Merchandising is King

Lessons learned from the Greater Toronto condo market.

By Michael Russo, MHN Contributing Editor

In the high-rise condo market, you can build it—but they probably won’t come. Not unless you know your buyers and nail them down with a sophisticated advertising program and all the necessary tools for your sales center. This includes full and scale models of the suites, touch screens, interactive displays and other technologies to create unique memory points to draw traffic.

“Not only are developers allotting a bigger percentage of their budgets to interior design and merchandising, but they are also recognizing the value of it, particularly in tougher times,” says Doris Pearlman, MIRM and president of Possibilities for Design Inc., Denver, Colo.

“You have to create a vibe and an excitement with your merchandising program because in some high-rise condos, you need to meet your sales test in 30 to 60 days,” adds Peter Comyns, sales manager for PMA Brethour, one of Canada’s leading real estate firms with offices in Toronto and Ottawa, ON.

Comyns, Pearlman and developer Andrin Limited recently teamed up on the City Centre Condominiums project located in downtown Kitchener, ON. City Centre will feature approximately 400 condominium suites. At 15 stories in height, it’s also one of the tallest residential high rises in the area.

Andrin Limited is looking to get up to 80 percent of the building sold before construction begins, so the sales, marketing and interior design team went all-out on City Centre’s sales center. The 3,500 square-foot sales pavilion showcases two fully furnished model suites and a 2,000 square-foot presentation and sales area.

In Canada, presentation centers are temporary, free-standing structures built that will eventually be moved or dismantled. City Centre’s pavilion represents the exact model configurations available and also houses the sales center.

“For high-rise condominiums like these, model suites with fully developed interior designs are absolutely required,” says Anne Marchildon, vice president of sales and marketing at Andrin Limited. “The more people who understand what you are marketing, the better your rate of sales will be.”

The Greater Toronto Area (GTA) is a pre-sale dominated market, and City Centre is on its western fringe, about one hour’s drive from downtown Toronto. While the city is broker-driven in terms of sales, the opposite holds true of Kitchener.

“The ‘co-broke’ market in Kitchener/Waterloo is much less entrenched and sophisticated than in the GTA, so the effectiveness of your on-site team is critical to the overall success of the project,” says Comyns.

The same is true of interior design. While Andrin Limited works with interior designers on all of its projects, this was the first time the company partnered with a designer from the U.S.

“Doris (Pearlman) visited suppliers in Toronto to find the samples and finishes she would need for her color palettes and designs,” says Marchildon. “Thanks to electronic media, the fact that she was in Denver and the project was in Kitchener was irrelevant.”

The merchandising team’s primary job on City Centre was to meet the profiles of buyers with units that fit their personalities while using interior design techniques to make the smaller suites more livable. Quadrangle Architects Ltd. of Toronto had a similar task. According to Leslie M. Klein, founding principal, City Centre “brings the fundamentals of design to urban living, with buyers’ taste and lifestyles reflected in their homes.”

“The living spaces were thought out down to the square inch,” adds Comyns. “I watched the interior design team visit electrical, tile, cabinet, finish and furniture suppliers and pull together all these products. This isn’t decorating—it’s a science, and Doris (Pearlman) is brilliant at it.”

Possibilities for Design Inc. can back up Comyns’ compliment with multiple awards from home builders associations across the nation.

In fact, the company has already won 2011 and 2012 Gold Awards for interior design and merchandising at City Centre from the National Association of Home Builders (NAHB). Sponsored by NAHB’s National Sales and Marketing Council, The Nationals awards program is in its 31st year and is one of the nation’s largest and most prestigious competitions for sales
and marketing professionals.

“Whether you have investors or are driving brokers, the building has to have a very strong appeal, and that’s exactly what she (Pearlman) did with City Centre,” says Comyns.

Design details

Pearlman’s primary responsibility at City Centre was “messaging” the property through merchandising, design drawings and model units, and the message was distinct in both of City Centre’s model homes.

For the smaller suite (510 square feet), it meant catering to a young and trendy “Gen Y” single male or female. For the larger model (1,100 square feet), Pearlman targeted an older buyer with a more sophisticated, high-end look. The design was contemporary, but not as “edgy” as in the smaller units.

“Our job here was to do several things,” explains Pearlman. “First, in the smaller suites, we illustrated how people can live comfortably in a limited space; second was to create a ‘memory’; and third, to help people understand that a small space can be as livable as a larger suite if you know how to plan the spaces.”

