NIC charts the changes for seniors housing industry

As Robert Kramer, executive director of the National Investment Conference for the Senior Living and Long Term Care Industries (NIC) remembers it, there were only about 400 people in attendance at the first NIC conference held in 1991. And only one person was willing to admit that he was a lender to the seniors housing industry.

What a difference six years makes. At the most recent NIC conference held in October 1997, there were more than 1,300 attendees, half of which were lenders and investors and the other half owners and operators of senior living facilities.

"When we started NIC, we had product in search of capital. The last two years, especially this last year, we have capital in search of product. That's how things have changed. Overall since 1991 we've seen over 20% growth per year in attendance at the conference."

As the seniors housing industry has grown in popularity among lenders and investors nationwide, it has been paralleled by the growth of NIC's research efforts. In fact, thanks to the success of its annual conference, NIC's overall research budget over the next five years will amount to about $2 million. For 1998 alone, NIC will spend nearly $500,000 on its research efforts.

Parallel paths What is NIC and why the emphasis on industry research? The organization's purpose is best exemplified in its own mission statement:

"Founded in 1991, the National Investment Conference is a nonprofit educational forum, the proceeds from which are used to fund research and other efforts supporting the process of efficient capital formation in the senior living and long term care industries."

"NIC was started as an 'information bridge' between the lender/investor community and the owner/operator community," says Kramer. "The primary focus was on educating the financial community about the seniors housing industry and what the opportunities are. Initially the focus was more on stimulating capital flows to the industry. In fact, that was in our initial mission statement. That mission statement has now been adapted to reflect the changes that have occurred in the industry, to one of providing for efficient formation of capital."

The annual NIC conference provides a convenient venue for industry information, both in terms of networking and in terms of the educational component and the release of research. But today the conference has become only one part of NIC's total volume of work. Its major focus is information dissemination, and the conference has been the engine to fund the research.

One of the more interesting tenets behind NIC's research effort is the hands-on involvement from seniors housing industry leaders. NIC's research projects committee includes Geoffrey Dohrmann of Institutional Real Estate Inc.; Raymond Lewis of Heller Financial, Inc.; Anthony Mullen of Traditions of America and committee chairman; Penny Pritzker of Penguin Group L.P. and Classic Residence by Hyatt; and Harvey Singer, NIC research director.

Mullen says the key to NIC's research success is staying focused on what both owner/operators and lender/investors really need.

"Certainly it helps to have a hot industry, and there's no question the growth in the NIC [conference] attendance is due to that. But if you look at it, we are customer driven, we are focused on what is important. Unlike many of the other real estate-based industries, there was very little if any outside research being done. There was a real void that needed to be filled, and the NIC stepped in to fill that void. We've tried to stay focused on the applied side of the research rather than the theoretical side. We asked the lender/investors as well as the owner/operators what research needs to be done in order for them to do a better job in their business, which is to serve senior customers. So if you want to know something about this business, particularly from a finance and investment side, people think of NIC and that's the way we wanted it."

As a major investor in the market, Penny Pritzker echoes those sentiments. "We have two companies now, and are desirous of investing more capital in the senior housing business. I think NIC is where the action is. In terms of the people who attend the conference and the types of presentations and the thoughtfulness about the industry. It's a leader. NIC is really a place where people are talking about investment and investment performance and company performance and the bottom line of the industry. As an investor that's a place where we want to be active," says Pritzker.

For Raymond Lewis, the conference has been invaluable. "Every year that I've attended the conference, I've come away with new contacts and real transactions. You can't place a value on that. It is probably the single most effective marketing event that we have in the year. The relationships that I've been able to establish through that conference have led to hundreds of millions of dollars of financing volume. That is the conference," says Lewis.

Over the years, the conference has changed to reflect the changing nature of the industry. "Back in '91, we had a financial community that, to the extent that they even knew about this industry, was very skittish and saw it as high risk in terms of the problems of the high-end congregate model of the '80s," says Kramer. "We believed then and believe now that the key to this industry growing and maturing was getting good data, good research, good information. Specifically we believed early on that it was essential in the long term to get institutional investors, and particularly pension funds, to have a reason to look at this industry. But for them to do this, they would need reliable benchmark data. When it comes to the pension funds, investing is done by them as fiduciaries. And as fiduciaries, they have to show that their decisions are reasonable, the so-called 'prudent man test.'

That is one reason Geoffrey Dorhmann is involved in the NIC research projects committee. He brings to the table an intimate knowledge of the institutional investor market.

