Market Studies Are ‘One Piece to a Larger Puzzle,’ Concludes InterFace Panel

Brian Sunday (far right), vice president of AEW Capital Management, says AEW has done deals where the market study came back negative but the deal turned out to be a home run. Listening intently to Sunday speak are (from far left ) panel moderator Susan Brecht, president, Brecht Associates; Zach Bowyer, senior managing director, CBRE Valuation & Advisory Services; Lana Peck, senior principal, National Investment Center for Seniors Housing & Care; Rob Schiller, director of market research, LCB Senior Living. Brian Sunday (far right), vice president of AEW Capital Management, says AEW has done deals where the market study came back negative but the deal turned out to be a home run. Listening intently to Sunday speak are (from far left ) panel moderator Susan Brecht, president, Brecht Associates; Zach Bowyer, senior managing director, CBRE Valuation & Advisory Services; Lana Peck, senior principal, National Investment Center for Seniors Housing & Care; Rob Schiller, director of market research, LCB Senior Living.

Market studies are great tools to help identify the potential opportunities and pitfalls in the seniors housing development and investment business, but they never should be the final arbiter of whether to pull the trigger on a deal, say industry experts.

“In our history we have done deals where the market study came back negative and it was a home run. We’ve done deals where the market study came back and said that there was a tremendous amount of demand and the deal was a loser. It’s one piece to a larger puzzle that we should use these things for,” said Brian Sunday, vice president of seniors housing at AEW Capital Management. The Boston-based firm currently has about $2 billion in seniors housing assets under management.

The comments from Sunday came during a panel discussion on market studies at InterFace Seniors Housing Northeast in Philadelphia on Wednesday, Nov. 8. The daylong program, which took place at the Sheraton Philadelphia Downtown, drew more than 240 attendees and included breakout sessions on technology, development, operations and the capital markets.

The program also included a lively question-and-answer session between David Schless, president of the American Seniors Housing Association, and Richard Kelley, publisher of Seniors Housing Business, on a range of hot-button issues including tax reform.

The panel that featured Sunday was titled “Getting Good Data: The Impact of Market Studies on New Development and How Projects Are Designed and Underwritten.”

Moderated by Susan Brecht, president of Pine Beach, N.J.-based Brecht Associates, the panelists in addition to Sunday included Zach Bowyer, senior managing director, CBRE Valuation & Advisory Services, Boston; Lana Peck, senior principal, National Investment Center for Seniors Housing & Care, Annapolis, Md.; Rob Schiller, director of market research, LCB Senior Living, Norwood, Mass.

How Studies Can Miss

Sometimes a market study fails to capture the nuances of an operating model within a particular property segment. For example, AEW is currently weighing a possible assisted living deal in Connecticut.

Because operators in the market already provide an ample amount of high-acuity assisted living, the segment appears to be saturated based on the market study. “But this operator’s model and its whole pitch is that it’s doing really light acuity, almost independent living,” said Sunday. In short, there is a healthy amount of demand for that type of product.

“It’s important to note that market studies are great tools, but you’ve got to have it feed into the larger equation,” emphasized Sunday.

Talk to five different market feasibility consultants and you’ll probably get five different ways to analyze the marketplace, said Schiller of LCB Senior Living, a developer/operator and third-party manager of senior housing communities. “It’s part art, it’s part science.”

The company, which provides independent living, assisted living and memory care services, currently owns and/or operates communities throughout New England and is developing several new communities in the Mid-Atlantic states.

When conducting a market study, Schiller said LCB Senior Living uses the basic metrics such as household income and home values in the area to assess consumer demand. The supply side of the equation poses its own set of challenges. “When you are looking at the competition, not all competitors are created equal,” Schiller points out. The art is in knowing how to drill down on all that available information.

“For LCB, we have a specific niche in our marketplace. So that plays a part where not all competitors are created equal. You need to account for them, but you may account for them in different ways.”

Audience Gets Its Turn

During the Q&A portion of the program, one audience member asked if the market studies being conducted today are not only focused on gauging consumer demand for seniors housing, but also on the pool of qualified labor to operate new facilities.

“That is a great question,” said Brecht. “Probably for the last year we have been more sensitized to the notion that part of a market study has to look at the availability of the labor market and who you are competing with. Is a hospital expanding, and are you competing with staff for that hospital? I don’t think you can quantify that factor, but it absolutely needs to be part of what you look at.”

Bowyer of CBRE said perhaps a bigger issue than the availability of labor is how much the operator will have to pay the workers of a new facility, something that needs to be taken into account when developing the real estate pro-forma for the property.

Sunday of AEW echoed that sentiment. “As far as wages, I would say that for the last six or seven development [projects] that we’ve opened in the last two years, we’ve missed on payroll expenses on every single one. They were too light when we underwrote the deal. It’s definitely a huge issue, and we’re seeing it happen right in front of us with the wage growth.”

Brecht also asked the panel members if they are worried about the current climate surrounding immigration policy in the United States and whether that could impede access to foreign workers needed to fill positions such as certified nurses’ aides.

“Absolutely, that could be a very big problem in the future,” said Peck of NIC. The veteran market research analyst who joined NIC early this year pointed out that 50 to 60 percent of a typical seniors housing operator’s expense load is labor. “It’s going to be incredibly more important for feasibility analysts to at least add some of that information into [market studies]. There are tools you can use.”

For example, the NIC MAP Bureau of Labor Statistics Employment and Wage Report provides state and national level employment and wage data for occupational job categories associated with the seniors housing and care sector. The report also provides data for developers, operators and capital providers to use in benchmarking labor market costs across properties for use in both their business plans and pro-formas. (For more information, go to info.nic.org/nicmap-bls-report-blog.

Peck urged operators to closely monitor the pool of registered nurses in their marketplace to ensure that staffing remains adequate. Reports have surfaced of seniors housing operators losing a number of registered nurses to expanding hospital systems, according to Peck. “There have also been reports of poaching within the industry — new properties coming in and taking market share with regard to employees.”

A developer in the audience who said that he’s competing in a market with plenty of “older-generation facilities” wanted to know to what extent he can count on getting residents to move out of these older facilities into his community.

“That’s a tough play,” said Brecht. “First of all, it’s difficult enough to move at any age. To move again when you are 80 and living in a community where you have made friends and you have a life … I think counting on pulling people out of existing communities is a dangerous way to assess the market.”

Sunday of AEW concurred. “We never assume you are going to pull anyone out of an existing community in the area. If you do that’s great, but we want to make sure that there’s at least enough demand on top of what’s already in place. The odds are that you are going to get some of those people, but I don’t think it’s smart to actually put an assumption on how many people you do get.”

Bullish Outlook

AEW is currently investing in its third closed-end fund, which raised about $500 million earlier this year. By using leverage at 60 to 65 percent loan to value, it has a buying power of up to $1.5 billion.

“Our current strategy is a mix of doing ground-up development and existing deals,” said Sunday. “I would say right now the allocation is split down the middle: 50 percent ground-up development and 50 percent existing product. That’s the most development we have allocated to seniors in the last 10 years. We’re pretty bullish on the development side of things.”

— Matt Valley

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