Paving the Way to Feasibility

Adapting demand methodologies for assisted-living market analysis

By Susan B. Brecht, Brecht Associates Inc.

Although lax standards for feasibility studies were not exclusively to blame for the early failures of many senior-housing committees, poor feasibility studies were frequently associated with poorly performing facilities. The perception of high risk and the reality of poor performance diminished the availability of capital. This article examines each component of the market-feasibility study for assisted living, illustrating, where applicable, how it differs from traditional senior housing. It identifies basic analytical issues that need further research designed to create a basis on which methodological techniques and standards can be established.

Introduction
The majority of published literature on market feasibility studies for traditional forms of senior housing--continuing care retirement communities (CCRCs), lifecare communities, congregate housing--primarily targets analytical techniques utilized to assess relatively independent elderly. Those techniques incorporated benchmarks relating to the site evaluation, geographic definition of the market area expected to be served by the project, the appropriate minimum age, the relationship between income and project fees, the inclusion of comparable and competitive communities, projected absorption and fill period and, most significantly, acceptable levels of market penetration and market share. The latter indicators reflected, respectively, the proportion of age- and income-qualified households--net of existing and planned competition--required to fill the subject facility, and the percentage of all age/income-qualified households required to fill the subject and all other existing and planned communities. However, while the supply and demand that incorporates most of these components still forms the underlying basis for assisted-living market-feasibility studies, many of the elements of studies for this form of seniors housing require a different emphasis or methodology.

Need for Establishment of Accepted Market Feasibility Standards
From the 1960s through the mid-1980s, senior housing development focused primarily on CCRCs and congregate housing. During that period, the approach to market-feasibility analysis for these products went through a period of substantial change, leading eventually to a minimal set of standards that were accepted on an industry-wide basis by developers, sponsors and, most critically, the financial community. In the early days of the seniors housing industry, assumptions were based more on hunches than on actual experience. When experience varied significantly from the assumptions on which feasibility studies were based, the results were unanticipated levels of "poor" performance that in some instances led to financial insolvency and bankruptcy.

Assisted living is now in its formative stage, and at a point at which data on performance is just becoming available. Feasibility studies and the methodological standards for assisted living are therefore evolving as knowledge increases. Early studies for assisted living relied on many of the same types of assumptions that formed the basis for development of CCRCs or congregate housing. For example, utilization of 3 percent to 5 percent penetration rate as an acceptable standard for project feasibility was simply applied to assisted living. In early feasibility studies, competition for assisted living was defined more narrowly than it is likely to be today, in much the same way that early studies of CCRCs only considered other CCRCs to be competitive, rather than encompassing a broader variety of seniors housing.

Understanding the differences between independent-living and assisted-living demand analyses will facilitate the articulation of a set of standard, widely accepted benchmarks or practices in conducting market-feasibility studies for assisted living. Establishing standards will allow those who commission such studies to become educated about what they should expect from the feasibility study. Equally important, this will create a framework for underwriting the financing of such facilities. Because of the potential for overdevelopment, it is critical that those who are actively involved in the industry--as well as those just entering it--have a generally agreed-upon basis for evaluation and decision-making.

Site Evaluation
Which Comes First: Site Selection
or Target Market Identification?
In an ideal world, an organization would approach the development of an assisted-living community by identifying the target market and its preferences, needs and desires, and then selecting a site that meets the criteria established through that process. The feasibility consultant would be brought on board, under these circumstances, to do a study that would lead to the identification and selection of a site. Only rarely does an organization approach development in this way. The vast majority of studies are conducted once the site has been selected. As such, site evaluation becomes a component of market feasibility.

During the years in which seniors housing oriented towards the independent elderly emerged as a development trend, the philosophy relating to site selection reflected and increased understanding of the discretionary nature of the decision to move. As the industry matured, developers recognized that seniors who were relatively independent wanted to be able to easily maintain the activities that had sustained them before making the decision to move. As such, site selection became more attuned to supporting this notion. Most critically, those involved in the industry were finally disabused of the simplistic notion that "if you build, they will come."

Criteria for Site Selection
The site for an assisted-living community must meet several key criteria:

• It must be located in a neighborhood that is perceived as safe and
  attractive to the entire family making the decision;
• It must be easily accessible to adult children who will want
  convenience in visiting elderly relatives who reside there;
• It must reflect the socioeconomic target market being sought; and
• It must be accessible to shopping, places of worship and medical services.