"For an institutional investor to make a commitment to an area like seniors housing, they really have to understand everything there really is to know not just about what it can do in terms of return, but also in terms of risk. That's important from the standpoint of fit. So the reason I'm involved in the committee is to make sure that the committee is focusing on areas that are going to be useful to the institutional investment community," says Dohrmann.

One of the most interesting research projects currenty under way is the eventual creation of a performance index for the seniors housing industry that tracks investment in terms of risks and returns for this sector. The index could be similar to the Russell/NCREIF Index for investments in other institutional real estate sectors, for example.

"Unless the senior housing industry can put together similar type statistics, it's going to be hard to attract the kind of equity capital it really needs to be able to grow," says Dohrmann. "It has a lot of debt available to it. What it doesn't have available to it is a lot of hard cash equity. The pension fund community is well positioned to be able to provide that equity if it can feel comfortable with the investment."

"Our goal has been to provide these kinds of benchmarks," says Kramer. "Long term, we want to see performance indexes for the major sources of money -- public and private, debt and equity. That means two things. One, what's an approximate sense of how much money is invested and then secondly, how well overall are those investments performing. What are the returns."

Back to the future It's probably no secret that the seniors industry went through a period of wrenching change in the late-1980s and early-1990s, along with nearly every other major property type including hotels, office buildings and retail. In particular, the congregate care sector was the hardest hit.

"There were lenders there at the 1991 conference that didn't want to say they were lenders because they weren't currently accepting any applications," says Kramer. "That's where we were in 1991. An industry coming off the problems of the '80s, congregate boom to bust, of overbuilding, of not understanding the market, of people getting into the industry and seeing it just as real estate and not understanding the service component and the "aging in place" of the populations they were serving, of many developers going after the high-end product. There were a number of distressed properties. There were projects that weren't able to fill up as fast as planned, and when they did fill up, the properties aged and the turnover rate was high. These problems led to the fact that the sources of capital were very concerned about further participation because they had been burned in the '80s. Others just were unaware of the industry."

And here's a refrain that you hear over and over from people who have spent much of their lives working in the seniors industry: "A lot of people got into the industry that didn't understand it," says Kramer.

Perhaps that is what led to the creation of the wrong property type targeted for the wrong market. As Harvey Singer, NIC's research director, points out, "The models that were built were upscale and were built on the 'cruise ship' model in the sense that there were a lot of amenities, there were a lot of activities that were perhaps more relevant to the active adult market and the 'young-old' market, the 56-to-64 year old. But the fact is that the average age of entry into congregate properties is the upper-70s and the average age for more healthcare intensive properties is much higher. So the real estate that was built wasn't targeted to the right customer, wasn't built for the right customer, and therefore was not a good investment."

As Kramer notes, back in 1991 "there was very little capital available, but there's no question there still was market demand for the right product, but the operators were finding that money was very hard to come by and it was very expensive because it was seen as a high-risk venture."

Assisted living breaks cover So when did it all turn around for the seniors housing industry? Why has capital chosen to come back by the truckload?

"I don't see one year or one event that you can point to, like a tax act type change, where you say, 'That changed the whole playing field.' What happened was the industry went through a period of shakeout, absorption and maturation," says Kramer. "Shakeout meaning many got out of the industry in the late-'80s and early-'90s -- those who didn't belong in it. Troubled properties were absorbed and repositioned by the operators who knew what they were doing. For instance a lot of congregate was converted to assisted or they added home healthcare and so forth."

But perhaps most importantly, developers and operators became more focused on the needs of the older consumer. "They recognized the needs-driven market and they responded, which explains such phenomenon as assisted living."

And there you have it. You simply can't talk about the seniors housing industry today without the words "assisted living" coming up, and for some sound reasons. Though assisted living is anything but a new trend in the industry, it has taken off in the lastthree years in particular. That is in no small part the result of some heavy hitters sitting in New York City in late-1994 and early-1995 who recognized the possibilities of taking this segment into the public markets, along with much of the rest of the commercial real estate industry.

"If I had to say one event has captured the eye of the investor, it would probably be the assisted living companies that went public. That has put this industry on the map for Wall Street But he's quick to point out that it isn't just assisted living. "It's important to see that what happened was that operators were more focused on determining the wants and needs of older consumers -- and what they were willing to pay for."

There appear to be many sound reasons for the continued growth of the assisted living sector. "Not only does the market prefer it and want it, because it is a residential-type option not institutional, but it is also less expensive. Projects are being evaluated locally, rather than just based on national demographic projections. Many developers and investors now realize that they need to tailor a project to the community's specific needs, rather than just looking at the growth of age groups and believing all they have to do is put up seniors housing and they will come," says Kramer.

