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| The Winners in This Difficult Market Understand Demand—Do You? |
| Written by Jonathan Smoke | |
| 03.13.2008 | |
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Discuss this article on the forums. (0 posts) Last week the Greater Atlanta Home Builder Association and the Urban Land Institute held a joint meeting called “Survival of the Fittest,” featuring a panel including a local builder, a respected economist, a local market researcher, a lender, a legal foreclosure specialist, and a real estate attorney. Given the title, the organizers and the quality of the panel, I willingly invested my hard earned money to attend. A ballroom full of builders, developers, brokers, and numerous others connected to housing did as well.  I didn’t walk away with any insights. Instead I walked away somewhat puzzled by what I heard and even more concerned that no one seems to be talking about one of the clear requirements of succeeding in a competitive market: understanding and capturing demand.The moderator posed a question early in the session that drew the same patent response from the panel—where would the best investment be made now in the Atlanta market? The answer—inside the perimeter—seemed logical. For those not familiar with Atlanta, the perimeter is the name given to the area inside Interstate 285. It basically includes the city of Atlanta and the more urban parts of the greater Atlanta market. That seems logical because, without question, the land inside 285 is more valuable on average than the land outside of 285. But given the quality of the panel, I expected more of a witty response. I expected the panelists to explain how success in a challenging market isn’t all about buying the most expensive land. In housing, the performance of a community is determined by location, supply and demand. Case in point—the Atlanta Business Chronicle reported in this week’s issue on the top selling communities in Atlanta for 2007. According to the paper and its source, Metrostudy, the top selling community closed 354 homes last year. That would be almost 30 units a month. Guess where it’s located? In Hall County, which is way outside of I-285. In fact, I’d wager you can get to Athens or Gainesville more quickly from that community than to downtown Atlanta. I’d also be willing to wager that Pulte’s Del Webb didn’t pay Atlanta prices per acre for this large active adult community. But this wasn’t the lone exception to my point. Based on a quick review, I could only identify ONE of the top 30 selling communities as being inside the perimeter. Now clearly, closings aren’t the only measure of success. The top 30 list is dominated by large master planned communities that are capable of offering multiple price points. Having multiple product lines that appeal to multiple customer groups can increase absorptions. The builders and developers of these top selling communities decided to offer multiple product lines to help them perform well. It wasn’t luck. The article about the communities clearly sets forth that these communities did not perform well because of discounting: “Most of the top-selling communities have common advantages: a range of price points, a strong amenity package and good locations.
Another common characteristic: very little or no discounting.” This combination of advantages comes from experience and good decisions backed up by research. If they designed the wrong product and amenities, they wouldn’t have captured the demand in the locations. And if they didn’t know what features to offer, they would have resorted to discounting to recoup at least some costs of including features and amenities that their customers didn’t value. Instead, they captured price and pace—the real measure of success of a new community. I just wish the article would have said that the communities clearly must have great appeal to a sufficient base of demand. This is why I found the panel discussion to be lacking. At one point the comment was made that the downturn has impacted every product type, price point and location. The conclusion was that the only way to close homes is to discount. I noted this witty gem: “There are very few homebuyers out there—only bargain hunters.”
Am I the only one who didn’t find this helpful? The instructions for survival were useful: focus on cash flow, cut expenses everywhere you can, communicate with your lenders, develop a clear plan for how you will survive, and discount as needed. Now there’s a kernel of truth and wisdom to that advice and I’m not really trashing any of the recommendations individually. Builders do need to develop plans to turn around problem communities, and if they are so mistargeted and off market, discounting may be the only hope of generating cash to meet commitments. I just wish that someone would have thought to talk about the fact that there are some people doing things right; doing things right means understanding who you want to sell to, how to reach them, what they want, and if there’s enough of them to make your community a success. If you are a builder or a developer, think about the demand side of the equation in addition to your accounting and financial position. If you don’t have a clear picture of your desired customer, who’s really shopping you and who your competition is, that may be your real problem. We’ve got intelligence that can help you. And if you are in Atlanta, we have some great partners (more on this later…) with a strong history of success in designing and selling communities. Together we can help you understand your market and do better than discounting and praying for this downturn to end. 
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