Base your construction plans on sound market analysis, not misinformation
By Charles Bissell, MAI
Recent news headlines have highlighted with great hyperbole the demographic trends affecting seniors housing and the future need for additional seniors housing product to serve the growing demand. Unfortunately, news headlines tend to sensationalize the facts and can lead to misinformation in the market. Below are a few myths we have seen recently emerge.
Myth 1 The ‘silver tsunami’ has hit
Data from the U.S. Census Bureau shows that there are about 76 million Baby Boomers and that they represent close to one-quarter of the U.S. population. Certainly, the aging of the Baby Boomers is creating a dramatic shift in the age composition of the U.S. population. However, this shift will occur gradually over the coming decades, and the most significant impact on the seniors housing sector is years into the future.
The first Boomers started turning 65 in 2011 and will not turn 80 until 2026. Given that the average age in most seniors housing properties is 80 and above, the Baby Boomer Generation will not start to have a significant impact on demand for another decade or more.
The U.S. Census Bureau projects 1.7 percent annual growth in the population of persons 80 and above between 2015 and 2020. This is stronger than overall population growth, which is forecast to be 0.8 percent annually, but not nearly as strong as might be indicated by recent news headlines. Yes, the Baby Boomer wave is coming to seniors housing, but the vast majority of Boomers will not be ready to give up their homes or traditional rentals for at least another decade.
Myth 2 Increased prevalence of dementia is leading to exponential growth in demand for memory care facilities
One statistic frequently cited is that the number of persons in the United Sates with Alzheimer’s disease is expected to increase from approximately 5.2 million today to as many as 16 million in 2050, according the Alzheimer’s Association.
The growing number of persons with Alzheimer’s disease coupled with the success of many early-stage developers of freestanding memory care facilities has led to many new entrants to the memory care sector.
Undoubtedly, the statistics are both chilling and compelling. Demand for memory care will continue to grow as the Boomers age. But like overall seniors housing demand, the growth will not begin to spike until the Baby Boomer Generation begins to hit their 80s, which is still more than a decade away. In the meantime, millions of dollars are being spent on medical research to stop, slow, or even prevent Alzheimer’s.
Also, it is important to understand that only a small percentage of seniors with dementia will need to be housed in specialized memory care facilities. Many with early-stage dementia will reside at home or in non-specialized seniors housing.
In numerous non-secure assisted living facilities, many residents have some level of memory impairment, but can still function without the need to be in a facility that is 100 percent secure. With sufficient support and memory aids, many seniors with dementia will never need to relocate to a specialized memory care facility.
The NIC MAP data shows that that the average occupancy for memory care at facilities in metro Houston has fallen from 94.9 percent in the fourth quarter of 2006 to 78.9 percent in the third quarter of 2014. During that period, the inventory of memory care units more than doubled, and more new construction is underway.
Myth 3 There is minimal new construction
NIC MAP reports that seniors housing starts are 2.1 percent of existing supply on a trailing 12 months basis. This is not an excessive number, given annual growth of 1.7 percent in the 80-plus population.
However, the current supply under construction is just the beginning of the construction wave. In nearly every market, we are finding multiple projects in the development pipeline.
Many of the developers are well capitalized and have the ability to deliver the projects. Certainly, there are projects that will not get built for various reasons, but with so much debt and equity capital now available, there are likely to be more than a few ill-conceived projects that get funded and delivered.
One example of a market with a large assisted living development pipeline is Collin County, Texas, a rapidly growing county situated immediately north of Dallas. This area is attractive to developers because of its favorable demographics, affordable land, strong infrastructure and a pro-growth climate.
Research conducted by Integra Realty Resources reveals that Collin County currently has 2,248 licensed beds of assisted living (excluding small board and care homes), with an average occupancy below 90 percent. Currently, there are at least 16 facilities with more than 1,400 beds either under construction or in the planning stages. Of course, the area is growing, but can the market support more than a 50 percent increase in supply within a relatively short time frame?
Similarly, there are a considerable number of projects in the development pipeline in Austin, San Antonio, Denver, Atlanta and Chicago to name a few markets. The majority of projects are assisted living and/or memory care projects, but we are starting to see some resurgence in new independent living projects.
Myth 4 Build it and they will come
Many developers are making their way into seniors housing from the apartment and lodging sectors. Some seem to have the perception that simply building a nice project in a prime location is the recipe for success. While the mantra in most forms of commercial real estate is location, location, location, in seniors housing it is operations, operations, operations.
Seniors housing remains a highly management-intensive business. It is also a highly localized business. New developers entering the sector should align themselves with a quality operator and get the operator’s input on markets, site selection, facility design and pricing.
Successful seniors housing operators must combine and balance the skills of a healthcare provider with those of a hospitality provider. Having a seasoned operator on board early in the development process is key to the development of a successful project. It has been proven many times that a shiny new building can sit vacant if the right management team is not involved.
In conclusion, the seniors housing business has high profit potential and exciting growth trends. Be sure you base development and acquisition decisions on growth, not hyperbole. Market intelligence and strong operational expertise will lead developers to deliver more successful projects.