ups and downs of the early 1990's, the seniors housing market
has settled on a winning concept to meet the diverse needs of
the growing seniors population. After experimenting with
independent living, continuing care, and congregate care retirement
community models, many developers have found assisted living
facilities (ALFs) to be the most marketable and profitable type
of seniors housing. Many investors consider ALFs to be
an attractive investment vehicle in light of an aging population
that's spurring continued demand for these services.
is Assisted Living ?
living combines "housing, supportive services, personalized
assistance, and health care designed to respond to the individual
requirements of residents needing help with activities of
daily living (ADL)," according to the Assisted Living
Federation of America (ALFA). In addition to providing
room and board, ALF's offer residents a wide array of care
and services, which may include:
in Assisted Living?
daily meals served in a common dining area;
Assistance with ADL such as bathing, dressing, grooming,
eating, and walking;
Emergency call systems and 24-hour security;
Management and administration of medication;
Personal laundry and housekeeping Social and recreational
Transportation to medical services and stores.
nation's aging population's continued demand for services
has made assisted living development an attractive investment
vehicle. The fastest growing age group in the United
States, the over 85 population segment, is expected to increase
by 39 percent by 2000 and 33 percent between 2000 and 2010,
according to the U.S. Census Bureau. ALFA predicts that
assisted living - today a $12 billion to $15 billion industry
- will double by 2000.
increasing net worth of seniors also contributes to the growth
of this industry. By the year 2000, more than 53 percent
of people over 80 years old will have incomes of $15,000,
and almost 53 percent will have incomes of at least $25,000,
according to Claritas, Inc., a demographics research company.
This is an important factor because most assisted living is
funded through private income such as resident's financial
factor contributing to demand is the lack of available nursing
home beds. Due to limitations on Medicaid funding, the
primary source of nursing home revenue, many states have issued
moratoriums on authorizing the new development of nursing
home beds, attempting to control their Medicaid budgets by
limiting the number of beds on the market. This, in
combination with high occupancy rates for nursing homes and
increased concentration on higher-acuity patients, has resulted
in a lack of available beds for low-acuity residents.
Impact of Hotel/Multifamily Developers
the multifamily and hospitality markets move towards saturation,
developers from these arenas are entering the assisted living
market. Marriott and Hyatt are two hospitality-related
companies that have made a strong entry into ALFs. On
an operations basis, hotels are most similar to assisted living
development due to their service package (offering food service,
concierge, and other amenities). Hotels do, however,
lack the health care component that is essential to ALF operation.
Multifamily developments, while similar in construction features,
lack both the service package and the health care component.
With demand still exceeding supply in many markets, assisted
living development is an investment on par with hospitality
and multifamily projects. Further, lenders have not
reached their saturation point; money is still readily available
for experienced operators.
assisted living market is one of rapid change. Several
of the following trends currently are shaping the industry's
increasing number of ALFs offer specialized Alzheimer's or
dementia-care programs designed to meet these individuals'
more demanding needs. Specialized Alzheimer's programs
typically are housed within a separate wing or in a dedicated
24 to 28 units is the minimum facility size at which operators
can realize economies of scale and maximize profit margins.
Currently, most developers and operators are constructing
facilities ranging in size from 40 to 90 units. These
larger facilities can maintain their own staffing and provide
the level of care required to carry residents as they age.
Depending on location and revenue generated, well maintained
facilities of this size typically realize profit margins ranging
from 30 percent to 40 percent. Effective and efficient
management is, of course, a necessity for maintaining high
Levels of Care
now are catering to a higher level of care and many are beginning
to meet the needs of traditional long-term care residents.
There is also a trend towards multiple levels of care through
which facilities can provide more extensive care and realize
A la Carte
have found that bundling or packaging services often is financially
inefficient and fails to adequately address residents' individual
needs. Providing services a la carte corrects these
shortcomings and also allows for increased revenues since
bundling the services normally results in discounting.
Design and Feel
contrast to early ALFs that were modeled after nursing homes,
developments today are moving away from long corridors and
small semiprivate units. Especially in more affluent
markets, residents are demanding more privacy and luxury.
Private apartment units of 400 to 600 or more square feet
increasingly are more common.
Concentration in Secondary Markets
large metropolitan areas such as Atlanta begin to reach potential
saturation points, developers are turning towards secondary
markets. For example, Alternate Living Services, one
of the largest national ALF providers, recently built ALFs
in Gainesville and Palm Coast, Florida.
estate professionals who are considering entering the ALF
market need to study the market carefully because many experienced
players have extensive expansion plans for this segment.
A market analysis based on qualitative and quantitative is
often the first step to determine the need for a facility.
For the analysis of any senior housing project, income and
demographics are typically confined to the over-75 population
overall process for evaluating a potential ALF market should
include the following key components:
the feasibility of an ALF development must incorporate the
micro and macro aspect of a community. For instance,
site determination may be limited to restrictive zoning, rock
formation, and/or state planning lists. Initial research
into local and state planning parameters, as well as a site
survey, may save time and prior to developing a full analysis
of the market.
economic factors may have a large impact in the decision making
process. For instance, smaller communities that are
dependent on one or two employment bases may be subject to
either downsizing or expansions that change the size and economic
viability of the population of adult children. This
could be critical because adult children are often the primary
decision-makers in the fill-up process. Larger cities
boast a more diverse employment base, although they too can
be affected by the actions of large employers. The age
of community residents also is important - ALFs are more successful
in areas with an older adult children population base (aged
35 to 44 years).
community's economic development office is a good source for
defining area economics and is a good starting point for determining
movement and traffic patterns within the community, which
influence the exposure and accessibility of a project.
the industry continues to evolve, many competitive factors
have emerged. Through the early '90s, independent living
facilities concentrated on the active adult. During
the last five years, many operators have added either home
health care and/or assisted living wings to their centers.
