There is an age-old saying in real estate: “If you build it, they will come”. If you have the right marketing message and generate enough interest, this is true. They will come. But the two most important questions to ask are, “Once they see what you’ve built, will they like it enough to buy, and can they afford what you’ve built”?
About two weeks into this pandemic, I braved a visit to Target to buy food for the house. When I passed through the aisles, it told a story of irrational panic, but it also told a story of rational need and taste. It became very easy to see what people liked and what they didn’t. The pasta aisle was wiped out clean – except for lasagna. There were enough boxes of lasagna to feed a small village. I’ve tried to make lasagna once in my life. It took a long time, and the payoff wasn’t worth the effort. I never made lasagna again, but plenty of people will order it at a restaurant when they’re in the mood to be decadent. We just won’t sacrifice the time and effort to make it – even in a pandemic. Every aisle at Target told a story of winners and losers. The Oreos cookie aisle was wiped clean, except for the exotic variations of flavors that people didn’t want. I wondered to myself why these food manufacturers would make so much of one type of food that people don’t really want – even in a pandemic.
When creating a product for a market, the formula is simple. Ask people what they want, know what they can afford and then deliver exactly what they want and need for that price. There might be some factor of luck involved, but the formula is simple. If you oversupply the market, the demand will drop, and you will have to lower your price to entice people to buy. Right now, in the New York City real estate market, there is a huge inventory of available apartments and an even larger pipeline of apartments (over 7000 units) coming to the market. A large supply of this available inventory is in new developments. They have been built, the buyers have taken a look, and in a lot of cases, they have decided not to buy. The product is either unaffordable and too expensive, or the homes they are looking at are not appealing.
The real estate market doesn’t have an absorption problem. It has a product problem. The buyers are out there and want to buy but there isn’t the product available for them to buy at the right price. A large number of developers have missed the mark(et). They have tried to capture the top 1% and have built homes predominantly for this uber wealthy segment. They have completely forgotten about the 99%. There are more than twice as many apartments available over $3.5M than there are between $1M to $1.5M. This disparity will get bigger when we look at the pipeline of homes that will be coming to the market over the next 3 years.
It takes big balls to be a real estate developer – especially if you have your own money in the deal. The risks are high, but the payoff can be huge. If you build the right thing, you can make a lot of money. If you don’t, you could spend years of your life working on a project only to lose your shirt and bear the brunt of being ridiculed. Right now, there is a void in a market that needs homes. Affordable homes, with layouts that make sense and appeal to the forgotten 99%. Some developers will recognize this opportunity and build what the market needs for a price people can afford....others will remain lured by the sexiness of thinking they can dominate the top 1%.