| Return to the Brecht Associates Site Adapting Methodologies for Assisted Living Market Analysis by Susan B. Brecht EXECUTIVE SUMMARY As investment in assisted living communities accelerates, the role of the market feasibility study not only takes on increasing importance, but the establishment of general and widely accepted standards regarding its contents becomes critical. Although lax standards for feasibility studies were not exclusively to blame for the early failures of many traditional senior housing communities, 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, and identifying basic analytical issues that need further research designed to create a basis on which methodological techniques and standards can be established. I. Introduction The majority of published literature on market feasibility studies for traditional forms of senior housing (continuing care retirement communities (CCRC), lifecare communities, congregate housing) primarily targets analytical techniques utilized to assess relatively independent elderly1. However, while the supply and demand equation still forms the underlying basis for assisted living market feasibility studies, many of the elements of studies for this form of senior housing require a different emphasis or methodology. A. Definition of Assisted Living Every state provides, through a wide variety of licensing categories of group settings, for services to be delivered to frail seniors who do not require nursing care. Those settings have many names including personal care, board and care, domicillary care, adult care, residential care. However, since the mid to late 1980's a movement has emerged to establish a framework from both a physical design and operational perspective that responds to the changing demands of senior consumers and those who care for them. "Assisted Living" has been defined by the Assisted Living Federation of America (ALFA) as offering "personalized assistance, supportive services and health care in a professionally managed group living environment. Residents receive individualized assistance that is available 24 hour a day, and is designed to meet their scheduled and unscheduled needs. The setting is homelike and residential. For those who cannot live alone, this combination of housing health care, services and assistance with activities of daily living (ADLs) expands their ability to live dignified, meaningful lives."2 Arguably, many of the attributes of assisted living according to ALFA's definition are applicable to the various licensing categories that govern this level of care. However, it is the emphasis now placed on several elements that distinguishes contemporary assisted living from its historical counterparts. Those elements include the "homelike and residential setting" in contrast to alternatives that were either nursing-home like and institutional or conversions of existing residential properties not originally intended as a group setting. In addition, the emphasis on "dignified, meaningful lives" supported by assistance that meets "scheduled and unscheduled needs" further emphasizes the individualized concerns of the consumer rather than the convenience of the operator. As the assisted living concept evolves, it appears to be filling a much needed gap. For seniors who wish to remain in their homes as long as they are able, assisted living provides a non-institutional option. For those frail seniors who do not require the medical care provided in the nursing home, assisted living represents a far preferable alternative. This has been amply demonstrated, although not formally documented, by the transfer of senior from nursing homes to assisted living communities described by staff at most assisted living communities. B. Need for establishment of accepted market feasibility standards From the 1960's through the mid-1980's senior housing development focused primarily on continuing care retirement communities 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 at least a minimal set of standards that were accepted on an industry-wide basis by developers, sponsors, and, most critically, the financial community. Those standards incorporated benchmarks relating to the geographic definition of the market area expected to be served by the project, the appropriate minimum age, the relationship between income and the amount paid on a monthly basis, the inclusion of comparable and/or 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. In the early days of the senior housing industry, assumptions regarding all of the benchmarks delineated above 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 bankruptcy3. 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 sort of assumptions that formed the basis for CCRCs or congregate housing. For example, utilization of a three to five percent penetration rate as an acceptable standard for project feasibility was simply transferred 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 senior housing. Understanding the differences in independent and assisted living demand analysis 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 importantly, 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. II. Site Evaluation A. 