The Launch Effect

As you may be aware, I put a lot of effort into, and quite enjoy, finding different ways to present housing data. Data visualization can be a means to finding relationships that are difficult to find with just a table of numbers. It can also be a faster way to absorb market information into your mindset so you’re better prepared to interpret the market and make decisions going forward.

With that in mind I decided to take a look at the “Launch Effect” in the GTA High Rise market, looking at projects launched in the Downtown East and Downtown West submarkets over the last 4 years. The resulting chart is as follows with an explanation further below.

The two submarkets tested for the launch effect had a total of 77 new high rise project openings from January 2007 through October 2010. 18 openings in Downtown East and 69 openings in Downtown West. Each row in the above chart represents one project, and the rows are sorted by opening date with the earliest openings at the top and the most recent at the bottom.

There is a circle in each month that the project was active and selling units.

The size of the circle represents the percentage of the project that sold in that particular month. The largest circle on the chart equates to 94% and the smallest circle equates to 0%. The first circle in each row represents the month that project opened for sale to the public. Typically, if you see the very small circle representing 0% sold as the first circle in a row, that means the project opened too late in that month for any sales to considered as firm sales. If a project launches within the last 10 days of the month, the rescission period has not expired before the end of the month and none of the initial sales will be firm until the following month. Those units sold that remain sold after the rescission period are then counted as sales in the month they become firm sales. And for the purpose of calculating the launch effect we use the first month that firm sales are possible.

The colour of the circle also represents the percent of the project that sold in that month but within a range – dark red circles represent more than 75% of the project sold in that month, dark blue represents that less than 25% of that projects sold in that month.

Reviewing the chart by year we see many strong project launches in 2007 (ie: red circles indicating greater than 50% of units sold in the first month), much less so in 2008 (but not without success stories), and then a very strong 2nd half of 2009 for both of these downtown submarkets. The 2nd half of 2009 was so strong in Downtown West that 7 of the 9 project openings in the last 4 months of the year sold more than 50% in their first month of sales. As a result, 2009 had the highest average launch effect rate for both of these submarkets, of the 4 years illustrated above. On average Downtown East projects sold 64% of units in the first month and Downtown West projects sold 60% of units in the first month.

So far in 2010 the launch effect has declined somewhat to 55% in downtown East and 41% in downtown West, however that’s well above the launch effect measured during the record sales year of 2007 for Downtown East and comparable to 2007 for Downtown West.

So in addition to providing a good market overview and comparison of the launch and sales performance of these two submarkets, we can use the information to fine tune  projections of the duration of the sales and marketing campaigns of proposed projects. The length of a sales and marketing campaign is important to forecast, and use in your proformas and cashflow projections, right from the residual valuation calculation at land acquisition through project planning and right up to project launch. Using updated combinations of launch effect and ongoing average sales per site for your market area will give you the best idea of what to expect.

The other thing I like about this chart is, in some instances, you can see larger dots (ie more sales) well after launch and after many months of low sales for a given project. I immediately wonder what happened to generate that month of increased sales activity for that project. Was it advertising? Incentives? A new opening across the street that brought extra traffic? When you see something like that its always worthwhile to dig a bit deeper into why the sales increased as it could represent a learning opportunity. And sometimes learning opportunities turn into market insights which can be applied to your own sales program.

About Steven Hurst

VP Analytics, RealNet Canada
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