Developed for the National Council of Housing Market Analysts By: Susan Burnett (Goldrush Realty), June 2008
Market analysis for age- and income-restricted rental housing, referenced here as “senior housing market analysis”, differs significantly from the analysis of general occupancy rental communities. The tendencies, incomes, needs and wants of senior renter households differ, at times significantly, from younger and/or family households. The demand for age-restricted rental housing should be evaluated with an understanding of these differences. This white paper identifies specific factors to be considered in conducting senior housing market analysis, proposes best practices, and suggests red flags that warrant particular attention when encountered in this type of study.
Factors to Be Considered in Senior Housing Market Analysis
Market Area Definition
- Larger Market Areas: The location and size of a proposed senior development both have a significant impact on the market area. While general occupancy rental communities typically draw the vast majority of tenants from within the boundaries of a relatively discrete market area, senior rental communities often draw tenants from a much larger area. The greater draw of affordable senior communities is primarily due to their scarcity in most markets. Given the lack of comparable units and the desire for age-targeted units and amenities, seniors will generally move a greater distance.
- Age: The age target of a community is often determined by the state housing finance agency through its qualified allocation plan. For example, some agencies will allocate to communities reserved for those ages 55 and older, meeting the age restriction requirements of the Housing for Older Persons Act of 1995. Others may restrict “elderly” housing to require occupants to have a minimum age of 62 years or 65 years.
- Household Size: With the advent of two-bedroom units in senior independent living communities, a question arises whether to set maximum income at a three- person household, using the customary 1.5 persons per bedroom assumption, or at a two-person household which would be typical in the market. Different states have different policies concerning this issue. However, it is incumbent on the analyst to accurately portray the size of the universe of age- and income-qualified households, which NCHMA believes is best estimated by using the two-person maximum.
- Rent Burden: The analyst must consider the potential of declining income over time and the need for senior renters to pay higher portions of their income on housing. Senior householders may pay a greater proportion of income on housing costs than non-senior households because they have fewer demands on their income. Any analysis of this target market should consider the willingness of seniors to pay housing costs in excess of the HUD 30% threshold used in defining maximum LIHTC limits. Many state agencies suggest a rent burden of 35% to 45+% for gross rent. The best practice is always to consider what threshold for rent burden is appropriate for the proposal being evaluated, considering target population, market area, and other significant factors.
- Demand from Outside the Primary Market Area: One component of demand for senior rental housing is seniors moving to be closer to working-age children and grandchildren. In many cases, these households come from beyond the region and state. In general, demand from this component is greater in affluent suburban areas with a large percentage of young and middle-aged residents. The importance of this demand segment varies from market to market and should be validated by the analyst as part of the research into the competitive market.
- Homeowner Demand: Another component of demand is homeowners converting to renters. Even for independent senior living communities that offer limited services, increasing frailty or the desire to limit maintenance chores can generate demand for rental housing. On a national basis the impact of tenure (renters/owners) has a significant effect upon actual projected demand from homeowner conversion. Senior homeowners tend to move into age-restricted rental housing later than senior renters. Increasing frailty among senior homeowners becomes a significant factor as they age. Under many state funding guidelines, the estimated pool of senior tenants can only include 10 to 30 percent of senior homeowners.National data from the American Housing Survey provides some statistical insight as to the movement of seniors from homeownership to rental options. Certainly, a homeowner household’s equity base has an impact whether an income-restricted property would be a living alternative. However, the analyst must consider that LIHTC income restrictions apply to income, not wealth.
- Comparability: Given that there are significantly fewer senior rental communities than general occupancy communities in most markets, the identification of true comparables can often be difficult. The market analyst should identify all senior rental options within the primary market area and compare them with the proposed development. If the existing senior communities are not comparable with the subject development due to the inclusion/exclusion of services/amenities and/or community entrance fees, this should be explained and adjusted accordingly. Service enriched communities frequently command higher rents than can be explained through typical adjustments.
- General Occupancy Market Conditions: In all markets, the best practice is to provide an overview of the market area’s general occupancy rental market. While not senior targeted, these communities are an option for senior renters, especially those unencumbered by special needs. In particular, seniors often reside in single-story products or walk-up units. For independent living senior communities, these general occupancy communities will provide a better indication of achievable rent levels than a senior-oriented, service-enriched, market-rate community.
- Availability of Senior Services: The market analyst should identify senior services available in the market area as well as at competing developments. The availability or proximity of services””such as health care, social service referrals, transportation, and educational and cultural programs can improve the marketability of the senior rental community.
- Recreation and Service Amenities within Walking Distance: Many senior tenants in age- and income-restricted buildings either do not or prefer not to drive. The availability of recreation, shopping and services within walking distance add to the appeal of a senior rental community.
- Design Factors: The relative importance of the following items will vary from market to market and from target tenant group to target tenant group and should be considered by the analyst in evaluating the potential marketability of the subject property.
- Single-story buildings
- Secured entry
- Emergency pull cords
- Recreation amenities
- Common area amenities
- Roll-in showers for handicapped and very frail seniors
- Senior stall showers instead of the traditional tub/shower unit
- Wide doorways for wheel chairs
- Universal design of appliances
Potential Senior Housing Market Analysis Red Flags
- 55+ Households Included in Demand Estimates: Generally, reducing the minimum age of householders to 55 significantly increases the household base compared to a target market with a minimum householder age of 62+, thereby inflating the demand estimate. Regardless of program requirements, the analyst should determine the likelihood of a proposed community to attract householders age 55-64.Depending on rental market conditions and the product to be offered, many of households age 55-64 would not consider residence in a “senior” rental community. That being said, this age segment should not be automatically discarded from an analysis. In high cost areas, the need for safe, sound and affordable housing can overcome the reticence of households with householder age 55-64 to enter age restricted housing. In these cases, the shelter is addressing the needs of adult households without children. Alternatively, the community and unit design may appeal to “young seniors” who would prefer an age-restricted environment, but in a low density building type. For example, a single-story product with individual unit entrances may attract a younger household base than does a mid-rise building with one common and secure entrance. The analyst must make a judgment based on factors such as the competitive environment and product to be constructed.
One argument for including in the demand estimate all households with householder age 55+ is to be consistent with fair housing laws, which allow a rental community to age discriminate. However, for an analyst to conclude that people of a certain age are not likely to move into a proposed development is not the same as saying that they cannot. The best practice is to determine what age groups are actually present in comparable units in the market area and make an educated judgment on the appropriate target market for the proposed development, regardless of the age restriction permitted by the state agency.
- Estimates of Demand from Outside the Primary Market Area: Data vendors providing population and household projections incorporate a net migration component; that is, they make assumptions about the numbers of persons/households moving into and out of the area, which could include seniors moving from out of the area. It is important that when considering demand from outside the primary market area, the analyst understand the data provider’s assumptions in the calculations so that, if this demand component is used, it does not double count movers into the area. If seniors are moving into one area, then they are moving out of some other area; it is the net change that market analysts are concerned with.
- Variability Between Markets: Market variables and product types for senior rental housing vary dramatically from one region of the country to another. Based on these regional and product variances, it is not possible to create a single universal demand methodology for senior housing. Market analysts are advised to consider each market on its own. When undertaking any senior market analysis, the analyst must research components of demand specific to the subject market area. No assumptions should be made based on a previous analysis, unless it was specific to the subject market.