Trends in the Retirement Housing Industry by Susan B. Brecht The retirement housing industry has matured considerably during the past two decades as the elderly population has increased and seniors have come to accept and seek alternatives to remaining in their homes. Standardized, accurate statistics have not been maintained over time regarding the number of retirement communities in operation in the United States. However, some historical perspective on growth can be provided by examining trends as reported by periodicals such as Contemporary Long Term Care (CLTC), which has been surveying the industry since 1987. In its first survey, CLTC reported that the 65 survey respondents operated 563 communities in 1986, with a total of 71,985 units1. In its 1995 survey of the top 49 retirement housing community operators, survey respondents reported having a total of 916 communities (owned and/or managed) with 124,699 units2. Since CLTC's survey only represents communities owned or managed by respondents, it is safe to assume that the total universe of retirement communities exceeds the numbers reported above. The maturation of the industry was also demonstrated by the results of the American Senior Housing Association's (ASHA's) 1995 Annual Survey which reported that 72 percent of its respondents had been involved in the retirement housing industry from 10 years or more, with an additional 20 percent reporting involvement for 5 to 10 years. As the maturation process has taken place, retirement housing has expanded from its early dominance by lifecare or continuing care retirement communities (CCRC's). These communities, which included both independent living and nursing care on a single campus, typically charged residents an entrance fee and monthly fee. Many CCRC's incorporated a form of self-insurance which enabled residents to pay a rate close to the monthly fee for their apartment when they had to move from an independent living unit to the nursing home. In recent years, this self-insurance has given way to fee-for-service models where residents pay for nursing care only when they received it, or to the use of commercial long term care insurance. In addition, a variety of other models have emerged representing different approaches to the provision of and payment for services. Rental retirement communities represented a major area of growth in the 1980's, fueled in part by the Department of Housing and Development's 221(d)(4) Retirement Service Center mortgage insurance program, which did not cover communities that charged entrance fees. Although the program is no longer in existence, the rental model is still a popular option for newly developed retirement communities. In addition, a small but definite increase in the number of equity models (cooperatives and condominiums) has taken place, particularly among communities targeting a more affluent segment of the elderly population. Another trend worth noting is the development of smaller retirement communities. Retirement communities consisting of 100 to 200 independent living units are much more typical than those with 200 to 300 independent living units which characterized the early CCRC's. In some cases, communities are being developed on a phased basis, in order to mitigate the up front risk associated with the initial fill period, and to allow the community to be more responsive to market demand and preferences. AHSA's 1995 State of Seniors Housing Report indicated that the median number of independent living units in CCRCs participating in the survey was 168, while congregate communities reported a median of 117 independent living units. In the 1980's, many rental retirement communities were developed which offered no nursing care or assistance with activities of daily living, providing residents primarily with hospitality services such as meals, housekeeping, transportation and activities. Exceedingly high turnover within these communities due to the inability to meet changing resident needs provided the evidence necessary to convince even those unfamiliar with long term care that retirement housing is more than a real estate/hospitality business. In addition because many older congregate communities have not addressed the need for personal assistance or health care services, lease-up rates have been slow due, in part, to a lack of perceived urgency as seniors delay the move from their homes. It has become quite clear over the past ten years is that retirement communities, even those that emphasize "independent living" are attracting an older, and somewhat frailer market than was originally expected or even experienced in the 1960's and 1970's. Average entrance ages into independent living units in retirement communities are typically late 70's and early 80's in contrast to late 60's and early 70's, which may have been more typical when the industry began to develop. As a result of this change in resident profile as well as the experience gained in the 1980's, it has become clear that some form of health care and/or supportive services oriented towards the frail elderly are a necessary component of retirement communities. In response to the increased age at entry and the awareness of the frailty and needs of the target market, few retirement communities today are developed that do not have at least one higher level of care, whether it is assisted living and/or nursing care. To underscore this point, ASHA's 1995 Report indicated that 53% of the 100 senior executives of senior housing surveyed agreed that congregate housing without an on-site assisted living or nursing component cannot adequately serve the needs of those over the age of 75. Even those which only offer independent living are either directly selling additional support services to residents (depending on the regulatory constraints within the State) or are providing or helping residents to arrange for home health care services in order to mitigate the problems of high turnover. From a regulatory perspective, independent living communities, particularly those structured on a rental basis, are the least heavily monitored and governed by State regulations, In some states this has resulted in a fair degree of flexibility in terms of the provision of additional services. While CCRC's are regulated in at least 36 states, these regulations are primarily oriented towards consumer protection issues rather than the staffing and service provision issues that are typical of higher levels of care such as nursing. Probably the most dramatic trend affecting the retirement housing industry in the 1990's continues to be the emergence of assisted living. Assisted living is being integrated with independent living and/or nursing care and is being offered as a stand-alone product. Assisted living is defined by the Assisted Living Facilities Association (ALFAA) as offering "personalized assistance, supportive services and health care in a professionally managed group living environment. Residents receive individualized assistance that is designed to meet their scheduled and unscheduled needs. The setting is homelike and residential." 