Stephen G. Kliegerman
President of Development Marketing
By Claire Levenson
As condo developments popped up all over the city, an industry of marketing and advertising sprouted up around them. But real estate experts are wondering what will happen to those divisions now that the U.S. economy is turning.
This decade's boom has seen major brokerage firms all over the city open new development marketing divisions at a rapid clip: Halstead opened a marketing division in 2002, Citi Habitats in 2003, and Brown Harris Stevens opened a new division in the fall of 2007.
The Corcoran group bought the Sunshine Group in 2005, creating the Corcoran Sunshine brand side by side with its former new development marketing group.
The intent of all this growth was to help developers make their buildings stand out in an increasingly competitive market. The result was that the brokerages' marketing staffs, which are composed of professionals with design, sales, advertising and architecture backgrounds, ballooned.
"There used to be less need for competitive branding, because there was less competition," said Stephen Kliegerman, the executive director of development marketing at Halstead. "Competition became stiffer, prices rose, so there was more need to compete for buyers and show why you are superior."
At Halstead, the new development business grew about 250 percent in 10 years, with new development brokering and marketing now making up 15 percent of the company's total business. The figure has grown by about 15 to 20 percent annually since 2002.
Similarly, new development marketing has exploded at Citi Habitats, where the load of new projects jumped from a total of between six and eight in the six-year period from 1997 to 2003, to approximately 35 in the past five years.
Budgets are correspondingly high: Since developers spend on average between 1 and 3 percent of a sellout on marketing, in the case of a $100 million sellout, as much as $3 million can be devoted to getting the word out about the project.
Developers spend anywhere from 25 to 50 percent more on marketing than they used to 10 years ago, according to Clifford Finn, the managing director of new development marketing at Citi Habitats.
With the market seeing signs of a slowdown, it is unclear what is on the horizon for the fate of new development in the city—and, by extension, the marketing divisions that go along with them.
Certainly, the number of new projects that will hit the market a year or two from now is down. Recently, the number of condominium offering plans submitted to the state attorney general's office for approval took a dramatic nosedive, falling to 5,684 in 2007 through October 31, compared to 14,071 for all of 2006.
Robert Shiller, a professor of economics at Yale University, said that while there's an advertising bonanza now, projects will likely pull back if the market turns down more. "It's like cost cutting anywhere," he said.
"In past cycles, advertising has been very strong during the boom part of the cycle and then drops off dramatically," Shiller added. "Ads seem to work best when people are excited."
He continued, "It does seem to me that promotion will drop off quite a bit. That's what's happened in previous cycles."
Others say they expect marketing to increase even if the market continues to weaken.
"There is a little bit of a market slowdown, even in New York," said Barry Hersh, the associate director of the Steven L. Newman Real Estate Institute at Baruch College. "Developers don't have a choice. How do you sell a building? One strategy is to spend more on marketing…We are in a very competitive situation, so you put more money to get more traffic."
Neil Binder, the principal of Bellmarc, echoed that sentiment. "If you have a slowdown, developers will be inclined to spend more on their model apartments and marketing expenditures will increase," he said.
With advertising on the Internet cheaper than print ads, budgets won't have to increase a lot to make up for longer absorption times, Kliegerman said. His rule of thumb: "I would suggest developers have a contingency of a half a percent of the sellout set aside for additional marketing."
Of course, spending more on marketing in a slow market can be financially self-defeating—and even marketers admit that the advertising allotment will have to shrink if things get really dire.
"But," Binder said, "we haven't reached that point yet." Binder, whose firm focuses more on resales than on new development, said he hasn't seen his competitors scaling down their new development divisions yet because they still have a lot of inventory.
Marketing executives at brokerage firms agree they are not scared of a slowdown because they still have a substantial number of projects to work on.
Some real estate experts believe that many developers will keep building until June, when the 421-a tax abatement program expires. But once that happens, there will probably be a lack of new construction in New York City, Hersh said.
Furthermore, the higher end of the real estate market has so far been relatively immune to the slowdown, partly because of international investors and the weak dollar. At Brown Harris Stevens Select, the focus is on ultra-luxury and foreign buyers, said senior managing director Shlomi Reuveni.
Reuveni said there is no talk of downsizing at his firm: The staff of 12 is scheduled to increase to around 30 in the coming months.
The president and chair of Gumley Haft Kleier, Michele Kleier, said firms that work in prime locations won't be affected, but those that work in other areas could feel the pinch.
"The areas that are slowing down are the fringe areas," she said. "Companies that focused on these areas will be in trouble."
Friday, February 01, 2008