LeadingAge Magazine · March-April 2020 • Volume 10 • Number 02

Defining Our Terms: What is the Middle Market?

February 16, 2020 | by John Mitchell

Serving the middle market is quickly becoming a hot topic among aging services providers. Defining what we need to focus on is step one.

When author Mitch Albom wrote: “we get so many lives between birth and death,” he could have been referring to the housing market evolving to serve aging middle-income Americans. According to a study published last year in Health Affairs, baby boomers—as they have always done, disrupting norms—are redefining what it means to live older and longer.

“Baby boomers are making an effort to stay ambulatory and healthy,” says Tommy Brewer, managing director at Ziegler. "They have more time for fitness, and support systems are developing to help them age in place in their homes.”

Brewer and other experts report that though the aging market has long had models to serve those in the upper and lower-income brackets, the new frontier is in the middle market. While there are differences among the experts who are in the middle retirement housing market, there is consensus: The middle market is composed of those entering the retiree ranks who have too much-combined income and assets to qualify for a public housing subsidy, but not enough to buy into traditional life plan communities.

Middle Market stock photo

Mario McKenzie, a partner at CLA, estimates the middle market would start at 80% of median income in a given market. A white paper he co-authored, "2019 Senior Living Trends Report: Redefining Your Growth Strategy," states that middle market senior pricing must bundle services and housing together to substitute for the consumer’s same cost of living in their home.

“It’s not a perfect science to determine an actual income level as each market varies [see the sidebar for more detail], which requires an understanding of each specific market. But this is the concept: Understand what middle market projects are being built in a market area to better understand household income levels being targeted,” says McKenzie. “Targeting that income level becomes a good starting point for approximating the sweet spot for [an] affordable middle market product.”

There are significant challenges, according to Beth Mace, chief economist at the National Investment Center for Seniors Housing & Care (NIC). She is one of the authors of the Health Affairs study titled “The Forgotten Middle: Many Middle-Income Seniors Will Have Insufficient Resources for Housing and Health Care.” According to the authors of the May 2019 published article in Health Affairs, it’s the first study to project senior housing and health care needs by income group.

The authors found that the number of middle-income seniors will nearly double by 2029 to 14.35 million over the age of 75. Of these, 8% will have a cognitive impairment, 60% will have mobility limitations, and 20% will have high needs. Yet, more than half—54%--will not have the financial resources to pay for traditional senior housing and related support care.

“There were a lot of interesting takeaways in the study,” says Mace. “We can now define the middle market as teachers, firefighters, government workers, and nurses, who are among those who will not have the means to afford the most common options for senior housing. Also, there will be fewer married people compared to [the] 61% in the group who are married today. That means they won't have a spouse to take care of them."

Brewer envisions a reboot of senior housing options for the middle market, which he doesn’t think is currently being served very well. The current entry fee model to move into a life plan community is a barrier for many in the middle market. He believes more rental options are needed. Yet, he acknowledges that exactly who is in the middle market can be challenging to determine.

With both traditional nursing home and life plan community construction trends falling or flat due to the high cost of land and bricks and mortar, Brewer thinks models that serve people in and close to home offer promise serving the middle market. This would include in-home nursing and therapy care. He also sees a growing trend where those in the middle market contract with life communities for dining, exercise, and social support services. The trick, he says, is finding the right price point. Another option, according to Brewer, is converting apartment complexes to provide the health care and socialization community services sought by middle market seniors.

A parallel issue impacting the finances of baby boomers in the middle market is the viability of home equity, long presumed to be a bastion of monied reserves for this demographic. An analysis by real estate site Zillow projects that from 2017 to 2027, 9 million homes are forecast to be listed on the market. Much of this glut can be attributed to baby boomers transitioning to assisted living and normal mortality, according to Business Insider coverage of the Zillow analysis. However, many of these homes are located in places younger replacement buyers don't want to live, such as 55-plus retirement communities or rust belt states. Millennials and Gen Xers prefer to live in large urban areas. They also want smaller, modern homes rather than the large and increasingly outdated homes baby boomers have built.