Pearlman also picked up on the Toronto area’s preference for contemporary design with a slight European twist.

“I think the younger generation in the U.S. will be looking for similar spaces,” says Pearlman. “For the designer, understanding the scale of everything is important. You don’t want to overwhelm a smaller suite with items that don’t lend themselves to enhancing the space visually.”

Possibilities for Design Inc. is accustomed to working with larger spaces as well. It recently delivered a 5,500 square-foot model to Toll Bros. for a development in Tarrytown, N.Y. The Fortunato Model in Heritage at Vista Del Verde earned the company a 2010 Gold Nationals Award for “Best Interior Merchandising of a Model Priced from $500,000 to $1 Million.”

“Our function is to create lifestyle environments that help the buyer envision how they will live in the space, while identifying with their particular age, wage and stage of life,” says Pearlman.

When asked about differences in the Canadian and U.S. markets, Pearlman cited more similarities than disparities. Traditionally, Canadians have looked to the U.S. for inspiration on model designs. However, because the U.S. recession has been deeper, Canadian developers may have larger budgets and are currently putting a bigger priority on interior design, merchandising and advertising.

“Canadian developers have a very complete approach to merchandising and interior design,” says Pearlman. “Right now they are probably putting a few more dollars per square foot into their programs.”

At the same time, the cost-per-square foot for high rise condos in Toronto has increased significantly.

“The luxury market tops out at about $1,600 per square foot, while in the younger market, it doesn’t get much lower than $650 per square foot for a suite downtown,” observes Comyns. “A building of 300 units may range from 380 to 810 square feet. It can be a challenge, because you still have thresholds on pricing for the building in question, even though your cost per square foot goes up.”

Because a 200-300 unit building usually needs to sell about 70 to 75 percent of its space to reach its pre-sale number and acquire financing, there’s a lot of pressure on the merchandising team up front. “In less expensive markets, we’ve seen some recent project launches where you can get away with a vignette,” says Comyns. “But the sales office had better have the appropriate ‘vibe’ for the market, because you are not showing them an actual model.”

Comyns, who spoke at the NAHB convention last year, has high praise for the quality and ingenuity of model designs in the U.S.

“We’ve been stealing your ideas for years,” he quips. “If the Americans were to enhance their efforts at all, it would be to pay extreme attention to every detail from the pre-sale merchandising aspect of their projects. The old marketing formulas won’t work anymore.”

The City Centre sales and design team insist that the quality of finishes need to be high—even on the smallest of suites. Developers can afford these high-end materials because they are working in tighter spaces.

In terms of color, gone is the old-school percept of keeping all colors light, white and neutral. “In small spaces, rich color can be your best friend,” says Pearlman. “Use it on accent walls or inside built-in niches to create depth. Color blocking used this way pulls the visitor’s eye back toward the wall, making the overall room seem larger. Color can ‘wrap’ a space, create depth, exude warmth and add identity.”

Because the prospective buyers at City Centre are tech-savvy and environmentally conscious, Pearlman’s sales center displays emphasize flexible floor plans, green features and high-tech living.

Andrin Limited has also been flexible in responding to market needs at City Centre. While penthouse suites are usually last to sell, the company has had success selling the building from the top down.

“People seemed to gravitate to the prime corners of the building—to the larger suites and two bedrooms,” says Marchildon. “Most of the buildings downtown are six stories or less, so at 15 stories our project is unique.” And so are its suites. Because Pearlman was involved at the earliest stages of the building process, she was able to turn potential design flaws into bonuses for buyers.

“If you don’t have an interior designer involved from the ground up, you are doing yourself a disservice,” says Comyns. “It’s all about merchandising
to show the benefits of the suite in terms of layout. And that we learned from Americans.”

Life’s Been Good for Toronto High-Rise Developers

With 28,466 high-density homes built in 2011, the Greater Toronto Area (GTA) is the largest high-rise condominium market in North America. As the cultural, entertainment and financial capital of Canada, this southern Ontario city is leading condo development for a variety of reasons.

The primary raison d’être for Toronto’s good fortune lies in the steady flow of educated immigrant workers flowing into the country, with roughly 120,000 finding their way into the GTA last year.

High-tech companies, such as Google, Christie Digital and Research in Motion (RIM, the maker of BlackBerry), have provided employment for many of these newcomers who are also looking for nice places to live. Meanwhile, low-rise construction has been dogged by Greenbelt legislation, servicing issues and a burdensome municipal approvals process, among other things.

