NIC Notes

Insights in Seniors Housing & Care

Article

By: Beth Mace & Ryan Brooks  |  January 20, 2022

Considerations for a Successful Middle Market Product: A Strawman

Business Environment  |  Economic Trends  |  Forgotten Middle  |  Market Trends  |  Seniors Housing

Introduction

A growing number of senior housing operators and capital providers are expressing interest in the “Forgotten Middle,” a term coined by NIC in 2019 in its seminal research to describe the large middle-income seniors cohort by its demographic characteristics as well as its housing and healthcare needs. The middle market includes Americans who have too much wealth to qualify for government support programs such as Medicaid, but not enough financial resources to pay most private pay options for very long. Identifying the right balance of hospitality, services, and care delivery, while still maintaining a monthly rental price that can be paid for by this group, is the cornerstone to a successful middle-market strategy.

In 2014, there were 7.9 million seniors aged 75 or older who were in the middle-income cohort. By 2029, that number is projected to increase to 14.4 million. A variety of social and demographic trends are causing the size of this cohort to grow at a rapid and steady pace. Foremost is the aging of the baby boomers who are turning 75 every day (baby boomers were born between 1946 and 1964 and as this cohort ages, the middle-income senior population will nearly double). By 2029, middle-income seniors will make up 43% of all seniors. These trends will only grow over the next 20 years since the oldest baby boomer is 83 in 2029. Further, a shift away from pensions and defined benefit plans, an increasing likelihood of being unmarried, and fewer available family caregivers are other key factors influencing this cohort. More than half of this cohort are projected to not have the financial resources to pay for traditional average-priced seniors housing and care in 2029.

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Looking at the health characteristics of the projected cohort of 14.4 million middle-income seniors, it becomes clear that a significant portion of this group will require care as they age that may present challenges to living at home. Roughly 8% of this group will have some form of cognitive impairment, 60% will have mobility limitations, and 20% will have high needs – defined as having three or more chronic conditions and one or more functional limitation.

Further, it is likely that the COVID-19 pandemic has increased the size of this cohort, supporting additional consumer interest in moderately-priced senior housing options. To be viable, however, operators and their capital partners need to think through a variety of considerations in formulating a middle-market strategy. What follows are some key factors to consider for operators and capital providers interested in serving the middle-market segment that NIC has gleaned from conversations in the years since the study’s publication. Please note that this is intended only to serve as the groundwork for further discussion and is not intended to be a comprehensive list of all factors affecting middle-market senior housing.


Key Factors When Considering a Middle Market Strategy

Understand Your Consumer

The most important first step to consider in providing care and housing to the “Forgotten Middle” is to understand the resident that is likely to live in the property. Focus groups have revealed that middle-market consumers are not that interested in high-end services, such as luxury amenity spaces, elegant meals, and customized services. The middle-market consumer desires value, peace of mind, and independence. This suggests a host of considerations that may differ from higher-end senior housing and care. This group does not automatically want to pay for weekly housekeeping, dining room servers, and full-time fitness instructors. This may also mean that there are fewer high-end finishes such as granite countertops and less robust food menus. This is a group of seniors who are used to parking their own cars and carrying their own bags.

Marketing and sales teams should take the approach of marketing the value proposition of senior housing. This includes safety, security, socialization, engagement, room and board, care coordination and lifestyle.


Expense Item Scrutiny and Unbundling to Offer à la Carte Services

Powerful business intelligence (BI) tools have enabled a new approach to senior living pricing. These new pricing approaches are key for middle-market operators looking to understand how frequently certain services are rendered and how delivering those services impact the time and effort of a labor force.

For example, for communities that are positioned within walking distance to shops and restaurants, or near public transportation, it may not make financial sense to continue operating a shuttle that gets little use. The cost of gas, vehicle maintenance, insurance, and the driver’s time may be more effectively used elsewhere, or even to simply reduce the monthly rent. Moreover, the common and easy use of Uber or other on-demand transportation services may make transportation less necessary.