Jennifer Molinsky, senior research associate at the Harvard Joint Center for Housing Studies (JCHS), points out another complication. A common financial behavior among baby boomers is to view home equity as an asset they want to leave to their children, or only tap into in an emergency. Charlie Trefzger, president and CEO of Affinity Living Group, a large for-profit that is trying to create an assisted living model for the middle market, echoed a similar sentiment. He reports seeing more and more instances of multiple generations living in the same home, with baby boomer parents and grandparents. Such a trend takes any home equity out of play as a financial option for a middle-market housing transition.

Molinsky disagrees with the idea that millennials won't move away from urban centers to the suburbs. Suburbs that offer urban-like amenities, such as walkable town centers, are more likely to entice young buyers, especially as they seek quality schools for their children. Also, JCHS’s 2019 State of the Nation’s Housing Report found that housing construction overall has not kept pace with demand. The shortfall has created upward pressure on housing prices and rents across demographics. However, Brewer observes that the homeownership of each succeeding generation is not as high as previous generations. He doesn't think that home equity will be as dependable a source of funding going forward.

John Cochrane, president and CEO of HumanGood, Pleasanton, CA, notes that home equity has been well-protected and positioned in his state, where home sales and prices have been robust in the past decade. The large nonprofit, which serves 8,000 seniors, reports that it is developing a middle-market strategy.

He expects to test a middle market prototype in the next 18 months. There is, Cochrane says, no single model for reaching and serving the middle market. He envisions a mix of options. They might include a platform used in their affordable housing division that integrates intergenerational housing, along with retail, commercial, and educational uses, and is designed to fit into and interact with the surrounding community. HumanGood also finds inspiration in the Minka project, a combination of minimalist, small design, yet very adaptable to the individual.

(Editor’s note: Minka Homes is the latest brainchild of innovator Dr. Bill Thomas.)

“We do a good job serving the top 20% and lower 20% of the population," says Cochrane. “The remaining 60% is a diverse group that has been largely invisible to traditional providers and is sometimes thought to be either unresponsive or unreachable. This is only true because existing products are not designed to fit their lifestyles, aspirations, or financial realities. We believe it is the biggest market hiding in plain sight and presents us with a great opportunity.”

The experts are optimistic that senior housing providers will rise to the occasion. Mace believes it will take collaboration from both the public and private sectors, at times working together to develop solutions. Trefzger reports that his for-profit company is now working with rural not-for-profits to secure financing to develop new residential models.

McKenzie thinks deregulation is needed to loosen up capital. This would allow needed innovation in the sector where housing and health care intersect but is heavily regulated. He also notes that the for-profit sector brings new products to market faster, with better scale. However, the nonprofit sector, he says, has been a force for good with better documented health care outcomes, although at times with a narrower market segment focus.

“I’m always an optimist; you have to be if you’re a leader," says Cochrane. "Policy is always driven by the needs of the population we serve, and we will adapt."

Calculating Price Points

Mario McKenzie of CLA detailed his calculations for determining the price point for middle-market housing:

"When we are doing market work for an area, we inventory existing capacity. So, if there are 5 [communities] offering services, and on the average the lower-priced units were […] at a monthly service fee of $2,500 for independent living, that would convert to an annual income-qualified market of $45,000 ($2,500 x 1.5 other living expense factor x 12). If the median income in this market were $35,000, then the middle market could be those income and age qualified households with income between $28,000 ($35,000 x 0.80) and $45,000.

“In many market study methodologies, the independent living inventory equates to approximately 20-25% of the age and income-qualified households, which means 75-80% of the market is staying home. I suspect that as net worth and income drop, housing alone becomes a bigger percentage of disposable income and the percentage of individuals not able to afford independent living offerings increases. With less to ‘dispose of,’ it becomes critical that rents and services together compare to what the individual currently pays to live at home.”

John Mitchell is a writer who lives in Cedaredge, CO.