Homebuilders' research can lead to surprises at the sales office

This article first appeared in the PB January 2008 issue of Pro Builder.

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5 Common Market-Research Missteps

At the grand opening of City Square, a townhome community in downtown Escondido, Calif., as many empty nesters as young professionals showed up to view Barratt American's multilevel units — despite their lack of elevators. And at Dahlia Park in Issaquah, Wash. — a community of small-lot, single-family homes with first-floor master suites — Bennett Homes has racked up more sales to younger buyers than older ones.

Although both projects have been successful, their markets were not what they intended; and tales of the "surprise buyer" are not uncommon in the industry. It takes a comprehensive research effort done well in advance to accurately nail down buyer profile, and numbers don't tell the whole story.

Builders need to investigate other options the targeted buyer might have in the marketplace, says Brad Clason, a Coatesville, Pa., consultant. For example, are competing communities closer to work, shopping and entertainment? "If you're going to build townhouses in a more rural location, you'd better be price-sensitive if you want to get that younger buyer out there," says Clason. And it's not enough to look only at new-home comparables; also study the resale and rental markets and how they relate to employment centers and transportation corridors.

Brenda Desjardins, principal of New Home Marketing Services in Annapolis, Md., says that given what's been happening in the marketplace today, builders would be wise to check out resale comparables.

"Home buyers are saying, 'If I move into a new community, I don't know who my neighbors are going to be between now and when the community is built out, but if I move into an established neighborhood, I already know who lives there. I might not be able to get a brand-new home, but maybe I can get something that's 5 to 7 years old,'" says Desjardins.

Builders usually don't start research early enough, says Andy Detterline, a consultant based in Rose Valley, Pa. "Once they buy a piece of ground, it's really too late," says Detterline. "They should be figuring out where the holes are in their market and looking for opportunities there rather than buying something that's on the market, then doing a study to see if it works."

You've got to do much more than assess the sales rate of existing jobs — and do it thoroughly, she says. "The most voluminous study done in a rush, or by a research person who does not know the area like the back of their hand, can be torpedoed by one missing variable," warns Detterline.

The Delaware story

Consultant Andy Detterline warns that key variables can be overlooked if research is done hastily or by someone who doesn't know the market.

A few years ago, Detterline encouraged a client to purchase a 55-and-over subdivision in Middletown, Del., that a national builder wanted to sell. The seller had received a report from a respected research firm indicating that no one from Wilmington, Del., would cross the bridge over the Chesapeake and Delaware Canal to move to Middletown, a former agricultural area. Local builders and Realtors agreed, and they were right: of the 362 homes in that community, only 5 percent were sold to Wilmington residents.

"What the market research missed was that Delaware's real-estate taxes were the lowest in the country, while New Jersey's and Pennsylvania's were the highest," she says. "Retirees concerned about living on a fixed income could move an hour away, get more house for their money and save $5,000 to $10,000 in taxes each year. And they did just that — in droves, driving prices up nearly 60 percent over the life of the job."

The other factor overlooked was a new zoning district in northern Delaware that would make it impossible to build a competing job closer to the aforementioned "tax refugees." Detterline knew about the ordinance because she was helping her client evaluate raw ground for purchase in the Wilmington area.

The point is that builders need to study demographics; housing prices and supply; new zoning districts; and a multitude of other factors. "Unless you can understand trends and figure out where buyer motivation is headed, there are always going to be surprises," says Detterline. "You have to look at things that may be coming out of left field."

Expect the unexpected

To maximize the investment they've made in their designs, big national builders try to duplicate floor plans as much as possible in different locations, says Desjardins. "They want to know if their site will fit an existing product," she says. "I don't see as many errors in judgment when someone is designing a new product to fit a site as when the builder is trying to shove a square peg in a round hole."

Then there are times when the market adapts itself to the product being offered. At The Residences at Bulle Rock in Havre de Grace, Md., single-family homes with first-floor master bedrooms were expected to attract pre-retirees and retirees. But families, too, loved the idea of not having to deal with lawn-mowing and other exterior maintenance. They account for 15 percent of home sales at Bulle Rock.

"Sometimes the sense of community is more important than the floor plans," says Desjardins, who conducted the original market study for Bulle Rock. "What the developers are dealing with now are property management issues and how to manage the buyers' expectations. They have a big community center that was designed for older adults, yet there are all these people with kids that want to run around the pool."

