One of the topics that was discussed at the National Investment Center for Seniors Housing & Care’s (NIC) annual conference earlier this month was the type of analysis that senior housing providers conduct when deciding in which town or city to build a new facility. According to speakers at the conference, despite years of experience in the industry, many providers are still using the wrong metrics when determining where to build a facility. These speakers offered some salient advice to industry members that could help them build developments in more profitable areas and attain higher levels of occupancy and revenue in the process. As their revenue increases, so too will their ability to obtain financing for acquisitions and other purposes from companies like the Chicago-based financing firm Cambridge Realty Capital.

Knowing Where to Build

Currently, many senior housing providers use demographics, population statistics, income levels, and penetration rates when deciding where to build a new facility. While these metrics are important, there are other factors that are often more important that developers would be wise to look at when determining where to build a new facility. For example, instead of focusing on penetration rates to gauge demand in a given area, developers should look at the occupancy level of communities in the area they are targeting instead. Penetration rates are supposed to help providers determine if a particular area is oversaturated or underserved with senior housing properties.

However, in reviewing the data, economists find that at times there is little correlation between penetration rates and occupancy levels in certain markets. For example, one would expect an underserved market to mainrain a low penetration rate and high occupancy levels, but in fact, that is often not the case. While a market might maintain low penetration rates, for some reason it will also maintain low occupancy levels. This means that, although the low penetration rate is indicating that the market is underserved and could use another community, in reality it is not, or else the communities that are already in the area would maintain higher occupancy rates.

Therefore, instead of using penetration rates as a deciding factor on where to build a new community, using occupancy rates should be considered instead. If the communities in a particular region all maintain high occupancy rates, that increases the likelihood that demand for senior housing services is strong there, and could support additional senior housing properties.

In addition to looking at occupancy rates when deciding where to develop new facilities, providers should also look at areas where there are opportunities to form relationships that can benefit the community as well. For example, a skilled nursing provider should investigate the hospitals in the area and their readmission rates to see if a partnership is possible, and to gauge the type of demand that already exists for the services that they provide.

Another step providers should consider is looking outside of the nation’s top markets when deciding where to build. For example, during the second quarter of 2014, 90 percent of the construction for free-standing memory care units took place in the country’s top ten markets. While these areas might need all of these facilities, so do smaller, secondary markets, and providers should consider looking at them as well when deciding where to build.

Lastly, as with any new business endeavor, providers should also conduct a thorough analysis of competitors in the region when deciding where to build a new facility.

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