Interest Rate Outlook and Senior Housing Investment Strategy

With the Bank of Canada holding rates at 3.75% and the Federal Reserve at 4.25%, we examine how the interest rate environment impacts senior housing investments in 2026.

Current Rate Environment

United States

• Federal Funds Rate: 4.25% (December 2025)
• 10-Year Treasury: 4.12%
• Senior Housing Debt: 5.75-6.50% (65-70% LTV)
• Cap Rates: 6.5-7.5% depending on quality and location

Canada

• Bank of Canada Rate: 3.75%
• 5-Year Government Bond: 3.45%
• Senior Housing Debt: 5.25-6.00%
• Cap Rates: 6.0-7.0%

Impact on Valuations

Cap Rate Compression Potential

As rates stabilize and potentially decline:

• Current senior housing cap rates: 6.5-7.5%
• Projected 2026-2027: 6.0-7.0% (50-75 bps compression)
• Valuation impact: 8-12% appreciation from cap rate movement alone
• Plus NOI growth: 3-5% annually from operations

Historical Context

Previous rate cycles show:

• 2003-2006: Rates rising, senior housing cap rates stable
• 2015-2018: Rate normalization, cap rates compressed 100 bps
• 2020-2024: Rate surge, cap rates widened 150 bps
• 2025+: Stabilization creating investment opportunity

Debt Market Dynamics

Improving Conditions

1. Lending Volume Recovery

   • $42B senior housing debt originated (2025)
   • Up from $28B (2023-2024)
   • Projecting $55B+ (2026)

2. Competition Returning

   • Banks re-entering selectively
   • Life insurance companies active
   • CMBS market reopening
   • Agency lending (Fannie/Freddie) strong

3. Terms Improving

   • LTV ratios: 65-70% (from 55-60%)
   • Interest-only periods available
   • Covenants relaxing
   • Prepayment flexibility increasing

Investment Implications

Acquisition Strategy

Current environment favors buyers:

• Seller expectations adjusting: 2024 saw 12% price declines
• Motivated sellers: Some overleveraged operators must transact
• Less competition: Many buyers sidelined
• Better properties available: Quality assets coming to market

Returns Potential

Target investment returns:

• Levered IRR: 15-20% for value-add investments
• Unlevered IRR: 11-14%
• Cash-on-cash: 8-12% stabilized
• Equity multiple: 2.0-2.5x over 7 years

Risk Considerations

Interest Rate Risk

• Most debt now fixed-rate (85%+ of market)
• Typical 5-10 year terms align with hold periods
• Floating rate exposure limited and hedged

Refinancing Risk

• Underwrite to higher rates at maturity
• Maintain strong debt service coverage (1.40-1.50x)
• Build cash flow growth to absorb higher rates

Economic Risk

• Senior housing historically resilient in recessions
• Non-discretionary nature of care needs
• Family resources (not individual income) drive payment

Regional Opportunities

US Markets to Watch

1. Southeast: Rate-sensitive buyers returning
2. Texas: Strongest job growth supporting demand
3. Mountain West: Migration trends intact
4. California: Distressed opportunities emerging

Canadian Markets

1. Ontario: Supply-constrained, stable economy
2. British Columbia: High barriers to entry
3. Alberta: Value opportunities, improving fundamentals

Forward-Looking Strategy

Next 12-18 Months

Optimal positioning includes:

• Accelerate acquisitions: Before cap rate compression
• Lock long-term debt: Capture favorable terms
• Focus on quality: Premium assets will outperform
• Markets with supply constraints: Pricing power critical
• Experienced operators: Essential in challenging times

2-5 Year Outlook

Expected developments:

• Cap rates compress 75-125 bps
• Transaction volume recovers to $35-40B annually
• Development restarts selectively
• Institutional capital allocation increases
• Public REIT valuations recover, supporting private market

KianaCoby Positioning

Our strategy leverages current conditions:

• Acquiring off-market opportunities at 2023-2024 pricing
• Securing fixed-rate debt at attractive spreads
• Focusing on supply-constrained markets
• Building operating scale for efficiency
• Positioning for multiple expansion as rates stabilize

Conclusion

The current interest rate environment creates one of the best senior housing investment opportunities in a decade. Stabilizing rates, improving debt markets, and strong operating fundamentals combine to offer compelling risk-adjusted returns.

For qualified investors, partnering with experienced sponsors who can navigate this environment is essential to capitalizing on the opportunity.