I n d e p e n d e n t L I v I n g
p e n e t r a t I o n r a t e s :
o n e I n d I c a t o r o f
M a r k e t d e M a n d
Dixon Hughes PLLC
With feasibility and marketing firms calculating penetration rates based on different
methodologies, varying terminology and subjective assumptions, how can various
stakeholders get comfortable regarding acceptable penetration rates for a market?
A penetration rate is only one indicator of market demand for independent living in a
continuing care retirement community (CCRC). Other factors including velocity of pre-
sales, marketing efforts of the provider, occupancy levels of comparable communities,
the number of planned comparable units in the market, reputation of the provider
and education of the consumer regarding a senior housing product should also be
considered when estimating the depth of the market for a project. If this is the case,
then why do so many stakeholders rely on independent living penetration rates as one
of the key indicators of market depth?
For more information about
The analysis of penetration rates in this document represents the approach,
penetration rates or other senior living
methodologies and interpretations of Dixon Hughes PLLC, a leading provider in
healthcare advisory services, in an attempt to understand and define the thinking and
process behind this calculation.
These methodologies are generally used in a feasibility study to assess events
occurring as part of the permanent financing process when a product has already
been programmed and designed. When a project is in the development stage, other
techniques in addition to these calculations are used to determine unit mix, pricing,
services and programming. Again, a penetration rate is only one indicator of a project’s
potential for success and should be used in conjunction with a number of other factors.
What is a penetration rate?
Penetration rates help measure the degree to which a market is either underserved
or saturated. Simply put, what percentage of the qualified market must be captured
to achieve stabilized occupancy? Different types of penetration rates give insights into
various stages of a project’s development.
Dixon Hughes typically calculates three penetration rates to
Primary Market Area Definition
assist in determining market demand for a project:
The primary market area (PMA) for senior living services
Project Penetration Rate
is typically defined as the geographic area from which the
majority of prospective residents reside prior to assuming
Net Market Penetration Rate
occupancy at a project. The PMA for a project is typically
Gross Market Penetration Rate
determined by the origin of its depositors, the historical
The project penetration rate and net market penetration
experience of the provider (if applicable) and/or the
rate evaluate market demand upon entry into the market
experience of existing providers in the PMA.
place (i.e., the penetration year) whereas the gross market
Percent of Seniors Originating from the PMA
penetration rate evaluates the impact of planned units over
Once the PMA is determined, the percentage draw from
a period of time. As penetration rates increase, units may
the PMA is applied in order to estimate how many age- and
become more difficult to fill. However, higher penetration
income-qualified households would originate from the PMA
rates may not always be an indication of the difficulty in
versus other areas. This number can be subjective and can
achieving expected occupancy levels. Some markets may
vary based on the firm and/or the individual performing the
have a higher acceptance level for senior housing and
calculation. Based on the Dixon Hughes benchmark database,
may support higher penetration rates. The occupancy of
the draw from the PMA typically ranges from 70 to 80 percent.
existing communities in the market can be a key indicator
The percentage draw from the PMA can be lower if a project
of determining the acceptance of a product and the depth
is located in an area considered to be a retirement destination.
of a market. Existing communities that are fully occupied
with active waiting lists may be an indication that the market
Number of Existing and Planned Units in the PMA
is underserved. Alternately, low occupancy at existing
Determining the number of existing and planned units to
communities might indicate that market supply exceeds
include in a penetration rate is one of the more subjective
demand. Other factors may exist, including the possibility
components affecting the calculation. While there may be
that available product and service offerings do not meet the
a number of existing and planned units in the PMA, it is
expectations of consumers in the market. Qualitative market
important to consider which units are actually comparable
research, such as direct mail surveys and focus groups, can
to a project. Do the units have a similar pricing structure
help providers gain a better understanding of the market’s
and income qualification? What are the product and service
acceptance of different types of senior housing products or
offerings at the community? Dixon Hughes typically uses a
conservative approach and considers all units with similar
services to be competing for the same pool of age- and
Dixon Hughes has compiled a database of approximately 90
senior housing projects financed since 2000 that benchmarks
important criteria, including penetration rates.