More broadly, à la carte services in general are likely more appealing to the middle-income cohort, where they can choose the frequency or apartment cleaning, meal plans and other services.


Maintain a Universal Workforce & Utilize Volunteers

The single biggest line-item expense for senior housing operators is labor, and it is also most often the real cost that drives up monthly fees for consumers. Unfortunately, the COVID-19 pandemic only exacerbated the labor challenge and brought with it a wave of higher labor costs.

For middle-market operators in particular, labor cost management is a crucial tenet to maintaining affordability. Some operators may find success by not having workers focus on one singular task or rather use the so-called universal worker. The workforce potentially needs to be managed in such a way that allows them to shift to where the needs are greatest. Gone are the days of a dedicated front desk or reception area employee. No longer can employees be dedicated as drivers only.

The labor force for middle-market operators needs to be agile, flexible, and able to repurpose themselves to where the demands are – whether that be making rounds, answering phones, delivering meals, or leading a class. Workers need to be cross-trained to perform multiple duties.

Volunteerism is another concept for middle-market operators to embrace. Some operators have found success in reducing staffing and overhead costs by having residents volunteer as a requirement of residence. Volunteering can be a way for residents to maintain engagement. Oftentimes, residents will be able to volunteer doing something that they love – assisting in the library, running the book clubs, or tending to the gardens and landscaping. Not only does resident volunteerism reduce the operating costs, but it provides residents another avenue for both purpose and socialization. In fact, volunteer requirements in some communities can even be seen as an attraction to residents.


Utilize Partnerships for Low-Cost Support Services

Location and proximity to restaurants, cafes, shopping, theatres, and entertainment can create a range of no-cost support services for the middle-market consumer, ranging from dining to socialization. Partnerships with dining establishments can serve as a win-win situation for both restauranteurs and operators alike. If operators can guarantee a minimum, predetermined order amount, restaurant owners may be willing to offer discounted meals to residents. A partnership in this sense, at the very least, reduces the need for cafeteria labor and potentially the build-out of a full commercial kitchen. With the right dining partnerships, perhaps the need for an on-premises dining option is eliminated altogether.

When it comes to delivering home care services, middle-market operators can work closely with a home care agency which can assign a few dedicated staff persons who can share care responsibilities among many different residents. In this way, care can be delivered to residents where they reside, and it can be affordable to residents because they are only paying for the services that they need. These services do not have to be paid for or subsidized by the operator, which would thereby lower operating costs. But an operator can ensure that a resident gets care by partnering with a home care agency who specializes in best-in-class care provision.

There are also acuity limitations that need to be considered when filling a unit. Consider some of the frailer or less healthy middle-income seniors. When thinking about what a higher-acuity, middle-income senior is going to require, it becomes clear that a community cannot provide all the supports and services that are needed and continue to remain affordable. As such, clear guidelines may be needed to set limits on what type of resident can be served in the community. Residents with multiple comorbidities, ambulatory challenges, or those requiring assistance with one or more activities of daily living (ADL) may not appropriate for middle-market property needing to maintain costs at an affordable level.


New Development, Repurposed Building, or Distressed Asset Acquisition?

It may not be possible to build new construction and still meet the needed price-point for the middle-market given the costs of entitlement, land values and pandemic-related surge in materials and soft costs. Keeping acquisition or development costs and related debt low is key to achieving success in the middle-market arena. Purchasing distressed assets – senior housing properties facing bankruptcy due to low occupancy rates or alternative property types such as motels, shopping centers, and offices could potentially reduce the cost basis.

For situations where development may pencil out, a strategy of developing multiple sites and replicating a building model and design that has been shown to work may be cost-effective. Incorporating middle-market buildings into existing communities can be done by converting existing, often older, units to more affordable options. Moderately priced buildings may need to be designed or retrofitted differently and not include elaborate common spaces. Providing smaller units or having double occupancy with higher density may also lower the price-point for middle-market seniors.

