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Building tomorrow’s real estate market

by R. Michael Brown

Residential real estate sales have been a bright spot for the economy since the onset of the pandemic, but along with retail, entertainment and other economic sectors, new-home construction has struggled.

Wild fluctuations in the cost of building materials, rapidly changing buyer preferences and a variety of other factors have compelled builders and developers to find innovative solutions to get their projects completed.

The Home Builders Association of Greater Chicago and New Home Source websites show there are 503 homebuilders in Chicagoland selling 296 communities. Shoppers can tour 213 model homes and 196 quick move-in homes are available. Prices are from $220,310 to $6,550,000.

Chicagoland new-home sales lost much of their early 2021 strength in the spring, mostly because prices rose as building-material costs spiked, according to a report released by Tracy Cross Associates, a Schaumburg-based consultant to the homebuilding industry. In addition, inventory was unable to keep up with high pandemic-era demand. After a first quarter when sales were about 76% above the norm, second-quarter sales were up by only 13%.

Part of the difficulty right now is the cost of construction — houses are selling for less than the replacement cost, which requires builders to think ahead and creatively to deal with the material supply issue. “It’s been really challenging, but we’ve been able to navigate through it,” said Kerry Dickson, director of residential real estate at Vermilion Development. “We had agreements in place before the supply crisis, so we were able to get [most of the material] at the earlier prices. But we’ve had to be flexible too, substituting material when we couldn’t get what we originally designed.”

As far as a rebound in the new construction market goes, the data shows that whatever Chicagoland developers are doing, it’s working. Homebuilding companies sold 3,185 new-construction units in the Chicago region during the first six months of 2021, the Tracy Cross report continues, an increase of nearly 40% compared to the first half of 2020, when 2,314 contracts were recorded.

The significant increase in sales can be attributed to a first quarter when contracts were up 80% year over year. In contrast, activity during the second quarter of 2021 was up only 3% compared to the same three-month period in 2020.

The drop in sales during the second quarter of 2021 was due, in part, to significant price increases across Chicagoland as homebuilders raised prices to keep pace with rising costs, explained the Tracy Cross report. Among the region’s top five homebuilders (Lennar, D.R. Horton, M/I Homes, Pulte and Ryan), the average price of a new home offered during the second quarter of 2021 was roughly $45,000 higher than in the same communities a year ago.

Rising prices were also responsible for a noteworthy product shift in the market. Some consumers, who may have been pursuing a single-family detached new home in the suburbs, elected for a townhome or duplex instead. Overall, attached sector sales in suburban Chicago during the second quarter of 2021 were up 16.2% year over year, while single-family detached new home sales dropped by almost 11%.

Also contributing to the overall drop in sales during the second quarter of 2021 was shrinking supply. There were 296 new communities actively marketing new-production homes at the end of June 2021, a 16.4% drop from the 354 communities marketing new homes at the end of June 2020.

“Last year the city market for new construction was quite a bit slower,“ said Cyndy Salgado, executive vice president of development sales and marketing for @properties. “There just wasn’t much going on because people couldn’t access all the amenities that they come to the city for. But now we’re seeing the city pick back up.”

As a sign that buyers have started returning to in-town Chicago, 126 units were sold during the April-June 2021 timeframe, an increase of 88% over the 67 sales realized during the same COVID-impacted timeframe in 2020.

New-construction residential selling

Marketing and selling new-home construction is significantly different from selling existing properties, so resale agents and brokers who want to participate in new-construction home selling should learn how to adapt — and there’s a lot to learn.

Some builders are more involved than others in the sales process. David Wolf, CEO of Wolf Development Strategies, a marketing and sales consulting firm in Chicago, only works with new-home developers.

“We offer a complete range of services to collaborate with developers from concept to closeout, from research and analytics to programmatic design,” said Wolf. “Our process is comprehensive, from pricing and inventory management strategies to on-site sales execution, we provide a highly skilled team of specialized on-site sales and leasing professionals, curated for your project, and fully managed by our team.”