Ten years ago, high-rise buildings made up only 30 percent of the market in the GTA. But the residential sector has effectively flipped, with high-density buildings doubling to 60 percent of the residential market in 2011, with low-rise accounting for the remaining 40 percent.

So far this year, the high-rise condo market has remained healthy. Still, one can hear a hint of caution in the voices of some developers. The challenges facing RIM, which employs 10,000 on the western fringe of the GTA in Kitchener, ON has given consumer confidence a bit of a shake. RIM’s losses have been Apple’s and Google’s gains, although the company’s new CEO, Thorsten Heins, is planning a revival.

There are also plenty of high-quality projects available to condo buyers in the U.S., but a serious lack of consumer confidence is hampering their ability to buy. At the moment, Canada does not have the looming issues outside the real estate market that are inhibiting sales in many U.S. cities and suburbs.

“The U.S. is well schooled in delivering high quality, vibrant neighborhoods,” says Anne Marchildon, vice president of sales and marketing at veteran real estate company Andrin Limited in Toronto. “I don’t think there are any problems with the products that developers in the States are bringing forward. It’s simply a matter of broader economics at this point.”

Andrin is close to passing its own sales test for the ambitious City Centre Condominiums development in Kitchener later this year. Although the project is still in the pre-sale mode, there are few developers better equipped to handle a project of this size—in spite of RIM’s difficulties. Over the last 20 years, the company has built in most of the suburban areas around the GTA and completed the single largest condo project in the Kitchener market in 2005.
The company’s conversion of a rubber factory netted it 270 units and a strong reputation in the area.

Of course, the marketplace in Kitchener was relatively scant in terms of competition seven years ago. “The city has proven itself to be a place where people are interested in living,” says Marchildon. “That has raised the bar overall, and that includes a company’s merchandising efforts.”

Andrin wisely positioned the project as a mid-market building, with suites ranging from 500 to 1,200 square feet. It has also decided to proceed with 180 units instead of 240 suites in the first phase of construction and make the second phase of the project a bit larger.

“There’s not a huge amount of depth for high-rise projects in Kitchener, and the rate of sales at the top end of the market was not particularly high,” says Marchildon. “There were other projects on the market at the time with larger square footages, so we focused on the ‘middle of the pack,’ and that seems to be serving us well.”

While Andrin has always been a leader in the low-rise residential market, it has been responsive to current trends and is adding more high-rise projects to its portfolio. “At the end of the day, you must know who your buyer is,” says Marchildon. “Unlike the Toronto market, where you can sell a condo as small as 350 to 375 square feet, Kitchener does not have a tolerance for that small scale of space.”

Working in the GTA

In Toronto and other major cities in Canada, developers rarely—if ever—create purpose-built rental housing. The tax laws, government regulations and other rental controls simply make for-rent development untenable.

“I don’t think there is a for-rent building under construction right now in all of Toronto,” confirms Peter Comyns, New Home Sales Management, at the PMA Brethour Real Estate Group, based in Toronto and Ottawa, ON Canada and Boca Raton, Fla. “Our rental stock comes from private investors who rent out their condos. The only other option for renters is outdated apartments built in the 1950s and 1960s.”

For this reason, the GTA has a well-developed rental market, with some of the highest quality rental space available in North America. And, vacancy rates in the for-rent market remain fairly low, say Toronto developers.

“The investors who are renting out these spaces have no intention of ever living in them, and they are not going to ‘flip’ them, either,” agrees Marchildon. “Their strategy is to improve their cash flow and capital returns, and that’s a big driver in the GTA.”

Unfortunately, the laws of supply and demand are having an inflationary effect in the Toronto area that is pushing condo pricing over $700 per square foot and as high as $800 per square foot in some areas.

“The buildings here are being bought in smaller bits, rather than having just one owner,” says Marchildon. “However, due to a fair degree of price pressure, there are not too many investors buying five or 10 suites at a time anymore.”

When pressed, both Marchildon and Comyns could find no fundamental differences between development in the U.S. and Canada beyond the nuances mentioned above. Still, these differences will make both markets slightly unique, just as a high-rise condominium project in California will be designed differently compared to one in downtown Chicago.

“Find out what your buyer wants and deliver it,” summarized Marchildon. “If you can do that at a price buyers are prepared to pay, then your project will be a success. This formula is universal, I think.”

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