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 such 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 senior housing oriented towards the independent elderly emerged as a development trend, the philosophy relating to site selection reflected an increased understanding of the discretionary nature of the decision to move. Early on, many organizations chose sites that were pastoral in nature, believing that seniors wanted to be removed from the hustle and bustle of daily life as they enjoyed their "golden years". As the industry matured, developers came to recognize that many seniors who truly 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 it, they will come". B. Criteria for Site Selection The site of an assisted living community must meet several key criteria: Despite the fact that selection of an assisted living community represents less of a lifestyle choice than an independent senior housing community, the basic elements of good site selection, as illustrated by the latter two criteria, still must be adhered to. Site evaluation can be the first point at which feasibility is judged. For example, a site which is substantially inconsistent with the socio-economic target market being sought may be judged inappropriate for the project being planned or may indicate a modification in the expectations regarding the target market. However, the location of the site must be responsive to two audiences or market segments: the senior prospect and their adult children and in this way differs from site selection for independent living. It is most often the latter who both intiate the search for this housing alternative and makes the final decision. Therefore, in terms of weighting criteria, accessibility, particularly to adult children may be considered to be the most important factor in site selection. A review of the zip codes of adult children for several assisted living communities currently in operation revealed that over % resided within the communities proximate to the assisted living community itself. Further the ALFAA publication referenced above indicated that 84% of family members lived within 30 miles of the facility in which their elderly realtive resided. III. Defining the Market Area Perhaps to even a greater extent than is the case with traditional senior housing, assisted living is becoming a neighborhood business or service. In ALFAA's 1993 publication, An Overview of the Assisted Living Industry, survey results indicated that 74% of assisted living residents moved from within 15 miles or less of the facility4. This reflects several factors that are shaping this industry: 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 senior 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 substantial information gathered from local informants who are in a position to provide reliable information. These might include regional and local planners, representatives of organizations serving seniors (Area Agency on Aging, Council on Aging), and local realtors, 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 of the market area. Information obtained in defining the market area may indicate that both primary and secondary areas be defined. The primary market area would include those locations expected to provide the largest proportion or majority of the residents. The secondary market area may include locations proximate to the primary market area which are likely to produce some residents (perhaps 10% to 20%), but which are not as closely tied to the project location as those incorporated into the primary market area. IV. Analysis of Demographic Trends A. Overall Population Trends The larger context for the analysis of target market for assisted living is set by evaluating general demographic trends for the defined geographic market area. Typically, demographic 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. B. Analysis of target market characteristics Understanding the demographic characteristics of the target market, i.e., those who form the pool of prospective residents, is key in market feasibility analysis for any residential real estate product. However, while the resident is the only end user in assisted living, there are actually two target markets: the resident and their adult children. As such, market studies for assisted living, must focus attention on both. 1. 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 (ie: a comparison of one-person households versus those with two or more persons) begin the process of estimating the size of the target market. Residents of assisted living communities are, according to the 1993 ALFAA Study, typically single women age 85. Less than three percent of all residents in responding facilities were married and living with their spouses. Household income for tageted elderly households must be evaluated. Although a detailed profile of assets is not really available for narrowly defined geographic market areas, information on housing tenure and housing values 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 realtors and is an important indicator of additional the economic potential of the target market. The Census also provides information on the proportion of elderly households that are homeowners and renters. 2. Analysis of adult children market Although no widely accepted formulas have yet been developed relating the size and economic status of the adult child market with demand for assisted living units, most studies still carefully examine this segment of the market. There are some organizations, such as Sunrise, which consider the adult child market (typically considered to be those age 45 to 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 which are experiencing significant economic growth may show extremely robust growth in this age segment because organizations are relocating personnel in this age group to an area. Other economically depressed markets may be demonstrating losses in this age segment as households leave the area to find employment elsewhere. C: Analysis of Housing Market Because of the potential importance of the home in the economic equation of assisted living affordability, an examination of the overall condition of the residential real estate market is an important component of the analysis. An examination of not only housing values and their pattern of growth or decline, but of the ability to sell homes within a reasonable time period becomes critical. Many developers of senior housing from the late 1980's and early 1990's 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 up front entrance fee as it was for continuing care retirement communities that did. 