CCRCs and Problems: Much Ado About Likely, Very Little

A product that has seen its share of struggles in the economic downturn is entry-fee CCRCs.  To clarify, not all CCRC models are struggling and not even all entry-fee based CCRCs are struggling as certain regions have seen less housing market fall-out and concurrently, operators have done the right things to keep their census stable during the “down times”.  Where problems have cropped-up is in new primarily new, unstabilized developments, CCRCs in markets where housing sales are significantly depressed, and in larger suburban and urban market locations where options within the price range are plentiful.

The demand curve for virtually all senior housing that is not low or moderate cost is very elastic; many options exist for seniors when it comes to housing.  Perhaps the most elastic of all demand pertains to entry-fee CCRCs, especially those whose pricing is above the median housing price within a geographic region.  As median housing prices fell in virtually every major metropolitan real-estate market, unless CCRCs recast their entry prices to coincide, their new resident markets may have all but dried up.  Certainly, slow housing turnover via sales would chaste the market regardless but all things being equal, pricing would be considered the icing on the cake.  An entry-fee CCRC seeking a premium price (twenty or so percentage points above median housing prices) in a market where housing values were falling and sales were slow should anticipate significant new sales problems and possibly, few to no new sales at all.

Sales/marketing strategy for an entry-fee based CCRC requires a value proposition to be solidly in-place.  The most common entry-fee CCRC includes some form of healthcare coverage (nursing care, assisted living, etc.) for either a period certain or as use to be the most common, for the remaining life of the resident.  Ideally, the balance of the fee (the non-healthcare portion) was set aside as a capital reserve or a combination of capital reserve and debt reserve.  This set-aside allowed for monthly rental prices to remain more stable, reflective of truly the economic costs of occupancy (the market rate philosophy).   If in fact, a CCRC has held to this formulaic standard and is a stabilized community, it should not be too difficult to continue to create a value proposition attractive to new residents.  Healthcare for example, is a hot topic and one that should easily be leveraged for most senior consumers.

Alas, problems have arisen in the sector, most notably with Erickson – one of the largest CCRC developers nationally.  On a case by case basis, there have also been a few other headliners – the Franciscan Sisters in Chicago who built a high-rise CCRC in high rent downtown and a CCRC in Pennsylvania (bankruptcy) sponsored by B’nai B’rith.  The “wind” of these problems has prompted the GAO to conduct an investigative study on the industry and report the same to the Senate Committee on Aging (see my related post on the GAO and CCRCs).  In Erickson’s case, the issues of insolvency have not cost any resident any funds, at least to my knowledge.  While investors and debt holders will take a hair-cut, there appears to be no drastic consumer issue that will arise.  Erickson’s fate occurred as a result of being overstretched on new development, a bit upside down in pricing (see paragraph above), and locked into some management agreements in locations that were heavily impacted by the economic downturn.  The Franciscan Sister”s issue in Chicago mostly involves an expensive, rather upscale project that has struggled making its value proposition clear to potential residents. This project was an enormously expensive undertaking and as such, pricing is at the premium end of the market in an environment that has seen drastic slow-downs in real estate sales and a large fall-back in property values.

With the GAO taking a look at the CCRC industry, there’s bound to be a bit of fall-out and perhaps, a few calls for added regulations and/or consumer protection activity on a state to state basis.  In my opinion, the Feds, busy with other matters more pressing, will do nothing in the form of federal regulation.  The reality in this situation is that the economy was bound to create a few setbacks for a few providers and developers.  CCRCs require a reasonably stable economy and a solid real estate market in order to flourish and prosper.  As such as has been the case across the last two plus decades more often than not, the track record for the industry has been solid.  For those operators in stabilized projects, well-known and priced accordingly, better times are soon ahead.  For developers of new projects, it will likely take another couple of years before the market is ready to assimilate more units, especially those that are priced at a bit of a premium – or higher.