supply on some levels. I think the whole business is undervalued, in fact.

We might see valuations driven by fundamentals, rather than cheap capital, a much healthier situation. You can make a case that there's still some overhang on pricing in seniors housing from all the capital that came into the business in the late 1990s. Everybody beat each other up on pricing for years. It's only recently that some of the operators have figured out that they can charge more as long as they're delivering a quality product.

NREI: Which seniors housing segment are you bullish on?

Jones: None of them are bad. But assisted living has attracted an increasing amount of attention from investors in recent years, and for good reason. From a lending point of view, assisted living is a little easier to finance, because it's need-driven. You can forecast with some accuracy, if you're careful, the number of people who will need assisted living. Independent living is a choice-driven action, which is a little harder to anticipate.