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. V. Qualitative Interviews Most market feasibility studies for assisted living communities do not include survey (mail or telephone) research with the prospects because of the difficulty of obtaining valid results. Until a move to an assisted living community becomes imminent, seniors and even their younger family members frequently are in a state of denial or do not recognize the dimensions of the need. As such, responses to surveys, and even 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 versus "what might be nice someday if and when 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 1993 ALFA Study revealed that beside family members who represented the largest single referral source (25%), health care professionals collectively represented 44% of referrals lead by hospitals (20%), physicians (14%), nursing homes (7%) and home health agencies (3%)5. 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. The second, assuming a fairly educated referral market, is in gaining an understanding what the needs and desires of these prospective residents might be. In addition, such interviews can illuminate potential barriers to the move including affordability, acceptability of specific locations, as well as 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, that 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. Certainly 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 assisted living, 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 achieve 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 in order to live on the proceeds or the interest income their investment could generate. This type of dynamic certainly influenced the nature of the market for assisted living in this particular community. VI. Analysis of Competitive Factors An element of increasing complexity in assisted living market analysis is the evaluation of the competitive environment. Unlike market studies for independent living units in congregate facilities and CCRCs, the assisted living facility faces a more complex array of direct and indirect competition. All must be considered. A. Direct Competition The most obvious form of competition will be other assisted living facilities, although not all will compete directly. Before the analysis of direct competition begins, it is important to establish criteria for those facilities that are to be considered. Most organizations planning a project have a fairly well developed idea about the socio-economic target market that they intend or hope to serve. If this is the case, criteria for establishing what is competition should consider other facilities serving a similar group. Establishing criteria regarding the minimum size of facilities to be considered competition is also a factor. In many markets, assisted living facilities may range from Mom-and-Pop operations that serve a small population in a converted single family home to larger communities built specifically for use as assisted living.If at all possible, once criteria have been set and existing competition identified, a visit should be arranged with each direct competitor, particularly if a detailed market study is being conducted (telephone surveys are sufficient for preliminary analyses). A visit to an existing property obviously allows a more thorough analysis and an opportunity to observe the details of the physical plant, and to a certain extent the condition of the residents and the attitude of the staff towards those residents. The following types of information should be gathered: * Information on competition obtained from regulatory authorities typically indicates the number of beds each community is licensed to offer. However, although many facilities license their maximum capacity (e.g. two residents per room/unit), this does not actually represent the optimal or actual operational capacity. Data gathered from representatives of operational competitive facilities should include the number of operational vs. licensed beds in order to avoid the potential for overestimating the supply within a given market. Of equal importance is information on planned projects. Planned projects can be identified through a variety of sources including representatives of existing facilities, municipal zoning/planning offices, and state licensing and regulatory representatives. Information on planned projects should include as much detailed information as possible including a description of the planned facilities and its fees as well as its status in terms of regulatory approvals, financing, and timing. B. Indirect Competition 1. Assisted living programs and services for independent living residents in Retirement Communities With increasing regularity, independent living components of retirement communities are either facilitating residents' arrangements for home care services designed to support the need for personal care assistance or are creating their own in-house capacity to deal with these needs. Survey research conducted by this author during the last two years in over 200 retirement communities has indicated that a range of 10% to 50% of independent living residents may be receiving such additional support in order to delay or obviate the need to move to a higher level of care. The lines, therefore, between levels of care, are blurring. From the perspective of estimating market depth, arguably, those independent living residents receiving such care, are no longer truly part of the market for a move to an assisted living community, and may be more likely to remain in their apartments or cottages until nursing care is required. 2. Home health services As alluded to above, home health care services can forestall the move to assisted living, and may be perceived, in that light, as a form of competition. The substantial increase in, availability of, and reimbursement for home health care services during the last decade has undoubtedly altered the patterns of movement from home to alternative living environments, helping seniors to stay at home longer. Discussions with marketing directors at all levels of care reveal that the majority are witnessing increasing age and frailty of residents at the point of moving into the community. Ultimately home care is not the right solution for many. Services are costly, particularly when they are required on a chronic basis, and not reimbursable when not prescribed by physicians. The social isolation of being homebound eventually becomes a problem for some seniors, and the assisted living community offers a healthy alternative. Finally, home care services work best when a family support system exists to maintain the senior. Burnout due to the frequent dual pressures of both child and elder care conspire to turn adult children into the primary target market for assisted living communities despite the fact that they are not the end user. VIII. Qualifying the Market Using Frailty Indicators A. Why age and income qualifications are not enough. 