The Federal Reserve cut a key interest rate for the first time since 2020, a move that could begin to make borrowing easier for cash-strapped nursing home operators.
But the 0.5% cut, described by some analysts as unusually large, also may be an indication that the nation’s top economic policymakers are becoming increasingly concerned with the labor market.
The central bank’s Federal Open Market Committee voted Wednesday afternoon to lower its key overnight borrowing rate by a half percentage point, or 50 basis points. It set a new rate target of 4.75% to 5.00%.
Early pandemic-era rate cuts temporarily buoyed lending, but the Fed made further corrections as inflation soared. Providers have faced a harrowing two-plus years since then when attempting to borrow for operations, improvements, construction and acquisitions.
“Skilled nursing and senior housing operators should be relieved by the Fed’s 50 basis points cut to short-term interest rates today,” Brent Holman-Gomez, senior vice president of Cambridge Realty Capital Companies, told McKnight’s Long-Term Care News late Wednesday. “Nearly all loan requests of the last couple years have been constrained by debt service costs at these much higher rates. This move by the Fed softens the edge a little and will allow new loans to be written slightly larger.”
Both the limited availability and cost of loans have been cited as reasons for an acceleration of nursing home sales and closures. They are also likely contributing to a virtual standstill in the construction of new nursing homes. An August American Health Care Association report found just seven skilled nursing facilities had been opened so far this year, a small fraction of previous years’ totals.
“The Fed rate cut will reduce financing costs in the industry and we view that as a positive for the industry overall,” CareTrust REIT Chief Investment Officer James Callister old McKnight’s. “I think it sends a very positive message to the sector that rates on mortgage loans and on accounts receievable-based financings will come down.”
But, Holman-Gomez noted, the general market is still restrictive, especially for new loans and new relationships. Borrowers will still have to put in “a lot of effort and work with experts to obtain new loans,” he explained.
‘The right direction’
In addition to higher rates, providers have been required in recent years to provide more operational and outcomes data for underwriting, a process that some said has made borrowing even more difficult. Providers that need to borrow to expand or add specialty services and grow their census argue that it can be nearly impossible to get a loan to do the work while occupancy is depressed.
And, Holman-Gomez noted, the difference in some key borrowing rates will be incremental. The Prime rate used by banks to set rates, for instance, will move from 8.5% to 8%. That’s still double what it was during most of the last decade, he pointed out.
“More reductions are needed to get back in line with capital plans from several years ago,” he added. “This is the right direction, and should also give long-term mortgage rates some conviction to continue the softening that’s occurred this summer.”
The Fed has been widely expected to cut the rate today, but analysts were unsure whether it would do so by 25 basis points or 50 basis points. One basis point is equal to 0.01%, or one one-hundredth of a percent.
Labor concerns
Some analysts said the Fed likely took a more aggressive start to its rate-cutting strategy — which Federal Reserve Chair Jerome Powell said could continue over three to four years — because of concerns about the labor market.
Since the last Federal Reserve meeting, economists have increasingly raised concerns about the reliability of July and August payroll data.
Powell pushed back on broader concerns about the hiring market, despite lackluster gains of about 100,000 monthly. He noted the unemployment rate is at 4.2%, which he called “very healthy,” and noted high participation among workers.
But the Bureau of Labor Statistics reported the healthcare sector added just 31,000 jobs in August — about half the average monthly gain over the last year. Amid that slide, skilled nursing lost 2,600 workers.
The Fed has predicted unemployment will rise to 4.4% in the near future. Powell reassured analysts and journalists at a press conference Wednesday afternoon that the Fed would respond to any job-market weakening in a way that maintains its efforts to bring inflation down to 2% from the current 2.5%.
“If the labor market were to slow unexpectedly, we have the ability to react to that,” Powell said, adding that the committee hasn’t developed a firm timeline or expectation about the size of future rate cuts.