Despite the fact that selection of an assisted-living community represents less of a lifestyle choice than the selection of an independent senior-housing community, the basic elements of good site selection--as illustrated by the latter two criteria--still must be observed. Site evaluation can be the first point at which feasibility is judged; for example, a site that is substantially inconsistent with the socioeconomic target market being sought may be judged inap-propriate for the project being planned or may indicate a need to modify the market to be targeted.

The location of the site must be responsive to two audiences or market elements--senior prospects and their adult children--and in this way differs from site selection for independent living. It is most often the adult child who both initiates the search for this housing alternative and makes the final decision. In interviews conducted by this author with marketing personnel at hundreds of assisted-living communities, the interviewees indicated that the vast majority of initial contacts had been made by family members rather than by the prospective residents themselves. Therefore, in terms of weighing criteria, accessibility--particularly to adult children--may be considered to be a critical factor in site selection. A review of the zip codes of adult children for several assisted-living communities currently in operation revealed that over 60 percent of the adult children resided within the local communities proximate to the assisted-living community itself. Further, the ALFA 1996 study has indicated that 60 percent of family members of assisted living residents lived within 20 miles of the facility in which their elderly relative resided.

Defining the Market Area
Perhaps to even a greater extent than traditional seniors housing, assisted living is becoming a neighborhood business or service. ALFA's 1993 survey results indicated that 74 percent of assisted living residents moved from within 15 miles or less of the facility. This statistic reflects several factors that are shaping this industry:

• Unlike some examples of seniors housing, assisted-living communities don't represent destination locations drawing residents because of features such as alliances with colleges/universities, local amenities such as waterfront locations, or other leisure-oriented attractions.
• To the extent that assisted living is positioned, in part, as an alternative to a nursing home, a market area drawing may begin to emulate that of nursing homes by drawing from a very localized market area. This will be the case increasingly if the substantial number of assisted-living communities being planned are actually built. With greater choice, seniors will be able to remain closer to home.

Specific site selection leads to specific geographic identity or orientation. The overstatement of the geographic market area is the single most critical error that can be made in a study, since it will ultimately lead to overstating the depth of the market for the project being evaluated. Unlike other forms of seniors housing for which substantial leasing or sales activities are required before financing is secured, assisted living is rarely pre-leased to any substantial degree. Market area determination must be made on the basis of detailed information gathered from local informants who are in a position to provide reliable information. These might include regional and local planners, representatives or organizations serving seniors (Area Agency on Aging, Council on Aging), and local real-estate agents, for example. The experience of other local assisted-living communities that are already in operation can also provide vital information needed to develop specific parameters defining the market area.

Information obtained in defining the market area may indicate that both primary and secondary areas can be defined. The primary market area would include those locations expected to provide the largest proportions of the residents. The secondary market area may include locations proximate to the primary market area that are likely to produce some residents (perhaps 10 percent to 20 percent), but that are not as closely oriented to the project location as those incorporated into the primary market area. In cases where the orientation of such areas is in no way connected to a project location, there may not be a definable secondary market area.

Analysis of Demographic Trends
Overall Population Trends
The larger context for the analysis of a target market for assisted living is set by evaluating general population trends for the defined geographic market area. Typically, population trend data is examined for the current decade and may also incorporate trends from the previous decade. Population growth is considered to be indicative of a reasonably healthy economic environment and of an area's ability to retain and attract residents. Overall population losses may be an initial indicator of an area's decline and may, unless corrected, impact long-term viability of new developments, including assisted living.

Analysis of Target Market Characteristics. While the resident is the only end user in assisted living, there are actually two target markets: residents and their adult children. Thus, market studies for assisted living must focus attention on both.

The Prospective Resident. An analysis of projected changes during the trend period in total elderly population and households (typically beginning with age 70 or 75 and above) and household composition (i.e., a comparison of one-person households and those with two or more persons) begins the process of estimating the size of the target market. Residents of assisted-living communities are, according to the 1996 ALFA study, typically single women of approximately age 85. Less than 3 percent of all residents in responding facilities were married and living with their spouses.

Household income for targeted elderly households must be evaluated. For this purpose, census data is readily available, cross-referencing household income by age of householder. Although a detailed profile of assets is not really available for narrowly defined geographic market areas, information on housing tenure and housing value is. The home is typically a senior's primary asset, and one which, until sold, is not income producing as other assets are likely to be. An approximation of elderly housing values can be obtained from the census and updated through the Multiple Listing Service available through most real-estate agents and is an important additional indicator of the economic potential of the target market. The census also provides information on the proportion of elderly households that are homeowners and renters.