In addition, it is important to know when planned comparable
units are entering the market – as either new communities
What are the basic components of a
or expansions to existing communities – and at what stage
penetration rate calculation?
those communities are in the planning process (i.e., zoning
There are five basic components to consider when calculating
approvals, priority campaign, pre-sales, etc.). Determining when
an independent living penetration rate:
new comparable units may become available is critical because
it can impact pre-sales and ultimate fill-up of a project if a
Primary market area definition
significant number of units are planned to open at the same
Percentage of seniors originating from the primary
Number of Units Available Due to Attrition
Number of existing and planned units in the primary
In order to calculate the net market penetration rate, the
number of units to be absorbed in a given year must be
Number of units available due to attrition
determined. Available units could enter the marketplace via
Age and income qualification
planned communities and through the turnover of existing
units in the PMA. Therefore, it is necessary to take into
Ziegler refer to their calculations as “penetration rates” and
consideration the number of existing units in the PMA that
would be vacated due to attrition. According to the American
Regardless of the industry term used to describe these
Seniors Housing Association’s (ASHA) The State of Seniors
calculations, project penetration rates show a project’s
Housing 2006, the annual resident turnover for rental and non-
inventory of units relative to market depth, whereas market
rental CCRC independent living units is 23.0 percent and 11.2
penetration and saturation rates show the market’s total
inventory of units relative to market depth. These calculations
Age and Income Qualification
assume that all communities in the market are competing for
In order to qualify for residency at a
the same or similar pool of age- and
senior living community, a prospective
resident must meet a particular age
The penetration rate methodology
requirement – generally 62 years
While there are multiple
utilized by NIC differs from BB&T,
of age – and demonstrate sufficient
penetration rates, each one
Fitch and Ziegler. NIC assesses market
financial resources to pay the initial
demand in an aggregate fashion, dividing
has a different purpose and
entrance fee, required monthly service
the total number of independent living
fees and other expenses not provided
set of components. They all
units in the market by the total number
by a project. Accordingly, management
intend to paint a picture of the
of households age 75 and older in that
typically establishes certain criteria
estimated market demand for
market. NIC does not consider an
to identify prospective residents
independent living units.
income qualification; the calculation
who would be eligible to reside in an
is simply a measure of overall market
independent living unit at the project
(i.e., annual income of approximately
1.5 to 1.7 times the annualized monthly
The methodologies utilized by Dixon
service fee at the project). For the purpose of quantifying the
Hughes are similar to BB&T, Fitch and Ziegler for project
number of age-qualified households in the PMA, management of
penetration rates and gross market penetration rates. For all
a project typically assumes that households age 75 or older are
three penetration rates (project penetration rates, net market
most likely to move to an independent living unit at a project.
penetration rates and gross market penetration rates), Dixon
According to AAHSA’s Continuing Care Retirement Communities:
Hughes adjusts the total independent living units at a project
2005 Profile, 1st edition, the average age of residents moving into
and/or comparable units to reflect assumptions regarding
independent living at a CCRC was 79 years old.
occupancy, the percentage of units expected to be filled from
the PMA, and the percentage of units expected to be filled by
How are industry penetration rates calculated?
residents over the age of 75.
While there are multiple penetration rates, each one has
The project penetration rate, as calculated by Dixon Hughes,
a different purpose and set of components. They all intend
is similar to BB&T’s “project penetration rate” and Fitch’s
to paint a picture of the estimated market demand for
“penetration rate.” However, Dixon Hughes’ methodology
independent living units. Although terminology varies within
varies slightly from Fitch and BB&T in that only planned
the industry, we have found the methodologies applied for
project units, not existing units at a project, are included in the
feasibility studies to be generally consistent.
We have analyzed the penetration rate methodologies of BB&T
The net market penetration rate calculated by Dixon Hughes is
Capital Markets (BB&T), Fitch Ratings (Fitch), the National
similar to Ziegler’s “penetration rate.”
Investment Center for the Seniors Housing and Care Industry
The gross market penetration rate calculated by Dixon Hughes
(NIC) and Ziegler Capital Markets Group (Ziegler). BB&T,
is similar to BB&T’s “market penetration rate” and Fitch’s and
Fitch and Ziegler calculate penetration rates using similar
Ziegler’s “saturation rate.”
methodologies. BB&T refers to its calculations as “project
saturation rates” and “market saturation rates.” Fitch and
How does Dixon Hughes calculate penetration rates?
For purposes of demonstrating the calculation methodologies of the three penetration rates utilized by Dixon Hughes, the
following assumptions are used.
Number of planned units at the project
Existing inventory of available comparable units
Number of existing entrance fee units
Number of existing rental units
Number of planned units at comparable communities
Stabilized occupancy percentage at the project
Percent of units to be occupied from the PMA
Percent of units to be occupied by age 75 and older
Number of age- and income-qualified households – Current Year – 20xx
Number of age- and income-qualified households – Penetration Year(1) – 20yy
Number of age- and income-qualified households – Stabilized Year(2) – 20zz
Notes: (1) The penetration year is the year the project is planned to open or the first full year of occupancy.
(2) The stabilized year is the year the project is expected to reach stabilized occupancy.
Project Penetration Rate
The project penetration rate is the percentage of age- and income-qualified households in the PMA the project would need
to capture in order to achieve stabilized occupancy in the year of opening. The project penetration rate is calculated by
dividing the number of independent living units at the project by the number of age- and income-qualified households in
the PMA. Seniors currently living in competitive independent living units in the PMA are subtracted from the pool of age-
and income-qualified households. Calculations are based on demographics projected or interpolated for the year the project
is expected to be available for occupancy. The following table presents an example of a project penetration rate calculation.