3 ASHA's 1995 Report indicated that 49% of executives surveyed indicated that their companies planned to develop stand-alone assisted living communities in the coming year, and 31 percent indicated plans to develop assisted living with nursing or offer assisted living services for independent living residents. Because assisted living is encompassed by many existing licensing categories from state to state (such as domiciliary care, personal care, boarding homes, etc.), it is very difficult to estimate the actual number of assisted living facilities. ALFAA's 1993 overview presents ranges estimated from 30,000 to 40,000 facilities, to references to over 65,000 facilities, as estimated by Coopers & Lybrand (1992) and Lewin VHI (1993), depending upon how assisted living is defined. Typical facilities range in size from 60 to 100 units. NatWest Securities Corp. estimated growth of assisted living by the end of the decade to reach $33.1 billion in revenues, with nearly 1.4 million beds projected to be operational by that time. Unlike the senior housing industry of the 1980's, assisted living has seen a growing number of its larger owner/operators take their companies public. Seven such IPOs were brought to market within the last 18 months representing assisted living owner/operators with established, successful operating track records and well defined development and acquisition strategies. However, although the IPO market has been a successful strategy for certain organizations, experienced analysts and investment bankers believe this will become more difficult as companies find it increasingly difficult to differentiate themselves from existing public companies. The growth in assisted living can be attributed to several factors. It reflects a means of serving those elderly who may be bypassing independent living in order to stay at home for as long as possible. In addition, the very old (those 85+) represents the fastest growing age cohort among the elderly with projected growth from 3 million in 1990 to 4.3 million by 2000 according to the U.S. Bureau of the Census. The growth in the size of the 85+ segment combined with the increased level of frailty among those seniors who ultimately do move support the development and expansion of the more need-driven product represented by assisted living. In addition, assisted living growth is being fueled from the more intensive end of the continuum of care. Most professionals will agree that there has been a significant pattern of misplacement of frail elderly in nursing homes when a lower, less medically intensive level of care would be more appropriate (estimates range from 20 to 40 percent). As nursing homes have been forced by hospitals to accept sicker, frailer patients, they have made room for these patients by pushing down those who were once considered intermediate care patients. In addition, there has been very little growth in the number of nursing homes, reflecting, in part, the desire of state governments to manage the growth of their Medicaid budgets. These factors, combined with the natural aversion to nursing home placement felt both by the elderly themselves, and their adult children caregivers, has given great impetus to the rapid rise of assisted living. Although many older existing assisted living communities still reflect an institutional model, similar to the nursing home, the newer communities embrace a residential/social model in both their operational and architectural program, enhancing resident independence, choice and dignity. Institutional models tend to incorporate a design framework based on private and semi-private furnished rooms, with nursing stations positioned on the floor or the wing much as one might find in a nursing home. The social/residential model of new assisted living communities emphasizes resident choice, stressing units designed to look like apartments (mostly studios and one-bedroom units ranging from 300 to 600 net rentable square feet). ASHA's 1995 Report indicated a building ratio of 40% common area to 60% net rentable area in participating assisted living communities, with 332 square feet of median net rentable area per unit). Many of today's assisted living apartments include kitchenettes with small refrigerators, microwave ovens, sinks, and a small amount of counter and storage space. Full bathrooms, frequently designed with a walk-in shower stall featuring a pull down or molded seat are also incorporated into nearly all units, regardless of the size. Attractively designed common areas are also typical of the new assisted living community including common and private dining spaces, living rooms and lounges, libraries, beauty/barber shops, convenience stores and exercise rooms. The building scale and appearance is residential in nature, and look little like a nursing home from either the inside or outside. Both ALFAA and the American Health Care Association (AHCA) published an annual survey of the top assisted living providers of 1995. ALFAA's top 50 providers list was lead, in number of communities owned and/or operated by Sunrise Assisted Living in Fairfax, Virginia, one of the seven companies to go public in the last 18 months. According to the ALFAA listing, Sunrise owned 26 communities, operated another 42 serving a total of nearly 4,000 residents. Of ALFAA's top 50 providers, eleven owned and operated assisted living communities in a single state, as compared to the multi-state operations of all of the other companies. Of