Architects design places where people live, work and play, but their creative process isn’t done in a vacuum. It relies on input from the developer and other stakeholders, as well as their own design knowledge and experience. However, for a building project to be financially successful, it must also meet market demand. To achieve that, the architect needs solid design direction with specific project requirements.
This design direction typically comes from the owner/developer team. Yet, in plenty of cases, the requirements are either unclear or are not based on solid due diligence. According to McGraw Hill Construction’s SmartMarket Report, Managing Uncertainty and Expectations in Building Design and Construction, “Unclear project requirements at the outset is identified by all [Owner Architect Contractor] parties as the top driver behind owner-driven changes.” As we know, those changes can become quite expensive, especially when they occur during construction.
To help clear up this uncertainty, Alan Nevin, Xpera’s director of market research and valuations, is often called in by either the developer or architect to prepare a market strategy study for a project. He has performed over 1,000 of these studies throughout California and nationally, and one common scenario he sees is that the architect was instructed to begin designing the project before conducting any market research.
“I have worked with numerous architects on multi-family project designs over the years, and unfortunately, by the time I am called on for a market study, the project is usually well into the design stage,” said Nevin. “As a result, I am typically handed a set of schematics, complete with floor plans, square footages, unit mix, amenities and parking. This approach is really counter-productive and causes the team to miss out on a tremendous opportunity to ensure a more successful project.”
Nevin has found that for multi-family projects, the architect has often not received specific design direction from the developer, nor has the developer retained counsel on project details. Most of the time, the developer’s direction to the architect is simply to optimize the property for maximum floor area ratios (FAR), height limits and the least onerous parking requirements. Architects do their best to address the needs of the client based on this general direction, but, more often than not, their research doesn’t go deep into real estate economics.
That’s where Xpera can help. Nevin routinely tracks projects coming out of the ground in California’s major active markets, such as downtown San Diego. He keeps an active record of what stage the projects are in, along with their FAR, unit sizes and mix, and parking ratios. Nevin says, “What we’ve found recently is that downtown San Diego has a wide range of multi-family and mixed-use projects with the same unit ratios and sizes. Yet, it is impossible that the entire market wants the same product.”
There are plenty of reasons for these copycat developments. One is that they are following past successes. Another is that they are trying to minimize San Diego’s development fees, which are mostly calculated per dwelling unit.
But if all developers provide design direction that calls for optimizing development costs with the same unit mix and sizes, the incoming supply of apartment/condo products will inevitably become mismatched with market demand.
Economically, this forces developers into a game of chicken (also called hawk-dove in game theory), which means some projects will under-perform financially when the target market segment is tapped out.
“Needless to say, I take a different perspective,” said Nevin. “The key focus of our development strategy studies is to determine the depth of the market and simultaneously determine niches in the market that have not been filled.”
When Xpera is asked to perform a market strategy study, our goal is to help provide a solid sounding board for the architect’s own design research, as well as a cornerstone for the developer’s due diligence for seeking construction financing.
This comprehensive, data-driven strategy results in the developer producing a more unique and exciting product to the market and ensures that it will be met with a favorable reception. Importantly, the product will not be a copy of every other project, helping it maintain its optimal position in the market. We know that renters and buyers will respond more favorably to new product with creative plans.
Nevin’s strategy studies have helped some of California’s leading architects take a stronger leadership role in developing their projects’ design direction, including Joseph Wong of JWDA in San Diego.
“Alan provides invaluable marketing strategy to the design team from the outset of a residential project,” said Wong. “His development insight and market research give a big-picture overview that fortifies the economics, targets future residents, and strengthens the design and the site development.”
The goal of Xpera’s development strategy studies can help ensure the most appropriate product hits the market, resulting in a project that sells out or rents up faster. By reducing turnover and allowing vacant units to be absorbed quickly, developers will be able to optimize revenue, and hopefully further spur the housing production that California so urgently needs.