Project Penetration Rate Example – 20yy
Age 75 and Above
Planned units at the project
Percentage of units to be occupied from the PMA
Planned units to be occupied from the PMA
Percentage of units to be occupied from by age 75 and older
Planned units to be occupied from the PMA by age 75 and older
Total units at the project to be occupied at 95% occupancy (a)
Number of age- and income-qualified households
Less: Existing inventory of available comparable units(1)
Net number of age- and income-qualified households (b)
Project Penetration Rate (a/b)
Notes: (1) Reflects the 500 existing comparable units in the PMA, assuming a 95% occupancy rate (475 units).
Net Market Penetration Rate
The net market penetration rate is the percentage of age- and income-qualified households in the PMA that the available
units in the market would need to capture in order for the entire market to achieve stabilized occupancy in the year of
opening. Net market penetration is calculated by dividing the number of available independent living units in the PMA by
the number of age- and income-qualified households in the PMA. Available units would include planned units of the project,
proposed units at other communities and units becoming available due to attrition. This calculation is particularly significant
How does Dixon Hughes calculate penetration rates?
when more than one project is entering the market during the same timeframe. Calculations are based on demographics
interpolated for the year the project would be available for occupancy. The following table presents an example of a net
market penetration rate calculation.
Net Market Penetration Rate Example – 20yy
Age 75 and Above
Planned units in the PMA:
Other planned units
Total planned units
Percent of planned units to be occupied by age 75 and older
Total planned units to be occupied by age 75 and older
Total planned units to be occupied at 95% occupancy
Total existing units available due to attrition(1)
Total units to be occupied
Percent of units to be occupied from the PMA
Total units to be occupied from the PMA (a)
Estimated number of age and income qualified households
Less: Existing inventory of available comparable units(2)
Estimated number of age- and income-qualified households (b)
Net Market Penetration Rate (a/b)
Notes: (1) Reflects the 350 existing entrance fee units in the PMA at 95% occupancy, assuming 11.2% attrition (37 units) and the
150 rental units in the PMA at 95% occupancy, assuming 23.0% attrition (33 units), for a total of 70 units available due to
attrition. (Source: ASHA State of Seniors Housing 2006).
(2) Reflects the 500 existing comparable units in the PMA, assuming a 95% occupancy rate (475 units).
Gross Market Penetration Rate
The gross market penetration rate (sometimes referred to as a market saturation rate) is the percentage of age- and income-
qualified households in the PMA that the total market would need to capture for the entire market to achieve stabilized
occupancy. Market penetration is calculated by dividing the total number of existing and planned independent living units in
the PMA by the number of age- and income-qualified households in the PMA. Calculations are based on demographics for the
current year and projected or interpolated for the year the project is expected to achieve stabilized occupancy in order to
show the rate of change between years. The following table presents an example of a gross market penetration rate.
Gross Market Penetration Rate Example
Market inventory of retirement communities:
Existing units in the PMA
Other planned units in the PMA
Total units available in the PMA
Percent of units to be occupied from the PMA
Total units to be occupied from the PMA
Total number of units to be occupied within the PMA at 95% occupancy (a) 356
Number of age- and income-qualified households (b)
Gross Market Penetration Rate (a/b)
What are “acceptable” penetration rates?
Fitch prefers project penetration rates below five percent and market saturation rates below 15 percent.
BB&T defines average independent living project penetration rates and market penetration rates as five to 10 percent and 15 to 25
percent, respectively, and high independent living project penetration rates and market penetration rates as above 10 and 25 percent,
The penetration rate benchmark graphs that follow are derived from the Dixon Hughes database. Quartile divisions are calculated by
ranking the penetration rates in the database in ascending order and then dividing the list into four equal groups. “Q1” represents the
25th percentile of the database (the point at which 25 percent of the senior living projects in the database are at or below), the median
represents the 50th percentile, and “Q3” represents the 75th percentile.
Penetration rates within the “box” fal in line
with the middle 50 percent of senior living
communities in the Dixon Hughes database.
Penetration rates that fal outside of the “box”
may indicate potential chal enges the project
If the penetration rate falls below Q1 (see
Independent Living Gross Market Penetration
Rate Graph on page 7), the market area may
have a large number of age- and income-
qualified households in relation to the
number of independent living units. Or the
market may be uneducated or not accepting
of the product. This could result in a fill-
up period much longer than anticipated.
Although perceived as favorable, lower
penetration rates may not always indicate
positive market conditions.
If the penetration rate falls above Q3, the
market may be saturated and have a more
difficult time filling units. Some markets,
though, may have a higher acceptance
level for senior housing and may support
higher penetration rates. In addition, if
entering a market where the majority of
the competitors have high occupancies with
active waiting lists, this could be an indicator
of demand for additional product.
