On the Case: Meet the New Neighbours

Even the best-laid plans don’t always work. Just ask the executives at Vancouver’s Fraser Land Development. They’re starting work on the third phase of a condo project that targets young professionals. Their problem? After succeeding in hitting their target market in the project’s first two phases, they’re now seeing more families asking about sales. Designs will have to change if they serve this unexpected market. It will be costly. Should they adapt to the new trend, or stick to their guns?

Executives at Fraser Land Development, a Vancouver-based condo developer, no doubt felt they’d given themselves a tall order when they started construction in 2008 on a three-phase,  300-unit project called Tivoli. The financial crisis was just beginning to rock markets, and the economic outlook was frightening. Despite all this, Fraser pressed ahead, buoyed by the fact it had done its homework carefully, choosing Tivoli’s location, unit design and finishes to target a specific clientele—single professionals buying their first condominiums.

As the economic storm eventually calmed, Fraser’s preparation proved its worth. It had spent upwards of $250,000 in marketing consulting fees alone, but they had paid off in brisk sales for the first two phases of the project, even in spite of lingering economic uncertainty. All of this pointed to strong demand in the target demographic that had been identified by market research. But when it came time to start selling the third and final phase, the portion that usually accounts for the lion’s share of a developer’s profit, the marketing plan stopped working.

It was late February 2010, and construction was scheduled to begin in 30 days. The condo designs had been locked in place for months and all the major trades were lined up to begin work. Potential buyers were flocking to the sales office. The problem? A large proportion of the people coming in to have a look at the project were not from Fraser’s target market of single professionals. They were from three-and four-person families. There were certainly many features in the Tivoli project that would appeal to them. Located south of Vancouver, Tivoli was surrounded by a heavily treed park. It was also close to commuter routes leading into the city as well as a variety of recreational facilities. But the units themselves were on the small side, ranging from 600 to 800 square feet in area, and featured open-plan designs that weren’t really conducive to family-oriented lifestyles.

With a disconnect emerging between the design of the project and the potential customers sizing it up,  Fraser found itself facing a conundrum: Should it undertake a costly revision of its plans to accommodate this unexpected interest from families, or should it stick to its original plan in hopes that interest from single professionals would pick up? The decision fell to Fraser’s vice-president of project management, Chris Lee.

Lee felt the conundrum acutely. The cost of redesigning units to accommodate families would come in at about $150,000, equal to about 3% of Fraser’s net profit—most certainly a deterrent to thoughts of shifting gears. But Lee was also keenly aware that sticking to the plan might cost him more in lost business. More than 20 qualified families had visited Fraser’s sales office when sales opened on Phase 3. Lee figured that he could have made a dozen sales within that group of people, which would have accounted for 12% of his total sales goal.

Lee also considered that consumer demand might have undergone rapid shifts due to the financial crisis and had changed after Fraser’s marketing consultants had finished their work. Or maybe the original market research was flawed in some way. Anything was possible. All that Lee knew was that he had relied on market research in the past and it had worked very well.  But was this a case where he should go with what his gut was telling him?

THE EXPERT VIEW

Jeanhy Shim, Vice-president, Sales & Marketing, Streetcar Developments

Before Fraser Land Development can make a decision on potential changes to its building design, it needs to quickly gather more information from the sales team about the traffic to the sales centre. Lee assumes that “half of the qualified families would eventually purchase units,” but how “qualified” were the families? Did they come to the sales centre because of the advertised price point for the smaller units? This is important to know because larger-size units would have correspondingly higher selling prices, so the key question is whether these families would still be able to afford the higher price point of a larger-size unit.

The best way to test the market for larger suites would be to design and price a larger unit. This could be done quickly and at no additional cost to the project as the development team could take two smaller units and sketch a suite layout combining them into a larger unit. No changes would be made to the working drawings at this point. Sales staff should then contact the families who had visited to tell them a larger unit had been created and ask for feedback.

This could be done in a couple of days, giving Fraser a much better sense of how serious and qualified these families are before changing plans. If there proves to be demand for the larger unit, then the working drawings could be modified.

The other key questions are: Did any single professionals visit the sales centre at all over the past week? Were there any qualified prospects and, if so, how many? The sales team should be calling and/or e-mailing the single-professional prospects who had visited the sales centre to get feedback about the product and pricing, and to determine how serious these prospects are about the project. If the sales team feels that there is strong interest from single professionals, then there may not be a need to redesign the building at all.

If there were very few (or no) single professionals who visited the sales centre at the opening, then the sales and marketing team should re-examine their marketing and advertising strategy quickly. If the feedback from the sales team suggests that the single-professional buyers have become more price sensitive, then Fraser could consider ways to offer a more attractive price point through an incentive program (costs would be recuperated through subsequent price increases) or through modifying the suite specifications to reduce costs.

In summary, Fraser needs to keep as many aspects of the building design unchanged as construction starts in just 30 days. It also appears that it will need to be open to making minor adjustments to the building design based on feedback from the sales team in order to achieve its sales targets.

Hussain Ali-khan, Managing Director, Carlyle Development Services

Fraser has been diligent in conducting market research for its three-phase Tivoli project. Yet for all that work, the last phase of it is attracting families rather than the targeted single professionals. It is not clear why this is happening and that is cause for concern. Chance is not a likely factor. Assuming that the probability of a single professional or a family coming by the sales center is 50/50, the probability that more than 20 families in a row would drop by is slightly better than being struck by lighting twice in the same year.  But any number of variables may be impacting actual market results.  Demand by single professionals may have been satisfied by Tivoli’s first two phases, with a demand from families revealing itself in the third phase. Employment reductions have hit young professionals hard and this segment may no longer be in a position to buy a home. Lenders may have tightened their criteria. Whatever the case, Fraser—specifically,  project manager Lee—should try to understand the trend before making decisions about the future of the project.

On the bright side, it appears that local amenities such as the park and the recreation centres appeal to families more than singles. Fraser can probably charge more per square foot for larger units, mitigating some of the switching costs. Also, families make great homeowners and tend to attract more families, creating a strong sense of community, which could enhance the value of Tivoli’s third phase. Fraser is also lucky that this information has come to light before starting construction, when a change order would cost more. From the perspective of mitigating risk,  the cost of switching will pale compared to having a half-sold building with the associated carrying costs. Those must be shouldered by the developer.

In spite of Fraser’s good work, the market has spoken.  The company should not let research get in the way of sales. It should redesign, but Lee, as project manager, will need to pull together all of the reasons for switching when he confronts his investment committee.

THE OUTCOME

Lee ultimately decided to follow his latest data and announced that Phase 3 would have more family units. But when Fraser’s sales team contacted the qualified families that had visited the sales office, they found that most had already purchased units from competitors. Then, when construction started, single professionals started to visit the showroom, while family visits dropped off. Lee was confident that Tivoli’s third phase would sell out. But he was left wondering if the decision to abruptly change plans was a costly mistake.

This case study was prepared by Financial Post Magazine and the Pierre L.  Morrissette Institute for Entrepreneurship at the Richard Ivey School of Business (University of Western Ontario). The case method is a key learning tool in the cross-enterprise leadership approach used at Ivey.  The views represented here are solely those of the case authors. Some details may have been changed to protect privacy.