Indeed, in a large planned-unit development, adapting to change is usually part of the developer's business plan. "They know they're going to start with one buyer profile and then have to adapt throughout the community," she says. A builder also needs to be sensitive to market shifts that can alter buyer profiles. Take condominiums, for instance, which have traditionally been geared to first-time buyers and empty nesters. "First-time buyers aren't necessarily interested in condos anymore — they want to go right into a townhome or a single-family home," Desjardins says. "And they're not so willing to wait and move up; they want it right away. So a lot of single people are buying smaller single-family homes."

Roll with the changes

If builders are able to adapt to a "surprise buyer" scenario, they can actually expand their buyer profile rather than limiting it. "It can be an opportunity rather than a negative," says Desjardins. And if their home designs are flexible enough to appeal to more than one buyer segment, so much the better.

Such was the case at Dahlia Park, where move-downs were the target market, but — at least initially — the project attracted more move-ups. "We assumed we'd get move-down buyers because there are dual master suites in every house: one upstairs and one down," says Gayl Van Natter, vice president of sales and marketing for Bennett Homes of Bellevue, Wash. "We were expecting empty nesters who wanted a really nice guest suite on the second floor, and also dual-generation buyers because we had seen all this research about boomers whose parents were going to move in with them or whose adult children were coming back to the nest."

When sales started, however, Bennett found that singles, dinks and single parents were latching onto the initial release of smaller houses. "They're well-laid out and on small lots, so there isn't much to maintain," says Van Natter. "People with active lifestyles who ski one weekend and camp the next, [or] were starting a business, or had just gotten divorced and had a child at home were all interested in those homes."

Sometimes it takes an additional investment on the builder's part to cope with the unexpected buyer. About 50 percent of prospective buyers at City Square are "the baby boomer/empty nester/retiree," says Lenette Hewitt, vice president of sales and marketing in Barratt American's Carlsbad, Calif. office. Those buyers are particularly concerned about Plan Three, a four-story unit. They love the square footage (1,906), the vaulted ceilings and the lock-it-and-leave-it lifestyle, says Hewitt, but climbing three flights of stairs is another matter. So in the next phase of the project, Barratt is adding, as a standard feature, private elevators to Plan Three at a cost of $25,000 per unit.

Hewitt thinks actual buyer profile (versus what's expected) has to do with location and market demand. "When you're in a situation where people are just happy to get a house or condo in a downtown environment, they're more tolerant of [a high-density] product," she says. "But because City Square is one of the first developments in downtown Escondido, buyers are not as conditioned and willing to accept density because they're not surrounded by it."

Malibu, Calif., marketing consultant Sandra Kulli adds: "When the unmet need in the consumer is met in a way that is palpable or tangible, they'll pick a floor plan that may not seem right for them in order to be in the place they desire."

Feedback from Realtors and residents is a valuable tool in a builder's research, says consultant Sandra Kulli.

Back in the mid-1990s when One Ford Road opened in Newport Beach, Calif., 80 percent of the bungalows designed for empty nesters were snapped up by couples with children. What the developers didn't realize, Kulli says, was that "they had this incredible social fabric woven in beyond the sticks and bricks. People were willing to shoehorn their families into small cottages to get what came with the small cottage."

Even in a down market, thoughtful research — both quantitative and qualitative — can have an enormous payoff when the community opens two years later. By "thoughtful research," Kulli means spending time with the target audience, and on more than a phone questionnaire. "Workshops with existing homeowners can give you great insight into improvements to make for a new community," says Kulli.

5 Common Market-Research Missteps

Allowing sticker shock to dissuade you. Many builders prefer not to invest a lot of time and money in pre-development research, says Annapolis, Md., consultant Brenda Desjardins. "If I quote $25,000 for a market research project, it would be prudent to understand this is a fraction of 1 percent of the investment they are making in a property. Failure to understand the nuances in the market will cost them much more."
Not starting early enough. Market research has the most significant effect when you're in a due diligence period.
Overlooking the value of focus groups. If you're building something the market has never seen before, focus groups can reap huge benefits, says Coatesville, Pa., consultant Brad Clason. That said, the project has to be sizable enough to justify the cost because — among other things — you're going to have to hire a professional moderator. Smaller builders planning smaller projects can accomplish this less expensively by getting together with a group of local Realtors. "You need to co-op with Realtors all the time, whether the market is good or bad," says Sandra Kulli, a Malibu, Calif., consultant.
Not taking resale statistics into account. Market researchers need to have a handle on the resale market, now that newer resale homes can be discounted by homeowners who have built up equity and may be willing to trade some of it to speed up the selling process.
Ignoring what's in the pipeline. Builders need to anticipate the competitive environment 12, 18 or 24 months down the road, Clason says. "Try to keep tabs on the available land in your market area."