1. Differentiation between independent living and assisted living residents The traditional methodologies considered acceptible for estimating market depth for independent living units in retirement communities are based, primarily, on utilizing age and income screens. To a certain extent, further modifiers including housing tenure and household type are used by some analysts. The process of sizing the market examines residents at the point of move-in, rather than later on in their tenure, when additional care may be needed. Although residents of retirement communities may be aging in place and obtaining additional support services, the criteria for admission to an independent living unit at most communities requires residents to function independently. By contrast, assisted living communities typically are serving elderly residents who require support that goes beyond the provision of one or two daily meals and periodic housekeeping services. Assisted living operators indicate that at the point of move-in the vast majority of residents require assistance with Activities of Daily Living (ADLs) such as bathing, dressing, eating, toiletting, and transferring. There are differences of opinion regarding how many areas of ADL assistance are typical of new residents, with some arguing that as many as three are the norm. Other assisted living communities have required residents be relatively independent and require occassional assistance with as few as one ADLs. As such, estimations of the size of the assisted living target market, when considering the end users, should take frailty level into consideration. Utilization of some measure of assistance with ADLs or Instrumental Activities of Daily Living (IADLs), such as meal preparation, shopping and managing money, has become more widely accepted and expected in feasibility studies for assisted living. (See later Section for more detailed discussion of ADLs and IADLs). 2. Potential for overstating size of market The risk in not utilizing frailty measures in estimating the size of the assisted living market is that overstatement of market depth can lead to overbuilding. This assuredly was the case for independent living demand studies in the 1970's and early 1980's when studies frequently misjudged such factors as target market age and geographic draw. Greater understanding of the market led to more exacting standards regarding such assumptions. So too, with assisted living, experience is modifying analytical standards, and baseline assumptions for assisted living acknowledge resident frailty through the application of measures of frailty identified through national studies. B. Measures of frailty 1. Activities of Daily Living (ADLs) a. What are they? Dependence on others in performing certain physical activities are considered to be indicators of functional limitations, and are viewed as an indicator of the need for health services. Although various studies identify over 40 indices that use varying lists of activities to assess ADLs 6, most include the following: Other measures frequently included in the basic ADLs are walking and getting outside. A total of eleven national surveys have estimated the size of the elderly population with ADL difficulties reflecting that a range of 5.0% to 8.1% of the elderly (65+) non-institutionalized population are receiving help at least on ADL limitation. There are substantial differences between the national surveys, as noted in the study by Wiener, et.al. In spite of these differences, trends across the studies tend to be similar although levels may differ. For example, there is a relationship between age and need for assistance. And, women are more likely to need assistance than men. What is unclear is which of these studies may be the most appropriate for use in estimating the size of the market for assisted living. As the Weiner analysis points out, "policy analysts and researchers need to think carefully about what questions they are trying to answer. In addition, to avoid confusion in reporting their results, they need to specify in greater detail than they have previously how they defined ADL disabilities and which data elements they used."7 At this point in the development of methodologies for estimating market depth for assisted living, there is no real concurrence on the most appropriate measures or indicators of ADLs. The only area in which consensus is likely is that studies of non-institutionalized populations are likely to be more appropriate than those which measured ADL dependencies among institutionalized populations, since the latter usually reflects nursing home patients. b. ADL profile of assisted living residents In its 1993 survey of assisted living facilities, ALFAA/Coopers & Lybrand indicated that participating facilities reported that residents, demonstrated an average of 3.06 ADL deficiencies, with the highest percent of residents requiring assistance with bathing and medication reminders. 8 It should be noted that these statistics reflect existing resident population, not characteristics of those at the point of move-in. As such, lower levels of ADL assistance may be typical of the population who are considering or making the move. 2. Instrumental Activities of Daily Living (IADLs) a. What are they? Another frequently used measure of limitations consists of IADLs, typically viewed as more complex tasks including such things as: Survey research indicates that approximately 17.5% of people age 65+ had IADL limitations and those most frequently experienced are the ability to get around in the community and going shopping. Few with IADL limitations managed without assistance. 