3 Alternatives for Sizing Up a Senior Living Market

Determining where to build a senior housing community: “It’s part science — but it’s part analytics and it’s part art.”

These were the sentiments of Beth Mace, chief economist for the National Investment Center for Seniors Housing & Care (NIC), at the annual conference in Chicago earlier this month.

When assessing a new market, developers most often look first to demographics and population statistics. But experts are finding that sizing up a market goes much further than just looking at sheer demographics and top-10 locales.

“The worst question anybody asks me is: Where should I build?” says Susan Brecht, president of Brecht Associates, Inc., a senior living consulting firm that specializes in market feasibility studies. “The question is: Should I build where I think I’m going to build? or, Where should I target my influences?”

Three factors — including occupancy levels, market size and local alliances — help answer these two questions and are critical to consider when conducting a market feasibility analysis, the experts say.

1. Look at Occupancy Levels, Not Market Penetration Rates

Penetration rates have long been used as an indicator of market demand for new development and expansion projects, industry reports show. By definition, they help measure the degree to which a market is either underserved or oversaturated.

The penetration rate for senior housing averages 10.4% for the 99 markets NIC MAP Data Service tracks, according to a report Mace wrote in June. However, there is wide variation in the rate across metro areas, with a rate of less than 5% in New York City and as high as 22% in Portland, Ore., the most penetrated market.

But, contrary to what many think, they’re not as accurate in determining a market’s unmet needs, says Larry Rouvelas, principal of Senior Housing Analytics, a Washington, D.C.-based firm that conducts market and financial feasibility studies. Rather, developers and operators should look at the occupancy levels of competition in the area.

“Occupancy is the foremost predictor of whether there is opportunity for new supply in the marketplace,” he says. “If all the competitors in the marketplace are running in the high 90s, then it’s probably saying the market could use some more product.”

There are a wide range of penetration rates out there, he added, and because of this, it often makes more sense to evaluate market areas based on occupancy levels.

If using penetration rates as a predictor of whether there are unmet needs in a specific market area, the data would show low penetration rates with high occupancy levels, and vice versa.

“If you look at the data, in fact, that’s not what you see,” Rouvelas says. “What you see is that there are plenty of markets out there that are high-penetration and high-occupancy and there are also some that are low-penetration and low-occupancy.”

For example, Lancaster, Penn., has historically been a high-penetration high-occupancy market, Rouvelas explained at NIC and previously noted in a report.

Its independent living penetration rate was 25% in 2011, twice the next highest metro area. By most methods in estimating unmet need, it would be far oversaturated. However, occupancy among the majority of independent living communities was 93%, much higher than the national average of 87.9% that year.

The reason? “There are historical differences in different markets,” meaning that in some areas, moving into senior housing may be expected at a certain age, Rouvelas says.

2. Target the “Huge Opportunity” in Smaller Markets

Look for opportunities outside top-10 primary markets, says Susannah Myerson, vice president of research and applied strategies at ProMatura, a senior living market and consumer research firm.

For memory care, the top-10 markets represented 90% of all the freestanding memory care construction in the primary markets, as of the second quarter of 2014.

“But many small markets have a need for memory care beds,” Myerson says.

Of the 1,060 properties for residents with memory impairment, 965 of them are freestanding memory care models — with the remaining 95 offering memory care services along with other care segments, according to the most recent NIC data.

This means nearly 870 freestanding memory care communities would be located in primary markets.

“There’s a huge opportunity in secondary and tertiary markets,” Myerson says. “I would encourage you to explore opportunities outside the top-100 markets.”

3. Identify Potential Alliances — And Key Competitors

Developing partnerships, as well as analyzing current and future competition in a given market area, is becoming increasingly more important as the health care environment evolves, experts say.

Rather than relying simply on data and demographic trends, identifying market elements such as planned and existing competition, as well as qualitative factors such as perception of a community, target markets and alliances and relationships, will be critical.

“[Qualitative factors are] arguably one of the most important parts of a market analysis,” Brecht says. “You can’t just run the numbers; you really have to talk to people in the market.”

One type of alliance, accountable care organizations (ACOs), are undoubtedly important when sizing up a market, says Gaurie Rodman, director of development services at Direct Supply Aptura, a senior living professional services firm that offers a full range of services including planning, design, construction management and procurement.

“As we start doing a market assessment, we start thinking, ‘How are we going to form those relationships?’” she says. “Two nursing homes close each week; assisted living facilities will be dealing with a higher acuity resident. We need to get our hands around what that means.

“Our skilled nursing facilities will be built differently (more flexible), technology will be a huge component (EMRs) — all of those begin to play a role in how we position skilled nursing facilities for success,” she added

With regard to skilled nursing, providers should take a look at the hospitals in the area to see if a partnership might be a viable option.

“We look at readmission rates because herein lies the opportunity,” Rodman says. “Whenever we see trends of readmits we look at the skilled nursing facilities that are doing those readmits to see if we can leverage [our services to fill a need].”

Not only should alliances be identified, but competition should as well.

Who are the primary competitors in the chosen market area? Are they comparable to your property? How are occupancy levels? These questions should be answered of existing competition, Brecht suggested.

As for planned competition, ask existing providers if anyone is planning expansions or new developments, the timing of the developments and the owner/sponsor of these projects.

“All of these [factors] have a tremendous influence on what the ultimate outcome is,” Brecht says.

Written by Emily Study