How Senior Housing Has Miscalculated Future Demand for Years

The senior housing industry may have been unrealistic in calculating its customer base for years, skewing estimated demand and impacting capital allocation decisions, according to a new white paper.

To assess whether the service-enriched senior housing industry has a realistic grasp on who makes up its customer base—and to determine the impact recalibrating the customer base would have on estimated senior housing demand nationally and in local markets—Rockwood Pacific, a California-based real estate services firm, partnered with senior living market analysis firm Senior Housing Analytics to pen a white paper on the topic.

The need to revisit who actually constitutes service-enriched senior living customers is pressing, according to Rockwood Pacific Principal Frank Rockwood—especially because the industry seems to have been getting it wrong for years.

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“We’ve heard from several different folks that we might be getting it wrong in terms of how we’re assessing the market,” Rockwood told Senior Housing News. “They had concerns we were missing the mark.”

For years, the service-enriched senior housing industry has, for the most part, considered people 75 years old and older as its customer base, Rockwood Pacific’s white paper notes. In reality, the median age of entry for independent living is about 83.7 years, and the median age of entry for assisted living is about 84.8 years, according to a study conducted by the Center for Retirement Research at Boston College in 2012.

“We recognize this is a little bit of a geeky topic,” Rockwood said. “But the implications are important. People are making decisions about senior housing investment opportunities—this could potentially have big implications on those capital allocation decisions.”

Getting realistic

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Making the switch and thinking of the 80+ cohort as potential service-enriched senior housing customers—as opposed to thinking of the 75+ cohort as potential service-enriched senior housing customers—has pretty significant implications, on both national and local levels.

“When you switch from thinking your customers are people who are 75 or older to thinking your customers are people who are 80 or older, the implications are on future growth,” Rockwood explained. “As a rule of thumb—whatever kind of growth you thought you were going to get when you considered the 75-or-older cohort your customer base—once you get a little more realistic about who your customer is, you’re going to knock one-third off your customer population growth rate.”

On the national level, for instance, the annual customer growth rate drops from 3% to 2% when the customer base is changed from people who are 75 years old and older to people who are 80 years old and older, Rockwood said. 

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In 2015 alone, shifting the customer base from people who are 75+ to people who are 80+ would have resulted in the removal of 8 million potential users of enhanced senior living services—a 40% reduction, the white paper says.

Market-by-market effects 

The effect of shifting the customer base would differ by local markets, though. For instance, re-calibrating the customer base wouldn’t majorly impact places where the number of people 75+ is growing quickly. 

“Places that have very fast growth of their 75-and-older populations also have very fast growth of their 80-and-older populations,” Rockwood said. “That’s not necessarily surprising.”

In markets where the number of people 75 years old and older is growing slowly, like Ohio or Pennsylvania, re-calibrating the senior living customer base would have a more negative impact, Rockwood added.
 
“These places that are slow-growing from the vantage point of how we typically look at things are actually worse off,” Rockwood said. “If you’re in a slow growth area, you already might have some concerns. You need to take a closer look because it may be a little tougher going than it seems.”

Shifting the senior living industry’s perception of its customer base has happened before. 

“Everyone talked about the 65+ population as the customer base for service-enriched senior housing back in the 90s,” Rockwood said. “But that wasn’t true back then—68-year-olds didn’t use enhanced services.”

In time, the industry simply realized that that customer base wasn’t relevant, Rockwood explained. He expects the same thing to occur with the 75+ cohort—albeit slowly.

“I think we’ll continue to transition to the 80+ benchmark, but I think it will be a slow process because it’s discomforting,” Rockwood said. “As an industry, you’re naturally inclined to have the biggest bucket of customers as you can; the bigger the bucket, the more attractive the senior living industry seems.”

Regardless of whether the switch happens soon, senior living operators, developers and investors should be especially careful about increasing supply in slower-growing markets, the white paper concludes.

Written by Mary Kate Nelson

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