9 b. Are IADLs an appropriate indicator of potential assisted living resident? Arguably, IADL assistance is an excellent indicator of a potential assisted living resident. Most residents of such communities are likely to need help in at least one or more IADLs. And, the services offered in most assisted living communities are designed to provide support for at least some IADLs such as shopping, getting around the community, preparing meals, and doing light housework, as well as taking medications. While IADL requirements may not yet be correlated to demand for assisted living communities, they do present an opportunity to better understand and profile prospective residents. This can be important in designing the appropriate service package and in general, appreciating the nature of the disabilities that residents may ultimately have, if not at the point of move in, eventually during a period of residency. 3. 1990 Census Mobility and Self-Care Measures a. What are they? In 1990, the U.S. Bureau of the Census gathered data from respondents age 65 and older on mobility and self-care limitations. Estimates of persons with such limits were made based on responses to questions in the Census inquiring whether respondents had a health condition lasting six months or more which resulted in limitations in mobility or self care. By asking these questions the Census Bureau's attempted to measure the number of older people with ADL limitations. b. Can they be correlated to need/demand for assisted living? While the proportions of seniors responding yes to the Census Bureau's questions regarding mobility and self-care vary by geographic area, the national statistics indicated that 13.2% reported mobility limits only; 4.9% reported self care limits only, and that 12.4% reported limits with both10. It should be pointed out, however, that the Census inquired whether or not the respondent had difficulty, not whether or not they had received help with these limitations. As such, it may not be appropriate to compare the Census data with that gathered through the various national surveys on ADLs described earlier in this paper since many of the latter results reflected those receiving help with ADLs. IX. Current Methodologies Used to Estimate Market Depth Methodologies used in establishing the size of the market for assisted living, studies that utilize only age and income screens do not differentiate the assisted living target market from the independent living target market. However, in order to more accurately establish the potential depth of the market, demand analyses may use additional criteria designed to reflect the particular characteristics of the assisted living resident. Demand analysis for any type of housing and/or services are built upon a series of assumptions designed to estimate the total size of the target market. Most methodologies in use today use some combination of the following variables. While the variable may be incorporated in the analysis, the way in which each is used is not necessarily consistent across methodologies. A. Demand Methodology Variables 1. Minimum age: Most studies being done today assume that residents will be at least 75 at the point of moving to an assisted living community. This recognizes that although many residents are in their early to mid 80's, a number are also between the ages of 75 and 80. A more conservative approach to setting the minimum age for an analysis would be to use 80, although few studies appear to be making this assumption. 2. Minimum income: Since pricing has a direct impact on utilization (i.e., demand), a minimum income level must be established, in order to size the market able to afford the proposed assisted living community. If the sponsor/developer has not established the economic target market for the proposed assisted living community, an analysis might be conducted estimating the size of various economic segments. In such cases, income ranges might be established in order to identify the size of each market segment. However, for studies being conducted when the economic target market has been identified, the following factors may be considered in establishing minimum income: a. Differentiation in income by household type: A substantial difference exists between income levels of married couple households versus households consisting of a male or female living alone. According to a report published in 1991 by the U.S. Bureau of the Census11 the following comparison can be made: * While these proportions obviously vary from market to market, the substantial differences reflect the potential for overstating the size of market from an income qualification perspective, if income is not differentiated by household type. Although standard data reports produced by national data vendors such as Claritas do not differentiate income levels by household type, this information is available on data tapes from the 1990 Census. In addition, highly segmented demographic data on seniors is available through a Cincinnati-based organization called Project Market Decisions in its SMART Report series. b. Unit price: If price parameters have been established for different types of units, it is typical to use a weighted average monthly fee. If not, the price for the majority of the units may be used. c. Rent/income ratio: Once the average fee has been established, it is common to make an assumption regarding the proportion of a resident's income that can be expected to be spent on that monthly fee. Given the service package for assisted living communities that typically includes all meals and snacks, as well as assistance with activities of daily living, many studies assume that approximately 75% to 85% of a resident's monthly income will be spent on the community's monthly fee. Minimum income can then be calculated by multiplying the monthly fee by twelve and dividing that sum by 75% to 85%. Discussions with some