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Chicago Tax Appraisers Must Recognize Funeral Home Obsolescence Issues



Article:
The funeral business has been one of the most stable industries for many generations. Shifts in profitability, demand and the services demanded are creating a need for modified designs in their real estate. There are three elements that typically affect depreciation levels for a building: Physical, functional and external obsolescence. Physical depreciation is simply a function of aging with time. Functional obsolescence results from design deficiencies as a consequence of the changing use of a building over time. External obsolescence occurs as a result of issues outside the property itself such as changing demand for the product or excessive competition. Issues affecting the national funeral home market are equally impacting the Chicago market. Chicago area commercial tax appraiser need to be up to date on these issues when performing Chicago funeral home appraisals.

Demand Issues:

Death Rates
One of the most critical demand issues relates to death rates in the United States. While the U.S. population is aging, a substantial increase in the death rate will not occur for another 25 or 30 years. According the U.S. National Center for Health Statistics the average death rate in the U.S. is as follows: 

                             Death Rate
 
Year             per 1,000 People 
2000                      8.5
2010-2016           8.3
2017-2020           8.4
2045-2050           9.7

There will not be a substantial increase in deaths per 1,000 until 2045 when it jumps to 9.7 per 1,000. With the U.S. population only growing around one percent per year, large increases in death rates are not yet here. Baby boomers are now starting to retire but they will not start dying in big numbers for several more decades. While our practice focuses on funeral home appraisals in Chicago and Cook County area, the national statistics and trends would be reflective of this market.   

Reduced Profitability
The funeral home has made most of its money on the traditional funeral with a casket, viewing of the deceased in their facility and related services. Spending on funerals has increased over time although funeral director's concerns are rising. The average adult funeral cost in 1991 was $3,742 and increased (according to NFDA data – 2010 survey) to $6,590 in 2009. The NFDA (National Funeral Home Directors Association) reported that gross revenue (including cremations) increased from $11.05 billion in 2002 to $11.95 billion in 2007. Profit margins, however have been shrinking.

Year            Profit Margin %
1989               8.96%
1999               9.24%
2009               5.31%

Part of the issue is a changing perception on how much funerals should cost and how much should be spent. The number of people carrying life insurance is on the decline. An article by Jeffrey Shaw, CLU and Executive Director, LIC, reported that 79% of people surveyed answered yes when asked if people should carry some type of life insurance in 1980. By the year 2000 that number dropped by 58%. With fewer people carrying life insurance there will be less money available to cover more elaborate funeral expenses.

The total number of funeral homes has also been declining as reported by the National Directory of Morticians Redbook.

Year          Number of Funeral Homes
2000                         21,107
2005                         21,080
2012                        19,680

There have been three cost saving approaches that have been negatively impacting funeral home margins: discount caskets, green burials and cremation.

People are increasingly shopping for discount caskets that aren't sold by the funeral home to save money. While this issue has been around for a while, funeral home directors continue to report it as one of their major concerns. Even rental caskets, for a traditional memorial service prior to a cremation are becoming more popular.

A newer trend that could potentially threaten the industry is increasing demand for Green Burials. The body is not embalmed; there is usually no grave marker or even casket since they don't degrade very easily. While this is still a very small part of the market, the number of users has been increasing and could be a future threat. Wisconsin's second green cemetery opened in August of 2012 outside of Verona near Madison. It has 25 wooded acres and will ultimately buy up to 2,700 people. Graves are dug manually here, either by the owner or the families of the deceased. The bodies are wrapped in natural-fiber shrouds (instead of caskets) and are lowered into the grave by a hand cranked machine. Caskets are only allowed if they are made of non-precious biodegradable wood. No embalming, concrete vaults or flashy tombstone are allowed. The land doubles as a nature preserve.

The increasing popularity of cremation has perhaps been the biggest shift in the industry. The trend is overwhelming and clear. The religious beliefs of many that have historically resisted the practice have also been softening. The percentage of funeral services by cremation according to the NDFA 2010 survey was reported as follows:

Year               Cremation Level
1970                       4.59%
1980                       9.72%
1990                     17.13%
2000                     26.17%
2005                     32.13%
2009                     38.15%
2010                     40.62%
2015                     46.57% (projected)

Cremation levels have increased at an alarming rate (from the funeral director's perception). Over 58% of Canadians used cremation in 2010 so there is no reason to believe that the level of cremations will not continue to increase over the next decade. To make matters worse the number of viewings and memorial services has also been dropping when a cremation takes place. In 2008 there were viewings/memorial services 59% of the time. The memorials dropped to 56% in 2009 and 53% in 2010. These numbers reflect a dramatic drop in the utilization of funeral home facilities. A direct cremation with no memorial service can run about $3,000 versus about $8,000 for the traditional service including embalming, hearse, funeral home labor and other expense (not including monuments or plots).

Ceremonies that Celebrate Life

In order to fight these highly negative trends for the industry many funeral home directors are trying to push ceremonies that celebrate life. Instead of mourning death they are seeking to promote parties to celebrate the deceased's life. Unfortunately, many funeral home buildings are on the dark side and aren't really designed for uplifting parties.

Real Estate Value Considerations in the Funeral Home Industry

The changing demands in the funeral home industry have resulted in shifts in funeral home design. Architects that design funeral homes report that new construction has larger, more attractive lobbies, smaller or no casket showrooms, children's rooms, food service capability, better video and audio technology and on-site crematoriums. Celebration of Life ceremonies demands happier and brighter buildings with more natural light. Chicago Jewish Funerals just opened their third facility. They are creating buildings that can support a more celebratory atmosphere and they also hope to be able to use the buildings for other purposes (parties, anniversaries, weddings, etc.).

The vast majority of funeral home structures represents the "old model" of the industry and suffers from obsolescence. A funeral home appraisal in the Chicago market must estimate what the property would sell for as if it is available for sale (even if this is not the case). In a market with shrinking margins, fewer funeral homes and a shift away from older buildings that don't cater to cremations or celebration of life facilities, the demand could be limited. It is also important to distinguish between the business value of a facility and its real estate. For ad valorem assessment purposes in Chicago and Cook County area, only the real estate is to be taxed.  This is a critically important issue for Chicago area funeral home tax appraisals.