MDS Senior Living Strategy of the Month

MDS Strategy of the Month – May 2012

Senior Apartments

The Battle for Market Share Intensifies

For years, full-service independent living and CCRC owner/operators and sponsors have been trying to get inside the minds of seniors. They try to convince them that service enriched senior living is the optimum solution for the future planning. Many seniors are not buying their story. There are three basic reasons:

Seniors Frequently Complain About the Hassle of Current Home Ownership and Ongoing Maintenance – While many are willing to explore alternative living arrangements, they seek their definition of successful downsizing.
Consumer Psychographics and Value Perceptions are Changing – Senior consumers have sharpened their definition of value which typically involves product, value, price, choice and service options.
The “I’m Not Ready Yet” Syndrome – This is today’s biggest sales objection. For many seniors, they’re not yet ready to accept service intensive independent living.

Market rate service-free senior apartments are a relatively new product that offers choice, flexibility and is responding to the “I’m not ready yet” sales objection. The product looks a lot like independent living apartment except it does not offer an extensive mandatory service package such as meals and housekeeping. The product is for seniors who are relatively healthy (or think they are) and do not require assistance with cooking, cleaning or other typical supportive services that are usually offered at full-service independent living retirement communities. The public spaces are well done but on a much smaller scale.

This product captured more than a 46 percent share of new senior living construction in 2007 while offering both low/moderate income (with tax credits) and market rate pricing models. In 2008. senior apartments accounted for 27 percent of new senior living properties and expansions constructed. These properties may have central kitchen facilities but they generally do not provide programmed meal packages for residents. Many offer community rooms for social activities and other limited amenities.

The average community consists of approximately 120 to 150 units. Over the past 10 years, senior apartment communities have been built containing a total inventory of approximately 90,000 units. Tax credit financed senior apartments for low to moderate income seniors dominated the development in early years. The focus has now shifted towards conventionally financed, market rate communities.

Resident Characteristics

Typical resident profile characteristics can be summarized as follows:

The average age upon move-in is 73.
On average, females comprise approximately 75 percent of the total resident population. Approximately 10 percent are marries couples.
Death is reported to be the leading cause of turnover. Residents typically have access to licensed home health care services provided by an unaffiliated third-party provider. A small but growing percentage of residents report receiving home health care.

Typical Physical Design Characteristics

Obviously the physical design of a senior apartment community is influenced by many factors. However, here is a typical profile:

The majority of developments are multi-story buildings (up to five floors with elevators and interior access to individual living units using double -loaded hallways). The properties are primarily located in suburban metropolitan areas.
Typical size 150 unit project
Approximately 15 to 20 percent of that area is public spaces and circulation (hallways, stairwells, etc.). The public space in service-enriched independent living communities usually involves approximately 30 to 35 percent.

Typical Services and Amenities

While services and amenities can vary from project to project, below are some of the typical offerings:

Transportation service
Elevators in all buildings
Social and recreational programs
Fitness center
Arts and crafts room
Swimming pool
Restaurant-style dining room (meal optional)
Beauty salon
Coffee shop

Financial Performance

While there are not yet any extensive financial benchmarks established for senior apartments, here is a typical market rate financial profile for a 150-unit project at 93 percent occupancy with an average monthly service fee of $1,100 per occupied unity and 2 percent miscellaneous revenue:

Revenue	$1,884,960
Expense	(739,200)	40% Expense Ratio
Net Operating Income	$1,145,760	60% EBITDA Margin

EBITDA=Earnings Before Interest, Taxes, Depreciation and Amortization

Total, all-in cost per unit is typically in the range of $125,000 to $140,000 per unit.

Call to Action

Recognizing that senior apartments are here to stay, they are perhaps the best current example of how the senior living product life cycle is changing. The traditional definition of a CCRC is changing. Senior apartments can provide both new development opportunities and competitive heartburn. Some sponsors and owner/operators are adding senior apartments to their existing CCRC campus. Also, keep your eye on service free senior condominiums being offered for sale on a fee simple basis.

You must carefully monitor these emerging trends:

Some residents upon move-in should really be opting for service-enriched independent living.
Other residents will inevitably age in place and need an increasing level of services (meals, housekeeping, assistance in living, etc.)

Will you ultimately provide some of these services or expect these residents to move out? Think about this situation now because it could influence your initial design (comprehensive commercial kitchen, etc.).

[The above was excerpted from chapter 15 of the book Independent Living and CCRSs; Survival, Success & Strategies for Not-for-Profit Sponsors and For-Profit Owner/Operators where you can find more details and explanations on the above concepts.]

Jim Moore is president of Moore Diversified Services, Inc., a national Senior housing and health care consulting firm based in Fort Worth, Texas. He has written several books about assisted living and Senior housing, including Assisted Living Strategies for Changing Markets. A book titled Independent Living and CCRCS has also been published. Jim Moore can be reached at 817-731-4266 or jimmoore@m-d-s.com.

To visit Moore Diversified Services, Inc. – www.m-d-s.com