multi-facility providers who are beginning to gather data on issues such as rent/income ratio indicate that many residents may be spending more than 75% on the monthly fee, but to date, no national data has been developed to either support or refine this assumption. d. Differentiating between owner/renters: Increasingly, studies are differentiating between the seniors who are home-owners and renters in establishing minimum income standards. As has been documented nationally, approximately 75% of seniors are home owners and the majority of them own their homes mortgage-free. Examination of localized data in numerous markets reveals that home ownership tends to increase with income. As such, owners who sell their homes when moving to an assisted living community are very likely to have considerable additional income available to them, once the proceeds from the sale of the home are invested. Analysts differentiating between the minimum income required by owners and renters are taking the such additional income into consideration in establishing minimum income for owners. Clearly a set of assumptions must be made about the amount of cash available for investment after the sale of the home and the interest level at which that cash will be invested. 3. Market Area Draw: Most studies delineate the proportion of residents expected to be drawn from the defined primary and/or secondary market areas for the proposed assisted living community. The determination of exactly what percent to use is another area where the judgment of the analyst is called upon. The basis for such a decision can be informed by the experience of local competitors, to the extent that they exist and that such information is shared with the analyst. In markets where the first assisted living community is the subject of the study, analysts must rely more heavily on information from interviews and on such factors as the degree of in-migration of adult children to an area. In markets where the latter is prevalent, a larger proportion of units may be filled from non-local seniors who move at the behest of their children. Regardless, it is prudent to be relatively conservative in such an assumption. As most analysts will agree, if the local market is not sufficient to support the majority of the assisted living community's units/beds, the project takes on a much greater level of risk. An assumption of local market area draw ranging from 60% to 90% is not uncommon. 4. Competition: Although some seniors may transfer from one assisted living community to another, it is atypical and most studies assume that once a resident has moved to an assisted living community they will remain there. As such, units/beds in facilities deemed by the analyst to be competitive must be addressed in attempting to establish the size of the available market for a new facility. Traditionally, in studies conducted for independent living, both existing and planned units are accounted for in sizing the available market. Different methodologies may vary in the proportion of competitive units used to calculate net (qualified households after removing competition) market depth, but typically the majority if not all competitive units are accounted for. This exercise is less simple in assisted living, particularly if the analysis is based on households rather than population. The Census defines households as including "all the persons who occupy a housing unit. A housing unit is a house, an apartment, a mobile home, a group of rooms or a single room that is occupied as separate living quarters. Separate living quarters are those in which the occupants live and east separately from any other persons in the building."12 In addition, the Census identifies another segment of the population as residing in Group Quarters which, among other things, includes "Nursing, convalescent and rest homes, such as soldiers', sailors' veterans' and fraternal or religious homes for the aged, with or without nursing care.13. As such, to the extent that assisted living facilities may have been captured by the 1990 Census as Group Quarters, their residents were not included in the Census count of elderly households. Therefore, excluding them from available households is inappropriate, since they were not among this universe when the Census was taken. Although it is, arguably, more conservative to simply assume that all assisted living communities counted its residents as members of households rather than among population in Group Quarters, this may be a vastly overconservative assumption in many markets. It is, of course, possible to determine whether or not an assisted living facility that was in operation in 1990 may have been counted as Group Quarters, by examining the Census information on a tract or even block level. 5. Frailty Qualifications: Reflecting back to the earlier discussion of measuring frailty levels, many studies now employ assumptions regarding a prospective resident's need for assistance with ADLs, IADLs or both. At this point, however, there is no consistency between the various methodologies being used regarding which measures of either are best suited to assisted living demand analysis. There are arguments both for and against the use of frailty qualification that go beyond the fundamental question of which measures are most appropriate. Using a measure of frailty to size the market, reflects an approach which attempts to accurately reflect the size and characteristics of the target market. Anecdotal evidence in most markets indicates that assisted living residents in most facilities have remained at home for as long as possible before moving and are increasingly frail upon entry. On the other hand, some providers argues that they are serving a proportion of residents, albeit relatively small, who have moved in order to be in a more supportive environment, but who do not require assistance in ADLs or IADLs. In certain states like New York, licensing categories such as Adult Homes, established to serve seniors who are not, strictly speaking, "independent", require that residents require only a minimal amount of supervision or assistance. 