Don’t let the numbers fool you. That’s good advice in general and especially fitting when analyzing market demand for senior housing including assisted living and medical care facilities.
Entering a market based on numbers commonly used by developers and appraisers may result in undue risk and a failed investment. Typically, demand for additional senior housing units or beds is based on demographics and studies gauging area seniors’ current and projected need for assistance with daily activities and living. This methodology stems from a dubious assumption: If the market has a low supply of senior housing and studies suggest that more is needed or will be needed, then there must be demand.
But the demand may be illusory. A safer way to enter a market is to evaluate its existing supply. ‘Generally speaking, if a market has a lot of senior housing facilities already and they are all performing well and have high occupancies, then there is probably room to build a new facility that stands apart as a newer, improved product with better services and amenities, and compete for and capture that existing demand,’ says BBG’s healthcare and senior housing specialist Michael French. ‘It’s much safer than going to a market with very little existing supply and hoping that people who aren’t in senior housing already will suddenly decide to move in to a facility.’
The move may put another facility out of business; thus, though developers seldom consider the potential impact of their facilities on other market participants, in our view they would be wise to determine how many senior housing units are eligible to be removed from the market when assessing demand.
Based on hundreds of senior living facility appraisals and market studies nationwide, BBG has found that occupancy is the primary driver and indicator of demand in any given market. The strongest markets tend to have high occupancies across the board and few if any low-quality facilities as the demand is strong enough to support higher rates and, in turn, inspire new construction. As new facilities are introduced, older and lower-quality facilities eventually are phased out.
That’s not to say there’s a one-size-fits-all approach to demand analysis, based solely on occupancy. Determining future demand for senior housing requires careful assessment of community-level market conditions and a fuller understanding of market drivers including the location and influence of adult children. Indeed, senior population increase projections may be undercounted in areas where economic development initiatives have succeeded in drawing young professionals to an area who may opt to care for their aging parents up to a certain point.
In certain communities, the ‘aging in place’ concept of enabling seniors to live out their lives in their own homes is bolstered by nonprofit organizations that provide the necessary support and home renovations. In fact, on the whole, homeowners 65 and older may be less likely to move to new senior housing in the numbers many expect based on their swelling ranks, according to Harvard University’s Joint Center for Housing Studies.
Again, it comes back to market penetration and occupancy as indicators of demand. Where senior housing quality and occupancy is high, so too is product acceptance by decision makers.