3 Reasons For-Sale Developers Should Break Ground Now
- May 26, 2021
With the condo market gaining steam in an already sizzling housing market, the race is on for developers looking to get shovels in the ground and capitalize on historically low inventory, as well as demand for larger floorplans, private outdoor space and other features that have become must-haves in new construction.
Existing condominium and co-op sales were recorded at a seasonally adjusted annual rate of 720,000 units in April, up 84.6 percent from April 2020. Prices are trending up as well, with the median existing condo price at $300,400 in April, up 12.6 percent from a year ago, according to the National Association of Realtors.
Yet despite a strong sales market, lenders have set high benchmarks for pre-sales that often keep construction from moving forward as quickly as current demand necessitates. As a result, there’s an imbalance in the market as buyers seek out new product in markets where few options exist.
But developers have a real chance to alleviate this tension by breaking ground with less than a typical percentage of units pre-sold or no pre-sales at all—so that the start of construction is timed closely with the launch of sales and marketing.
Traditional hurdles to starting construction earlier can be navigated with the right strategy, and bringing projects to market quicker ultimately helps developers achieve stronger sell-through.
Market dynamics at play should incentivize developers to move up their construction timelines for the following three reasons:
Lower Pre-Sale Requirements, Less Competition
Waiting is simply not a winning strategy in the current market. Although construction sites remained open during the pandemic, many projects that had not yet broken ground were paused, meaning developments that break ground today will face less competition upon completion.
Moreover, developers that start construction ahead of schedule can effectively minimize their pre-sale requirement by bringing more equity or collateral to the deal. Most lenders want between 35 percent and 50 percent of units sold before they will fund the construction loan. But with more skin in the game, developers can lower this percentage, especially if they have a strong track record and existing relationship with the lender.
From a real estate perspective, a silver lining of the pandemic was that everyone developed a greater appreciation for their home—or, in some cases, a better understanding of what they want in a new home. As a result, the housing market broke records in terms of sales and sale prices. That momentum carried into 2021, yet many would-be buyers were stymied by record-low inventory, prompting some to shift their focus from resale to new construction.
Even with the best sales tools, it can be difficult to sell buyers on a building that does not yet exist. Construction activity not only instills confidence but also shortens the window between contract signing and move-in. Our research shows developers can anticipate selling units about 25 percent faster if sales commence with construction. And as units move closer to delivery, the pace of sales often accelerates, especially if the homes are effectively marketed as “new construction without the wait.”
Sales and Marketing Advantage
When a deal is in motion and construction has started, there’s a greater opportunity to broaden your sales and marketing reach. The reality is that a project that’s viewed as in the concept stage will get less attention from other buyer agents. But once construction has started, the game changes among cooperating agents who become more likely to introduce clients to your listing, and referrals are the key to any successful sell-through.
In fact, we’ve found the announcement of a groundbreaking creates a bump in traffic and sales for a for-sale development—and there’s an even greater bump in sales six months out from units delivering.
With the market realities in clearer focus as vaccinations continue and reopening plans take shape, developers should capitalize on the fleeting opportunity they have to break through by breaking ground now. Those who do this give themselves a competitive advantage as the U.S. economic recovery gains momentum and a new wave of residential development begins to take shape.
David Wolf is president and CEO of Wolf Development Strategies.