In order to truly segment and describe the elderly target market it is necessary to cross tabulate householders data by age, income, housing tenure, and household type or size. Sources for such data as householder by age and income on a specific localized basis are available through the census bureau and commercial vendors like Claritas. However, while organizations like Claritas can aggregate such data for a geographic area defined in a wide variety of ways, obtaining Census data directly must be done on a place-by-place basis. In addition, vendors like Claritas offer a specific profile of elderly trends not only for the base year of the Census but for the current year and five years hence.

Analysis of Adult Children Market.  Although no widely accepted formulas have been developed directly relating the size and economic status of the adult children market with demand for assisted-living units, most studies still carefully examine this segment of the market. Some organizations, such as Sunrise, consider the adult-child market (typically to be those age 45-64) as an equally strong indicator of market potential as the elderly market itself. A trend analysis that considers this pool of households will frequently reflect the economic conditions of a given market. For example, markets experiencing significant economic growth may show extremely robust growth in this age segment because organizations are relocating personnel in this age group to the area. Other economically depressed markets may be demonstrating losses in this age segment as households leave the area to find employment elsewhere.

Analysis of Housing Market.  Because of the potential importance of the home in the economic equation of assisted-living affordability, a review of the overall condition of the residential real-estate market is an important component of the analysis. An examination of housing values and their pattern of growth or decline, as well as the ability to sell homes within a reasonable time period, becomes critical. Many developers of seniors housing from the late-1980s and early-1990s will recall the negative impact of that period's real-estate depression on filling and refilling units. The problem of a housing market in decline is just as real for assisted-living communities--which do not require an entrance fee--as it was for CCRCs that did require such a fee. Psychologically, seniors resist moving until their home is sold, whether or not they require the additional financial resources made available from the sale of a home.

Qualitative Interviews

Most market-feasibility studies for assisted-living communities do not include survey research with the prospects because of the difficulty of obtaining valid results. Until a move to an assisted-living community becomes imminent, seniors and their younger family members frequently are in a state of denial or don't recognize the dimensions of the need. As such, responses to surveys and focus-group discussions--unless held with those on the verge of making the decision to move--don't often reflect the reality of what will be needed vs. "what might be nice someday if we actually need this type of thing." This does not mean, however, that some form of qualitative research should not be incorporated into a feasibility study. With the building pressure that may lead to a move, there will be increased interactions with representatives of the types of organizations that provide services, advice and counsel to aging seniors and their families.

The 1996 ALFA study revealed that besides family members--who represented the largest single referral source (24 percent) healthcare professionals collectively comprised 35 percent of referrals, lead by hospitals (15 percent), physicians (11 percent), nursing homes (6 percent), and home-health agencies (2 percent). As such, interviews with representatives of each of these potential referral sources--as well as clergy, financial advisors, and attorneys--can be useful in assessing several key issues. The first is the extent to which it appears that those who are in a position to refer understand the concept of assisted living and are able to differentiate it from a nursing home. Second is gaining an understanding of what the needs and desires of the prospective residents might be. In addition, such interviews can illuminate potential barriers to the move including affordability, acceptability or specific locations, and attitudes towards purchasing services. This type of feedback can be critical to assessing feasibility. For example, a study may reveal that while the market appears to have the demographic depth to support a project, the biases and attitudes held by seniors about spending money on themselves may make it difficult for them to choose to move to an assisted living community or may preclude it altogether. Most seniors would prefer to remain at home if possible, but there can be demonstrable attitudinal differences from market to market about the acceptability of choosing to move. In one market where we conducted a study for an assisted-living facility, many seniors had moved on a full-time basis to small vacation homes that they had enjoyed during their working years. This blue-collar market was characterized by many key informants, as having created a second generation of working class family members who, hard pressed to acquire even the modest vacation homes of their parents' era, counted on inheriting the vacation homes in which parents now resided full time. Pressure was placed by children on their parents to "hang on" to the home and not sell it. This type of dynamic certainly influenced the nature of the market for assisted living in this particular community.

Susan B. Brecht is president of Brecht Associates Inc., a consulting firm based in Philadelphia that specializes in market feasibility and planning for assisted living and other types of senior housing and community-based services. Ms. Brecht may be reached by phone at (215) 592-0254; fax (215) 627-5362; or e-mail susanb@brechtassociates.com.

Editor's Note: Seniors Housing: Research Issues in Real Estate, Vol. 4, is published by the National Investment Conference for the Senior Living and Long Term Care Industries and American Real Estate Society. The Eighth Annual National Investment Conference is scheduled for Oct. 14-16 in Washington, D.C. For more information, contact NIC at 705 Melvin Ave., Suite 201, Annapolis, MD 21401; (410) 267-0504.

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