This has retained residents for a longer period of time, preventing
the movement of residents from a retirement facility to a
full service ALF. In addition, local home health agencies
have become much more active, servicing the frail elderly
in their homes. While sometimes an expensive and not
completely adequate alternative, home health services and
to a lesser degree, community-based services do maintain frail
seniors in their own homes, which prevents them from having
to move into full-service ALFs.
homes are a competitive factor for the low-acuity assisted
living resident. Many national nursing home companies,
such as Life Care Centers of America, Beverly Enterprises,
and Integrated Health Services, as well as local operators,
have either developed stand-alone licensed Alzheimer's facilities,
added assisted living units to existing nursing homes, or
have developed stand-alone assisted living centers on the
campus of their nursing home. This allows smooth transition
from an assisted living setting to a nursing home setting
without disrupting the resident. Furthermore, such settings
give the appearance of continuum-of-care to the adult child.
of Market Trends
all competitive facilities within the primary market area
(PMA) to determine occupancy levels, level of care, movement
within the community, adult children's influence, area economic
factors, and the percentage of residents from outside the
PMA. Frequently, senior housing marketing directors
track residents' prior living situations. This information
can be very insightful in determining the percentage of residents
the subject property can expect to draw from inside and outside
the PMA. Further, marketing directors are a good source
of information on absorption and occupancy rates as well as
any impending economic factors that may affect the area.
Area managers also have good insight into traffic patterns
and movement by adult children from areas of residence to
places of work.
these factors should provide a reasonably clear picture of
movement within the community. At this point, the PMA,
from which the subject should expect to draw the majority
of its residents, should be determined.
of the Secondary Market Area
secondary market area is all areas outside the PMA.
The impact of the secondary market area is determined the
impact of adult children and through discussions with area
administrators. A larger adult population is usually
indicative of a market in which more residents will be pulled
into the area and relocate into the facility from outside
of Income and Demographics
determining the PMA, compile demographics from reporting services.
Analyze income and demographics on the basis of age, ethnic
makeup, care of residents with physical or mental disabilities,
female population base, and household income.
of the Utilization Rate
the various alternate services within a community will determine
the PMA's utilization rate, which is the likelihood that a
resident will choose the assisted living setting over other
available alternatives. In general, those communities
with few services should have a higher utilization rate (i.e.,
residents with fewer alternatives from which to choose will
be more likely to relocate to a new ALF).
modality represents the number of residents that have either
physical or mental limitations. Claritas, for example,
reports the percentage of residents within the PMA that have
a care need. This percentage represents the age-qualified
residents that would benefit from assisted living services.
of PMA Draw
PMA draw represents the percentage of residents that a facility
can expect to draw from within the PMA. This figure,
which adjusts for in-migration from areas outside the market,
typically is derived from analysis of historical fill-up of
existing facilities as well as conversations with area operators
and local officials.
is essential to survey all competitive supply, including independent
living, nursing, and assisted living facilities as well as
the impact of home health services. All surveys should
include the determination of the physical plant, mix of units,
unit rates, service pricing format (tiered or a-la-carte),
occupancy, and services offered, In addition, consider
and survey all planned facilities.
survey of competitive facilities close to the PMA is critical
to determine their impact. In addition, account for
turnover of beds and vacancy factors within the market.
the target population base and adjusting for such factors
as utilization, care modality, supply (planned and existing),
and income qualification determine the PMA's net bed demand.
(This figure is a measure of overall unmet demand and is not
a forecast of penetration or facility fill-up.
a second check on the strength of a market, determine the
penetration of qualified residents within the market area
that the new facility needs to capture to reach stabilization
and sheds light on the viability of the market.
different sources offer financing for the development and
purchase of ALFs. These include the U.S. Department
of Housing and Urban Development (HUD) Section 232 program,
tax-exempt bonds, conventional banking, real-estate investment
trusts (REITs) specializing in health care, Small Business
Administration loans, and Fannie Mae loans. The HUD
232 program and tax-exempt bonds are both non-recourse-lending
services. The majority of other available sources are
of the newer developments in assisted living financing is
the synthetic lease. A synthetic lease essentially is
a loan that allows projects to keep mortgage interest and
depreciation deductions off the balance sheet to improve earnings.
historically most assisted living lending has been for the
purchase of existing projects, the past few years have brought
a steady increase in new construction. Though financing
parameters for new development remain stringent, developers
are finding a limited amount of good existing product available
to purchase. With profit margins remaining strong, assisted
living should continue to be a popular venture for both new
and established player, and the recent spur of development
is likely to continue over the short term.
Future of Assisted Living
the growth projections of the market it serves, assisted living
development is anticipated to remain strong in the coming
years. Several companies have established themselves
as specialists in this industry, both developing and running
these management-intensive facilities. This, along with
the potential of hospitality REITs to acquire ALFs as a hedge
against a downturn in the hotel market, provides a continuing
source of product and financing to keep the market growing
to meet demand.
Living vs. Hotel and Multifamily Investments
Living vs. Hotel and Multifamily Investments
rate of return
rate of return
cash on cash
lending criteria and a straight line mothod of depreciation
are used. All operations are based on actual operations
with implied capitalization rates utilized (rates range
from approximately 10 percent to 11 percent)