Other property types Believe it or not, though assisted living has racked up its share of headlines in the past few years, there are other property types to consider in the seniors housing industry.

CCRCs According to many industry observers, the continuing care retirement community (CCRC) sector is a potential sleeper that may be ready to awaken in the next few years.

"During the '90s the interest in CCRCs lessened, the reason being the amount of capital needed to do a continuing care retirement community," says Kramer. "It was a much larger project and took a lot more money. Secondly it was difficult in many states to get CONs (certificates of need) for the nursing beds. What we are seeing now, and our Lender & Investor Survey this last year confirmed, is that there is an upswing in interest in this product type. A number of trend indicators would suggest that we're going to see an increased focus on communities that offer a continuum. It makes sense in terms of what the consumer wants -- not having to move again -- and it makes sense in terms of managed care payers and what they're looking for, and it makes sense in terms of being able to keep your resident."

Congregate housing As a sector, congregate housing continues to be successful because there is much consumer demand for it. "One of the differences is that a lot of the congregate care facilities have some level of care services on site. It may be a separately contracted home healthcare company or group of companies that come in or it may be home healthcare actually provided by the operator. But it's some sort of provision that recognizes these aren't 67-year-olds. These are usually 82-year-olds or even older. For example, consider Holiday Retirement, the largest seniors housing owner/operator in the country. Though they do strictly congregate, they have arrangements with home healthcare companies to come into their properties and provide home healthcare services that enable those residents not to have to move. Many congregate communities are either building separate assisted living wings on the same campus, or if there is no room for expansion, converting wings or other areas," says Singer.

Nursing homes Outside observers of the seniors housing industry may wonder why anyone would want to own or invest in a nursing home, given the negative perceptions generated on nightly television news programs. But this sector is actually going through a period of pretty dramatic changes to compete in a more lucrative seniors environment.

"There is the impact of the assisted living industry that is taking many of the residents who used to fill nursing home beds at what was called the intermediate care level," says Kramer. "So the profile of the resident in a nursing home has changed. Back in 1994 sub-acute was really hot and everyone was wondering if it would become a new industry sector and the jury is still out as to whether this will occur. But the growth of sub-acute care has been at the center of what I would call the transformation of the nursing home. Residents in nursing homes are at much higher acuity levels than they were back in the early-'90s. There are more residents in nursing homes for shorter stays, meaning people who might be undergoing rehabilitation in some way or another."

Surprisingly, with all of the changes taking place and negative consumer perceptions, nursing homes have still seen a great deal of investor interest.

"It's nice when you have a supply-constrained environment, and that's what you've got with the certificates of need (CONs), and the evidence for that is on our latest Lender & Investor Survey. Even with the surge and popularity in assisted living, close to 80% of those responding said they were still active in financing nursing homes," says Singer.

"Investors and lenders continue to like nursing homes," says Kramer. "They know they have a restricted supply and even though nursing home occupancy has gone down over the last couple of years, still there is no question that investors are very bullish on nursing homes. But I stress that those are nursing homes with operators who are changing as the market is changing. Those that aren't changing, those that continue to have an institutional appearance, those that are not able to deal with a much higher acuity resident, those that are not able to deal with the short-term medical stay are going to have a very tough time competing."

The bottom line for the nursing home industry seems to be -- change or be run over.

A more fluid model The increasingly competitive nature of the seniors housing industry is creating more new types of nontraditional care facilities then ever before, including more companies looking into so-called "hybrid models."

"They may not be full-scale continuing care retirement communities, but it might be a congregate with an assisted living wing. Or it might be assisted living, but with a dedicated unit for Alzheimer's care. Or it might be assisted living with a dedicated nursing home wing. If you look at Marriott and CareMatrix and a number of other companies, you are seeing more and more hybrid products. They aren't necessarily a complete continuum, but they're either assisted plus Alzheimer's, or assisted plus nursing, or congregate plus assisted, or independent plus assisted. That's a trend we expect to see more of in the future," says Kramer.

Some of NIC's latest research shows real market potential for active adult and affordable housing segments, which haven't had a lot of attention outside the industry.