Wolf’s development clients depend on the company’s sales pros to handle almost all the buyer interaction. “The builder depends on us to do that,” said Wolf. “A builder representative may participate in the final walk-through before closing, but that’s it.”

@properties focuses heavily on new-home communities for developers, and is currently selling units at The Lincoln, Alcove Wicker Park, Gateway Northbrook, Kelmscott Park, Webster Square Condominiums and The Avondale.

“We work with developers as an extension of their team and do their marketing, public relations, social media and sales, so they can focus on developing the land and construction,” according to Salgado. “Selling new construction before it’s built isn’t just selling one individual property. It’s a conceptual sell from beginning to completion, selling using plans, renderings, model homes and other tools like virtual reality.”

Salgado emphasizes that you’re also selling the developer and their architect, engineering team and construction team to help the buyer get comfortable about the delivery and quality of the final product. In most resales, an agent or the current homeowner doesn’t even know who built the home.

Starting with a winning product

Marketing and sales agents for new-home construction work early in the process and use their market data to recommend a building and floor plan mix and finishes to developers and architects so they can sell units faster. And the key is to prepare to be flexible as the market shifts during long build times.

“Sometimes, what we do as the buyer demand shifts during construction, for example in a condo building — maybe there’s a one-bedroom next to another that can be easily combined, we already have a suggested floor plan recommendation to the developer for the combination ready to go so they can design and build that way in case that contingency is needed,” said Salgado.

Builders and their sales teams also have to be familiar with all the possible options for different appliances, materials, finishes and things behind the drywall, like HVAC and plumbing systems. Because of COVID and a heightened concern for healthy environments now, buyers are asking a lot more questions about HVAC airflow — especially in shared spaces and between homes in multifamily buildings, natural light and materials with surfaces that take allergies and possible contamination into consideration.

“It’s really important that the sales team understands the quality of construction to communicate to buyers,” said Dickson. “Right now, for example, since everyone is home, sound mitigation measures that you put into the flooring systems and in the walls is important to homeowners.”

New pioneering appliances, flooring material, smart-home Internet of Things (IoT) technology, security and mechanical systems, door and cabinet hardware, plumbing fixtures and all-around-the-home finishes are coming out every year, and prospective homebuyers like to hear about them. Brokers and agents that want to sell new-construction homes need to know about the latest.

The pre-sales partnership

The relationship between the developer and selling agents is important during the building process — understanding the pre-construction plan, the location and positioning of the overall community in the market/neighborhood, community amenities and what cost a homeowner will be responsible for, the product mix and where houses/condos will be on the site or building plan, building phases, homeowners picking options and the buying, building and delivery process.

Wolf said his firm works with developers months — sometimes years — in advance of a project coming to market. His firm’s work on The Reed, a 41-story luxury high-rise in the Southbank master plan development, started 18 months before sales began, and their work on 1400 Monroe, a collection of 42 luxury residences in the West Loop, started about six months out. “We understand the development process because we come from an institutional development background and are able to give the developer advice that is useful,” Wolf said.

The same goes for brokers, Wolf said, adding, “A big part of what we do is educate brokers to make their job easy.”

For new-construction developments across Chicagoland, touchpoints with the builder, sales agent and buyer may include community tour events, meet-your-new-neighbors events, home tours while they are under construction and final walk-throughs to inspect the property before closing. The interaction helps the future homeowners to feel comfortable with this large investment in something they can only imagine because it doesn’t exist yet.

In Chicago, brokers cooperate not only with in-house developer marketing and sales organizations, but also the marketing and sales consultants hired by developers.

Tim Anderson, founder and CEO of Focus Development, said his company uses an integrated approach and works with marketing consultants to conduct a market study to understand a community, help understand what to build and then use on-property sales agents to sell the homes.

“Since 1993, we’ve developed smaller, multifamily communities in historic districts to high-density, mixed-use redevelopments in thriving downtowns,” said Anderson.

Expert sources

David Wolf
CEO
Wolf Development Strategies

Kerry Dickson
director of residential real estate
Vermilion Development

Cyndy Salgado
Executive vice president of development sales and marketing @properties

Tim Anderson
founder and CEO
Focus Development

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