Senior Living Development Risks Increasing
Reminiscent of the mid to latter part of the 90’s, the Senior Living Industry is experiencing substantial new development of senior living on a national level, particularly Assisted Living and Memory Care, but also Independent Living. Some markets, such as Houston and Denver as referenced in a study completed by the NIC, have a very substantial number of either new beds already constructed or in the development pipeline. While many of the larger operators will continue to compete amongst each other in larger metropolitan areas, increasingly there is a growing trend of smaller (prudent) operators steering growth in second tier markets, but still less so in third tier markets.
Not long ago, a market turnaround expert said to me, “You can fix bad management but you cannot fix a bad market.” Recently my company, Senior Consulting, LLC (SC), was asked to provide operational services and financial analysis for an Independent Living facility. The facility was 1st class in all respects, about six years old and 60% occupied. SC concluded that an inclusion of an assisted living wing was the only answer to turn the respective facility around. The operators of the facility were good managers but they were in a fairly large metropolitan market that was over saturated with IL, and to a degree AL facilities. The respective facility should have never been built. When the market assessment is flawed, the implications can be very long term.
Development and operational success always begins with a market analysis that truly understands the nuances of a particular market that help in defining the Service Area as well as an appropriate location for a facility within the service area. Industry insiders wholly understand this. However, many of our clients are not industry insiders and most builders, developers and stakeholders new to the industry surprisingly do not know how critical a market analysis is as a first step.
We see a variety of approaches to how a service area is determined. The 5 and 7.5 miles rings as a guideline are old school. Distance and drive times are equally important to consider, as are hospital locations; geographical barriers, which can loom as hurdles in some markets more so than in others; or how residents and family members perceive a town or neighborhood. Stats are great, and the number of income and age eligible potential residents weighed against competition will drive conclusions, but if the presumed service area is flawed then those conclusions will be as well.
There are various market risk factors that come into play including balancing the barriers to entry in a market. Some markets have low barriers such as open zoning and site availability, or they may be located in a state such as Texas where many housing developers are capitalized to jump headstrong into senior living. Markets with high barriers to entry include long established and virtually fully developed markets or those with very particular planning and zoning departments. The timeline for development is usually longer in these markets, but the risks are lessoned that others may not follow a new project in that market.
Senior Consulting has a unique frame of reference for what constitutes a positive market analysis and a strong market penetration rate for assisted living and/or memory care. Over the last few years we have conducted over 80 market studies, including nine in Connecticut where four were positive over two years ago, seventeen in New York State where seven were positive over a year ago, and others nationwide where approximately one third to one quarter of the studies resulted in positive findings. Therefore, most of the time we advise to clients that they not proceed with development because our market analysis yielded unfavorable conclusions.
A 2000 CIRE Magazine article warned of the approach to the 2030 zenith of 106.8 million 65 and older baby boomers. More than a decade and a half away from the peak, opportunities for a single-market-focused developer are actually dwindling as available debt and equity or sale/leaseback options prompt a second wave of construction of new facilities accelerate.
The article precociously predicted what is occurring in the industry today, “Besieged by a spate of overbuilding, intense competition for a relatively flat short-term market, and closer scrutiny by lenders, seniors-housing developers and operators are looking for new survival tactics so they can stay on course until that big wave comes ashore.”
Therefore we suggest looking at many markets in depth to select one for development, as opposed to just considering a single market for development. For example, a conservative approach would be to assess five different or potentially overlapping markets to develop just one. We conducted 12 in months in two states recently for one operator, resulting in two solid opportunities for AL/MC, with three other opportunities for memory care only. We are starting similar approach in another state focused on memory care only facilities as typically a greater need as such.