CHICAGO — What are the limitations of a market study? In light of overbuilding concerns in some major metros, it’s a salient question.
J.P. LoMonaco, president of Valuation & Information Group, moderated a panel discussion on the impact of market studies on new development during the InterFace Seniors Housing Midwest conference in June.
The textbook definition of a market study is a comparison of supply and demand within a defined geographic area. It is a risk-assessment tool. Rick Banas, vice president of development and positioning at Gardant Management Solutions, considers a market study to be a snapshot in time that can help an owner or operator formulate strategies for developing a community.
“[A market study] helps you identify red flags, caution flags. It may provide a green light, but it is not the only element that can give you an indication whether a project is a go, no go, or whether it is going to be successful,” said Banas.
Dave Erickson, vice president of real estate development for the Ryan Cos., said one step he takes early on in the market study process is to mesh the National Investment Center for Seniors Housing & Care (NIC) data on supply and the Esri data on demographics with “our boots-on-the-ground knowledge.”
Alan Plush, president and senior partner at HealthTrust, which provides appraisal, valuation and advisory services to the industry, said he receives two types of phone calls from customers regarding market studies: one where the caller says, “we really want to know what the answer is,” and the other where the caller says, “here’s the answer, you need to validate it.”
“I hate the second call because it undermines the process,” said Plush, referring to developers who decide to build a project even before a market study is conducted. Over the years, Plush has learned that the “survivors” in the business are the development teams and operators that read every page of the market study beyond the executive summary to understand its finer points.
Art of defining the competition
Once the primary market area is defined, the next question the market study needs to address is who are the competitors in that particular market. Effectively answering that question appears to be both an art and a science.
The panel participants agreed that the age, occupancy rate and management of existing senior living communities — in addition to pricing — all are factors that need to be analyzed in the market study.
“I think that all competition should be considered. At the same time, you need to look and find out if a community is having occupancy difficulty. Is it one community in that particular target market area, or is it a wealth of communities?” asked Banas. “What is causing that one community — if it is one community — to have those occupancy difficulties? Is it something that's explained?”
Another important factor to consider is how existing senior living communities in the marketplace are positioned, emphasized Banas. “What positioning strategies are they using to try to attract residents? In most cases it's the same strategies, and the market study can help you identify how you are going to be able to find a niche in that particular marketplace.”
Erickson of the Ryan Cos. said if the rate at one of its planned senior living projects is $4,000 per month in a particular market but a competitor is charging $2,000 within the same geographic area, it’s clear that the competitor “is serving a different market.” In other words, it’s not an apples-to-apples comparison. “You really have to look at the rates to make sure that you are competing with the right supply,” said Erickson.
Newer doesn’t always mean better
Severine Petras, CEO and co-founder of Priority Life Care, said that it’s important to look beyond the age of a competing property to ask this important question: Has the property recently undergone a renovation? For example, an owner/operator may have increased the total number of units or expanded its delivery of services. “That goes back to not just reading the market report, but also getting some boots on the ground and asking questions,” said Petras.
The units of an older facility may be smaller, the hallways narrower, and the roof lower than today's new product. But if the operator has done a good job managing the property, it can prove to be a formidable competitor, said Plush.
When conducting a market study, Plush never discounts a poorly managed property because that situation can easily be reversed with the correct operator in place. “If you have a building that has nice bones and it's well maintained and the operator is just missing the mark, then that's a competitor.”
The one-day InterFace Seniors Housing Midwest conference, which was held at the Marriott Marquis Chicago at McCormick Place, drew 372 professionals from across the region. Panel sessions focused on a range of topics including development, operations, design, technology, plus the capital markets.
— Matt Valley