Whereas project penetration and net market penetration rates indicate a snapshot in time and typical y are calculated in the
year of opening, the gross market penetration rate is calculated in the current year and the projected year (often five years into
the future). The rate of change between the current year and the projected year indicates the impact of the project and other
planned units on the market as a whole. A small change in the gross market penetration rates is a favorable indicator, suggesting
that the planned units only have a slight impact on the market. A decrease in the gross market penetration rate over a period
of time is considered favorable, indicating that the number of age- and income-qualified households in the market is growing at a
faster rate than the number of independent living units in the market area.
Does the penetration rate really tell the whole story?
Penetration rates provide one indication of market demand and
What is the velocity of pre-sales (10 percent deposits)
must be considered in conjunction with other factors, including:
at the project?
Occupancy levels at existing communities within and
Is the project offering a different product than what is
near the PMA
currently prevalent in the market?
Other proposed projects in the PMA
How much competition exists in the market?
Design of the units and community spaces at the project
Are competitive communities full with waiting lists?
Alternatives for potential residents
If overal market occupancy is low, has the market
already reached its saturation point?
Efforts of management
Are there a number of planned communities that would
enter the market at the same time as the project?
The fol owing issues/questions should be addressed when
Are new contract types being offered by the project
analyzing a penetration rate:
compared to existing communities (i.e., rental vs.
Is the consumer educated about senior housing
entrance fee, lifecare vs. fee-for-service)?
products? If the consumer is unfamiliar with senior
Are there enough age- and income-qualified households
housing options, what are the financial implications of
to fill the project and those of competitors as well?
educating the marketplace?
About Dixon Hughes’ Senior Living Practice
Despite varying methodologies and calculations, there appears to
The Dixon Hughes Senior Living Practice has extensive experience helping
clients plan and develop operationally and financially sound projects.
be a consensus that penetration rates should not be relied upon as
We have taken great care in assembling a team of professionals who
a stand-alone factor in determining a project’s potential for success.
collectively possess over 150 years of senior living experience in a broad
range of financial, development, marketing and operational disciplines.
Even when penetration rates are “acceptable,” they should be
We assist clients with strategic and development planning, financial
considered in conjunction with one another and with the multitude
feasibility studies, market and operations assessments, and performance
of other factors that may impact performance.
and process improvement. Collectively, we have supported senior living
providers across the country with projects representing in excess of $7
When developing, marketing and financing a project, it is important
billion of capital raised.
to work with leaders in the senior living field who wil provide the
Keith Seeloff is the Member in Charge of the Senior Living Practice,
leading a team of 25 professionals providing business advisory services
most current knowledge base available. The team of professionals
for proposed and existing continuing care retirement communities (CCRC),
on a project should have the ability to analyze data and address
assisted living facilities, skilled nursing facilities and other retirement
housing projects. With more than 20 years of experience in healthcare
issues through every step of the process, regardless of the
and senior living, Keith has been a key participant in over 100 CCRC
methodology used. Furthermore, it may be important to test
development projects, including startup communities, existing campus
repositionings and obligated group financings, resulting in over $2 billion
different assumptions for the variables in the penetration rates
in tax-exempt bond financing. Keith is an accomplished presenter on topics
(i.e., income levels, PMA draw assumptions, etc.) to gain a thorough
affecting the senior living industry.
understanding of all of the “what if” scenarios.
About the Authors
Al things considered, it is important for the sponsor of a project to
understand and be comfortable with the methodologies and their
Stephanie has over nine years of experience in the senior living industry
implications since they wil have to live with the chal enges and
providing consulting and strategic planning services. She has been
involved in various phases of the development of senior living communities
rewards of the project once it is built.
including feasibility studies, financial analyses, market and product
demand, and pricing and service profiles for new, existing and expanding
“An Examination of Market Analysis Methodologies Used
Lisa has over 12 years of experience in the senior living industry providing
in Determining Demand for Start-up Continuing Care
consulting and strategic planning services. She has been involved in all
phases of the development and operation of senior living communities,
Retirement Communities.” Ziegler Research Report. May 17,
including market assessment and demand analyses, financial feasibility
studies and other advisory services.
“CCRCs: Evaluating Market Strength.” BB&T Capital Markets
Municipal Research Industry Report. March 21, 2006.
“Continuing Care Retirement Communities: 2005 Profile, 1st
edition.” American Association of Homes and Services for the
“Measuring Demand for Senior Housing.” Fitch Health Care
Special Report. October 18, 2000.
“The State of Seniors Housing 2006.” American Seniors
Housing Association. September 2006.
©2008 Dixon Hughes PLLC
Brecht Associates, Inc.
Hamlyn Senior Research
New Life Management & Development, Inc.