"Our national housing survey showed that on the active adult side there is a lot of demand for the product," says Kramer. "All of the attention has been on the much more need-driven part. Secondly, because of the fact that if you're wealthier you tend to be healthier, those with lower incomes are far more predisposed to move in to dedicated seniors housing because they want and need the services and the care. That means though the margins may not be as great, these projects fill up much more quickly so that their marketing budgets and lease up times are nowhere near what they are with the high-end product. Those companies that are delivering a good product to the moderate- to middle-income market are finding a higher level of success. We expect to see more people looking into this market. There is three times the demand from those with annual incomes under $20,000 as compared to those with incomes over $50,000. That's significant."

Perhaps the most important offshoot from the assisted living success story is a concept that the industry has known about for a long time but is only now beginning to implement in earnest -- "aging in place."

"In the '90s, more and more industry providers have combined residential housing with access to a wide range of support services. This enables the residents to 'age in place' and the provider to keep residents longer. The result has been a proliferation of product types and models for different market segments. That proliferation will only continue to increase. It's variety, not one size fits all," says Kramer.

Without question, lenders as well as operators have had to become much more sophisticated in their knowledge of the industry in order to avoid repeating the mistakes of the 1980s, where too much capital fell into the wrong properties.

"Probably the most important change has been the maturation of both underwriters and owners and operators. There are more experienced owners and operators as well as underwriters and they understand that this is a service-intensive business. They know that they have to deal with the residents when they move in and serve them and meet their needs. They recognize increasingly that they're going to have to have good market feasibility studies and not just simply cookie-cutter demographic projections," says Kramer.

Charting the changes Of course the industry has had numerous conferences since the early-1990s to network and learn more about what's shaping the future of the seniors housing industry. Still, the industry stands at a crossroads of sorts in terms of its ability to adequately measure not only the capital flows into seniors housing but also the performance of existing properties as investment vehicles.

"It's difficult to measure the exact amount of capital that is flowing into the industry, but we can use a couple of things as surrogates for that," says Singer. "One is the attendance at NIC. Among the 400 attendees at the first NIC conference, there was hardly a lender to be found. Today, lenders and investors make up half of our over 1,300 attendees."

The other surrogate to measure capital flows to the industry is NIC's annual Lender & Investor Survey. "We know that our survey sample represents only a portion of the total business, however, just from our respondents we saw $3 billion in debt and equity placed in the industry in 1993," says Singer. "This number rose to over $4 billion in '94, to close to $5 billion in '95. This growth continued in '96 and for 1997 respondents anticipated placing over $8 billion. So those flows are getting larger and they're accumulating. While the industry does not have a precise accounting for the total amount of capital flows, NIC is tracking larger and larger pools of funds that are being invested in senior living and long term care."

NIC's research evolution Let's take a minute to follow through the course of NIC's research program.

Though it has always used its conference to fund research, in the first few years of its existence NIC's resources only permitted it to contribute to research projects that others were doing that it thought were meeting important data needs of the industry. For instance, it supported then and continues today to fund the American Seniors Housing Association's annual State of the Industry Report. "We think this is an excellent, essential study. Our first research dollars went to support that study. And we've stepped up our funding for the ALFA (Assisted Living Federation of America) Industry Overview," says Kramer.

As early as 1993, NIC began publishing its annual NIC Review, where it solicits and then publishes some of the best research articles on the seniors housing industry.

In 1994, NIC conducted its own first study, called the 1994 Lender & Investor Survey. In 1995 NIC teamed up with the Harvard School of Public Health and the American Health Care Association to do the Harvard Long-Term Care Awareness Study. Thus began NIC's new emphasis on looking at the demand side of the industry, at consumer preferences and consumer awareness and knowledge. It asked such things as what do seniors know about seniors housing? How much do they understand about it? What kind of money do they see themselves putting towards it? How do they think they're going to meet their long-term care needs in the future?

In 1996, NIC published its first piece of research that was specifically aimed at the institutional investment community, called The Investment Case for Senior Living and Long Term Care Properties in an Institutional Real Estate Portfolio in partnership with Price Waterhouse. "That was significant because we addressed particularly the development of an effective structural demand model," says Kramer. "In other words, a model that would look at how many seniors were age and income qualified, then we looked at health needs, and we looked in terms of home ownership. So we used several different structural factors and variables to come up with an effective demand model. We also surveyed what data is available in terms of supply information. Our conclusion was that we had poor supply information other than for nursing homes."

For example, according to Singer, the estimated number of assisted living facilities ranged as high as 65,000 and as low as 4,000. "Part of that is because of the definition. The simple answer is there aren't very good numbers. So if you're looking at potential capital flows and capital needs for an industry, and part of that is determining the imbalance between existing supply and existing demand, the demand numbers are a little easier to get your hands on, but the supply numbers have been all but impossible. So that is mapping out a major direction for our research in 1998."