Indeed, the concept of roommates sharing quarters in senior housing had been trending in the years leading up to the COVID-19 pandemic. This trend allowed for more affordable senior living through cost sharing. Unfortunately, the practicality of offering housing in such a way could now be more problematic, with the emphasis on infection control and contagion prevention.

Operators and capital providers will also want to pay close attention to market demographics when choosing to develop a middle-market property. Areas with a high concentration of seniors with annual incomes of less than $75,000 a year may generate the most demand. It is also important to remember, however, that incomes can vary widely between different market areas and as such, so too should rental rates that target middle-market seniors.

When looking to identify the most appropriate market, another factor to consider may also be Medicaid assisted living waivers that are available in select states. According to the Medicaid and CHIP Payment and Access Commission, 29 states use Medicaid Home- and Community-Based (HCBS) waivers to cover services in residential care settings. In some states, assisted living is specifically identified as being covered by Medicaid, while in others assisted living services are only covered for individuals with certain health conditions, such as Alzheimer’s Disease or related dementia.

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Conclusion

Because of the increasing demand, targeting the middle-market can be a successful strategy for senior housing operators and investors. But when beginning the middle-market journey, it is vital to remember that throughout each stage, the goal is to make the project more economical to build and operate. This process begins with design and construction but must remain consistent through the planning of amenities and services as well. There are of course other aspects to consider – like how to effectively finance these developments – but this article is intended to serve as a starting point for discussion on how to move from theory to reality in the middle-market senior housing sector, by outlining the key considerations that have been identified through our ongoing conversations related to the “Forgotten Middle.”


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About Beth Mace & Ryan Brooks

Beth Burnham Mace is the Chief Economist and Director of Outreach at the National Investment Center for Seniors Housing & Care (NIC). Prior to joining the staff at NIC, she served as a member of the NIC Board of Directors for 7 years and chaired NIC’s Research Committee. Ms. Mace was also a Director at AEW Capital Management and worked in the AEW Research Group for 17 years. While at AEW, Ms. Mace provided primary research support to the organization’s core and value-added investment strategies and provided research-related underwriting in acquisition activity and asset and portfolio management decisions. Prior to joining AEW in 1997, Ms. Mace spent ten years at Standard & Poor’s DRI/McGraw-Hill as the Director of the Regional Information Service with responsibility for developing forecasts of economic, demographic, and industry indicators for 314 major metropolitan areas in the U.S. Prior to working at DRI, she spent three years as a Regional Economist at the Crocker Bank in San Francisco. Ms. Mace has also worked at the National Commission on Air Quality, the Brookings Institution and Boston Edison. Ms. Mace is a member of the National Association of Business Economists (NABE), ULI’s Senior Housing Council, the Urban Land Institute and New England Women in Real Estate (NEWIRE/CREW). In 2014, she was appointed a fellow at the Homer Hoyt Institute and was awarded the title of a “Woman of Influence” in commercial real estate by Real Estate Forum Magazine and Globe Street. Ms. Mace is a graduate of Mount Holyoke College (B.A.) and the University of California (M.S.). She has also earned The Certified Business Economist™ (CBE), which is the certification in business economics and data analytics developed by NABE. The CBE documents a professional’s accomplishment, experience, abilities, and demonstrates mastery of the body of knowledge critical in the field of economics and data analytics. Senior Principal Ryan Brooks works with the research team in providing research, analysis, and contributions in the areas of healthcare collaboration and partnerships, telemedicine implementation, EHR optimization, and value-based care transition. Prior to joining NIC, he served as Clinical Administrator for multiple service lines within the Johns Hopkins Health System, where he focused on patient throughput strategies, regulatory compliance, and lean deployment throughout the organization. Brooks received his Bachelor’s in Health Services Administration from James Madison University and his Master’s in Business Administration from the University of Maryland.

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