When the senior housing boom began five years ago, no one predicted the current stagnation in project development. According to a KPMG LLP study for the Assisted Living Federation of America, the increase in capacity among the top 50 assisted living providers was 50 percent in 1997. Increase in capacity dropped to 30 percent in 1998 and 25 percent in 1999. Last year, capacity increased by a marginal 1 percent.

In the mid-1990s, the senior housing market was wide open. The 65+ population was expected to explode between 1990 and 2010, supporting the need for more senior housing options. The buzz about the industry was very positive and financing was readily available. There was a flood of companies entering the market, including Nashville, Tennessee-based LifeTrust America, Inc. and EdenCare Senior Living Services of Alpharetta, Georgia.

EdenCare, a privately-held operator and developer of independent retirement living, assisted living and Alzheimer's care communities, was established in December 1996. The company was only one of many developers taking advantage of the booming senior housing market during the mid-1990s. EdenCare's strategy of "rapid expansion and aggressive plans for future growth" mirrored much of the industry's.

LifeTrust America's strategy was the same. LifeTrust was formed in 1996 by healthcare giant Clayton McWhorter and opened its first community under the name Morningside Assisted Living in January 1997. The company began with an aggressive plan for growth that included a goal of operating 57 communities in the Southeast by the year 2000. Within two short years, however, LifeTrust and much of the industry learned that the growth rate of the senior housing market and the anticipated absorption of capacity would be different than expected.

In 1999, the words Šover capacity' began to be used to describe the state of the industry. "Over the last five years, the senior housing market has had a tremendous number of projects that have been built," says Carl Johnson, LifeTrust America's chief operating officer. "That, in addition to slower-than-expected fill up rates, has caused excess capacity in the market. As a result, lenders have backed off. So there is a flatline in development at this point in time."

This slowdown in new development provides the opportunity for companies to improve operations and enhance services to seniors. The strong operators have always understood that the assisted living business is, first and foremost, an operating business. The ability to effectively provide high quality services at a perceived value to consumers remains the most crucial component of a well-run community. Developers who thought they could succeed without strong operating talent are being run out of this competitive business.

According to PaineWebber's November 2000 Assisted Living Monitor, there have been 40 projects recently abandoned or halted in Georgia alone. While in the short term the industry seems to be ailing, PaineWebber sees the low construction starts and high project abandonment as evidence of an overall industry realignment.

Johnson agrees: "We decided in fourth quarter 1999 not to pursue any other projects. We reevaluated our position and formulated a new plan for moving forward. Since then we've significantly increased our overall company occupancy." According to Megan Longley, EdenCare executive vice president of marketing, it is the company's focus on details within its buildings, both physical and operational, that allows EdenCare to compete effectively in crowded markets.

Senior housing companies are now focusing on the facilities they currently have. Resources are devoted to operational excellence, including staffing and training, and to meeting growth goals. Once the existing buildings are full and operating smoothly, companies can again begin expanding their reach.

Industry watchers agree that the long-term outlook for the industry is good. The fundamental concept behind assisted living remains sound: consumers want and will pay for a desirable alternative to institutionalization. In addition, the demographics that drove the initial boom in senior housing still exist. It is estimated that there will be approximately 80 million senior adults over the age of 65 by the year 2010. Johnson believes the wave of the 75+ population is just now starting a growth spurt that will continue through 2020. From a demographic standpoint, the industry is just beginning its ramp-up phase. PaineWebber reports that it will take an increase in demand that will not occur until 2005 to restart development and growth of the industry.

"I hate to think it's five years away," says Tom Raney, senior vice president for R.J. Griffin & Company, general contractors headquartered in Atlanta. R.J. Griffin & Company built many senior housing facilities during the development wave. "This last building cycle was big business for contractors," he notes. "Right now contractors are seeing very little new work in this sector. But it is a good thing to know that it's going to be back and that it's not over. As a construction company, we remain focused on the leaders in the industry because as their properties reach capacity, they will have expansion needs."

Johnson says that once the properties that are already built start reaching their fill stage, which most consider to be a 90+ percent occupancy, lenders will start looking at the industry again, and the demographics will support financing on a market-by-market basis. "I don't think we're going to see a massive amount of new development in the next five years, though," he adds. "It's going to be very selective. In the meantime, I think what we and the industry are looking at today are opportunities where there are markets with properties that would fit into our market mix. It would be more of an acquisition of those properties versus a greenfield development."

"We're watching the industry very closely," says Raney. "Now that the market is saturated with facilities, consumers are looking more into the track record of the management and the services they provide before selecting their senior housing community." Raney adds that the real winners in the business are going to be companies who have multiple facility management experience and are focused on maximizing the quality of life of each resident.

EdenCare's approach represents a different method of selective growth. "We're cautiously approaching new development opportunities," says Mark Maberry, EdenCare executive vice president of development. "Many of our projects in the future will be expansions of existing communities to create campuses with a mix of assisted living, Alzheimer's care and independent living. We're excited about building on some of our successful locations, but we realize we must grow much more slowly than we did in the past few years."

In the midst of the boom of the mid-1990s, no one could have predicted the slowdown in development in the senior housing market just a few years later. However, industry participants seem to be going into the next several years with eyes wide open. With a plan of focus on fill up, improving operations, expanding existing communities and looking at selective acquisitions on a market-by-market basis, senior housing companies will be poised to fill the needs of the aging population beginning in 2005 and continuing through the middle of the century.

©2001 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.