Also in 1996, NIC released its second Lender & Investor Survey and produced its first Lender & Investor Directory. It also released the first academic research monograph devoted exclusively to seniors housing, jointly with the American Real Estate Society (ARES), one of the country's premier academic real estate research groups.

"That was significant because it's that kind of research that has to be available when a director of research for a pension fund starts investigating this industry," says Kramer. "Each year we're awarding prizes at both our own conference and at the ARES conference for the best research papers on seniors housing. Again, we're trying to stimulate applied researchers doing work on this industry so that we can build the volume of data and studies available."

Just last year, NIC released its first National Housing Survey of Adults Age 60+. Rather than working from a structural point of view on demand, this research looks at the industry from a consumer preference point of view, asking such questions as what do they say are their intentions with regard to seniors housing? What information have they gathered? What have they done about it? NIC is now planning to expand this study in 1998 to more than double the overall sample size so that it can do valid break-outs by region of the country and by product type.

What's ahead in 1998? This year brings more substantive research from NIC than ever, including its first assisted living facility resident survey. But its two major projects for the year are:

1. The expansion of the National Housing Survey to a much larger sample size and to include questions that enable further differentiation between those who do move to seniors housing and those who do not.

2. A more definitive industry supply count. "This is our most critical new project in 1998," says Kramer. "We hope to release this in October but it will be an ongoing project updated on a regular basis and broken out by product type as well as by geographic region. We have good counts for nursing homes, but in terms of assisted living, congregate, CCRC, seniors apartments and so forth, most of the information is anecdotal. We're going to cross-check it with other major databases. We believe this is essential information because if you know the demand but don't know what the present supply is, it's pretty hard to accurately determine where to invest or develop."

"We've been working on both the demand and supply side to collect good information and data, seeing these as building blocks to being able to put together a performance index for the industry which tracks both public and private sources of capital, debt and equity. This will be done in stages. Our goal is to develop a recognized performance index for the industry," says Kramer.

Much of NIC's effort will continue to focus on educating the industry itself to be more active participants in the process of information gathering.

"As an information bridge, we are trying to help the industry understand that for it to be able to get more efficient capital and to be able to get more access to the major institutional investors such as pension funds, there must be good performance data available. And though, as a private operator, keeping such data may seem cumbersome, this data is essential for the future growth and health of the industry. It is not an option," says Kramer.

NIC hopes to work with other industry groups to ensure that the total number of quantitative and qualitative research projects does not overwhelm the industry. "Our hope would be that by working together we can avoid overwhelming the individual operator with too many surveys, many of which ask the same questions. If that happens, we'll get few surveys filled out and the industry will be the poorer," says Kramer.

Better standardizing of industry product type descriptions will also go a long way in providing better measures for the industry.

As mentioned, NIC has already launched and will release in 1998 an in-depth profile of residents at assisted living facilities. "We wanted to survey not just the facility management but the resident, to see the profile of the resident, their age, how far they've moved, where they've moved from, how they were paying for it, how infirm were they upon moving in and presently, and what compelled them to move."

NIC also is releasing a new underwriters' resource guide in early 1998. "The intent is to provide a guide for new sources of capital or new players to the kinds of information they ought to be considering, along with the due diligence kinds of requirements and the areas that they ought to be examining. Although we don't envision this as a manual in terms of an operating manual, we do envision it as a handbook that tells underwriters what's important and where they're likely to find key information," says Singer.

"We want to use this guide to respond to the numerous phone calls that we get at NIC from people who, if not completely new to this industry, are not really experienced in it from an underwriting point of view," says Kramer. "They may have a very good feel from their background about certain questions they should be asking, but they don't know the industry-specific questions they should be asking management or how to evaluate the information from management."

Last but not least, the NIC website (, just launched in January, is now up and running. It includes an extensive library of all of NIC's research publications, as well as news about the organization and the annual conference.

Plan now to attend NIC's 1998 annual conference at the Grand Hyatt Washington, D.C. at Washington Center October 14-16, 1998.

A) Seniors apartments; active adult communities; owner-occupied.

B) Congregate care facilities, independent living units in CCRC facilities;, and board and care (services only provided).

C) Assisted living facilities; assisted living in congregate and CCRCs; and board and care (services & care provided).

D) Nursing homes; skilled nursing units in congregate, CCRCs and hospitals.

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