6. Household Size: One pattern that is clear regarding assisted living residents is that they are, for the most part, single individuals, rather than married couples. Although independent living communities may draw from 20% to 40% couples, depending on a variety of factors, assisted living communities to-date rarely have more than 5%, if that, among their residents. As such, the potential exists for oversizing the market by including all married couples. This is particularly true for assisted living communities targeting middle to upper income residents because income is higher income segments will include a greater proportion of couples than lower income segments. Again, while information varies between markets, national statistics indicate the following breakdown by household type in 1990. * 14 Again, these statistics vary with income, but in general, they reflect the fact that a substantial proportion of the 75+ market may, in fact, not be part of the market for assisted living as long as this option remains unpopular among married couples. B. Using Market Penetration Rates in Quantitative Demand Methodologies for Assisted Living The quantitative methodologies used to size the market and evaluate market depth for independent living units have come to rely on a widely accepted standard referred to as "market penetration". Market penetration typically refers to the proportion of qualified households required to fill a planned project once the market has been qualified by age and income and competitive units, both existing and planned, have been subtracted from the qualified household pool. Penetration levels of 3% to 5% of the net qualified market have become considered as the acceptable norm by most organizations analyzing, developing or financing independent living units. Unfortunately, no such norms have yet evolved for assisted living. As can be appreciated by the discussion on the variability regarding which assumptions are used to size the market, the use of penetration rates begins to lose meaning. Many analysts agree that, to the extent a penetration rate is used at all, it is likely to be significantly higher than for independent living. Penetration rates ranging as high as 20% to 35% have been observed in various studies for assisted living communities. Factors supporting the acceptability of a higher penetration rate include the greater degree of screening that may be used to size the market, (i.e., leading to estimates of truer market size) and the need-driven nature of the assisted living move decision (i.e., more will choose this option because they need it rather than want it). However, despite this, widely agreed upon standards for penetration, or some other final capture rate measure are still elusive. X. Absorption Absorption or fill rate projections are critical in forecasting the financial performance of an assisted living facility. Overly aggressive fill-up forecasts can result in inadequate capitalization of start-up costs and, potentially, loan defaults. As such, absorption should be carefully considered and conservatively projected. There are a number of factors that should be taken into account by the market feasibility study, to the extent possible, given the point at which the study is conducted. • Experience of competitive facilities: Information on fill rates from newer competitive facilities, if they exist can be used to project the subject property's absorption pace. This information, however, needs to be evaluated within the context of the competitor's location, the experience of its staff, and the comparability of its pricing, services and design. • Experience of project marketing team: If a study is being conducted when the entire project team has been assembled, the experience and track record of the marketing staff or consultants is a factor to be considered in projecting absorption. In addition, for organizations that have already developed and filled other similar assisted living communities, the statistics on their other properties can be considered. • Pre-opening marketing: Most assisted living facilities do not pre-lease as substantial a proportion of units as is the case with independent living where a minimum of 50% pre-leasing is typical, if not required. However, if pre-leasing is anticipated, this will have an impact on the rate at which the project fills, particularly in the early months. • National Surveys: ALFA's 1993 survey indicated a net unit monthly absorption rate of 3.8 units15. In addition, a study was conducted in the early 1990's: When projecting absorption, the impact of turnover must be factored in so that fill-rates, net of turnover are used. Given the relatively frail nature of residents in assisted living facilities, turnover typically begins during the initial fill period. The 1993 ALFAA Study indicated that participating facilities experienced a 34% annual turnover rate.16 XI. Conclusions Market feasibility studies for assisted living communities, while similar in some respects to those conducted for independent living, vary in numerous significant ways. The lessons learned from the failures of many senior housing communities in the 1980's should point to the need for the establishment of sound baseline data and demand methodologies that take this data into consideration. Given the pace of development of assisted living communities during this decade and the increasing number of multi-facility providers, the types of data needed to establish baselines should be available. Collaboration between providers and analysts will be necessary to establish standards. Although the performance of individual providers is and should be considered proprietary, an organization such as ALFA, with its extensive membership base, could be the catalyst for a study designed to collect data that could be aggregated and evaluated for the purpose of helping all involved in this burgeoning industry to better understand it, and by doing so, enhance the potential for its future success. Return to the Brecht Associates Site |