the single state providers, three operated in California, one in North Carolina and the remainder in states located in the non-sunbelt states. As assisted living has emerged as the major growth segment in the retirement housing continuum, so regulations governing the industry have increased. In most states, some form of licensed and regulated assisted living already exists and programs can differ considerably from state to state. In certain states assisted living is subject to the approval of a certificate of need. In most states today, it is not. However, even where some form of licensure previously existed, such as New York (Adult Homes and Enriched Housing) and New Jersey (Residential Health Care Facilities and Class C Boarding Homes), new assisted living programs are being created and regulated. In a growing number of instances this is being motivated by the State's desire to limit its exposure to the rising cost of Medicaid coverage for nursing home patients. Assisted living is being positioned as a more appropriate (and significantly less costly) alternative to nursing home care. A reduction in the number of new nursing home beds accompanied by the encouragement of the development of assisted living is viewed as a strategy for managing the cost of long term care. In fact, several states have approved Medicaid reimbursement for assisted living services through Medicaid waivers in the belief that this will help keep long term care costs under control. Further innovation in assisted living is demonstrated by the development of assisted living communities that are specifically dedicated to serving the special needs of residents with Alzheimer's Disease or related dementia. An increasing number of such facilities are being developed by companies such as Manor Care, which calls its special care prototype Arden Courts. Other organizations such as Alternative Living Services in Brookfield, Wisconsin have specialized in this segment of the industry and are developing numerous small "special care" assisted living communities throughout the country. Sunrise is also reported to be developing such a prototype. One other emerging trend is currently on the horizon in the world of retirement housing. In its early years, the retirement housing represented a kind of "island of care", limiting its services to those who resided on its campus or in its structures. Today, more retirement facilities are seeking ways to become a part of the community in which they operate. Thus, some retirement communities are now reaching out to serve elderly who are still at home. This integration process is still in its infancy, and may take the form of memberships which allow outsiders to come to the community for meals and activities, to providing services to those elderly still residing within the community such as home care and meals-on-wheels. This movement responds to the desire of most seniors to remain at home while, at the same time, providing a revenue enhancement strategy for the retirement community offering the services. The initiation of efforts to become more integrated into a community-based or outwardly oriented system of care is consonant with initiatives that are being stimulated by the potential for health care reform. As the movement towards the creation of managed care systems begins to embrace long term care, retirement housing (including assisted living) will, potentially, become part of the overall continuum of care. Increasing focus has been placed on managed care for seniors during the last year. Modern Healthcare's cover article in its April 3, 1995 issues was entitled "The last frontier -- Medicare HMO's". Its overall emphasis was on the nationwide interest of managed-care plans in seniors given the apparent willingness of Congress to consider changes in Medicare risk contracting. That national perspective was demonstrated on the local level, for example, in Philadelphia, where the Philadelphia Business Journal reported in May that regional HMO's are now targeting seniors. The article reported that "during the first three months of 1995, Medicare HMO membership in the eight-county region is up nearly 30 percent as four competing managed-care companies have signed up almost 16,000 new members."4 The rapid emergence of managed care and increasing penetration into the Medicare/Medicaid market is resulting in the formulation of both vertical and horizontal alliances among retirement housing and long term care providers attempting to position themselves to take advantage of managed care. Finally, in terms of capital formation, new development in the retirement housing industry is still suffering from lack of adequate access to funding sources although the picture has improved since the early 1990's. Tax-exempt bonds are still the primary financing mechanism for not-for-profit sponsors. Federal mortgage insurance is available through HUD's 232 program for assisted living and nursing home facilities. Conventional financing is being secured for all versions of retirement and assisted living projects. In fact, 40% of the CEO's of companies actively involved in the development of retirement housing reported in ASHA's 1995 survey that they considered regional and local banks to be the best source of finance for new development with government backed vehicles identified by the second largest proportion (23%) of executives. In addition, there continues to be a considerable amount of activity in the acquisition of existing communities. Overall, the senior housing industry continues to mature and expand, particularly in the development of housing and service models designed to serve the frail elderly. Developers, operators, lenders and investors as well as consumers have become more sophisticated a s the industry has expanded. Experience and a strong track record are rapidly becoming the prerequisites for continued success. 1 Rogers, Steve, "Survey Reveals Continued Growth for Retirement Housing Industry", Contemporary Long Term Care, June, 1987 2 "Retirement Housing: The Top Providers", Contemporary Long Term Care, June, 1995 3 An Overview of The Assisted Living Industry, ALFAA and Coopers & Lybrand, October, 1993 4 Philadelphia Business Journal, "HMO's Are Setting Their Sights on Signing Up Senior Citizens", May 12-18, 1995, Volume 14/No.11.