Case Study: Paragon Real Estate Group Weathers the Crisis
The early part of the last decade saw a massive boom in residential developments all around San Francisco.
The early part of the last decade saw a massive boom in residential developments all around San Francisco. The skyline changed forever with the projects One Rincon Hill and Millennium Towers, which added over 1,000 luxury condominiums to the city.
Yet the investors behind the projects faced the reality of opening during the financial crisis: Millennium Towers opened in April 2009 and One Rincon Hill in following September. These coveted properties were anticipated to sell out within weeks when the designs were first discussed, but instead each building has yet to reach full occupancy.
These developers did not anticipate their opening dates coinciding with the worst economic crash since the depression. Neither did many other developers all around the country who found themselves highly leveraged with little market movement. So what can developers do to protect their investment during this economic crisis? Aside from a crystal ball, there are strategies that property owners are using to combat the market pressures.
Mark McNabb, a leasing agent and development manager from Paragon Real Estate Group, shared his insights on managing a successful development project despite the financial conditions. McNabb manages many properties throughout San Francisco, including condominiums, mixed-use developments, commercial buildings and office space.
Paragon Real Estate Group has continued to perform even in the face of adversity. The company reported achieving a positive revenue stream throughout every fiscal quarter of the financial crisis. Paragon also reported strong figures on closings, citing that the average number of days on market before an acceptance of offer for condominiums in SoMa South Beach districts was 68 days compared to other firms reporting an average of 77-140 days.
McNabb is intimately familiar with the challenges of this recession within the Bay Area. One of McNabb’s latest development projects, a 52-unit luxury condominium property on Van Ness, opened the day after Lehman Brothers collapsed.
Cities have traditionally been thought a safe zone for condominium developers because the demand for suitable housing grows as the city population grows. Attractive business opportunities bring high earning people into the city. Yet the market instability has developers doubting the promising investments in urban centers.
Developers are dealing with two major issues in selling their condominiums. First, potential buyers will not pay premium prices for real estate. McNabb says, “There used to be a time when there was a line waiting in front of an apartment building. Now, the first thing out of a prospective tenants mouths is, ‘Is the price negotiable?’”
Secondly, obtaining financing is difficult for even the most credit worthy individuals. McNabb says, “In the last year, the average required down payment was 25+ percent. On top of this, banks had a pre-sale requirement on new developments restricting any loans until 30 percent of the project was sold. Now, with FHA financing, developers can offer 3.5 percent down and a lower pre-sale requirement, which is huge to generate sales.”
In such a tight market, minimizing the costs associated with making sales is essential. McNabb uses free web-based services like Craigslist.org to advertise his listings, which provide searchable online classified advertisements in the form of posts. “In San Francisco, 99 percent of advertising is done through Craigslist. This is a very strong tool and we distinguish ourselves from others by using professional pictures and a rich HTML format. This way, when we present to a potential buyer, they are impressed with how much it stands out compared to other advertisements.” This type of advertisement reaches a large population with no posting costs.
In addition, McNabb advised that developers should always focus on good neighborhoods first, instead of building in upcoming areas with unpredictable desirability. “You cannot make up a bad location with amenities.” McNabb says, “You have to be really sensitive to where your development is and what clients will be attracted to it. Neighborhood is everything. In our latest development, we built it out to high end as we thought that it might separate us from other buildings in the area. Yet, we did not think that we would see a strong return on investment by placing high-end products in the units.”
McNabb suggests that developers mitigate risk by starting out less leveraged. This approach means cutting down on square footage and using less expensive materials to stay in budget. “This increases the profit margin,” says McNabb, and can help to justify price adjustments when properties are not selling.
McNabb believes that the risk tolerance for developers will remain much lower. “A lot of developers went under this last year because they were stretched to thin.” In his opinion, San Francisco will not see many highly leveraged developments in the future, as the real estate business is cautious of a “double dip recession”.
Lastly, McNabb offered advice regarding increasing consumer demand for a high quality product such as luxury multi-housing. Convincing the buyers regarding real estate value does not require more overhead, more advertisements or more emphasis on super-premium venues. It requires a steady and practical approach to marketing, one that fits with the sensibilities of a market that has become more aware of the practical costs associated with living in an urban space. Emphasizing value, location and quality with engaging advertising that bears nearly no cost, has helped McNabb and Paragon achieve success in this weary market.
(Lauren Willis is an MBA student at St. Mary’s University in London, England. She has studied economics at Cambridge University and holds a B.S. degree in Business Economics from the University of California Santa Barbara. Willis has worked in many areas of real estate including development, brokerage and technology.)