It is a core belief of mine that design and brand equity create value in real estate. But to what extent is this true? And how much should a developer invest in these things? Is it worth spending a 3-5% licensing fee on a cool brand? Will the price premiums really be there? Here are some ways to think about it.
One, good design can just mean good taste and, as we talked about yesterday, giving a shit. This doesn’t need to cost any more than bad design; you just have to put in the effort. This is the low-hanging fruit to be seized.
Two, good design solves problems. And if you’re solving problems that increase returns and development yield, promote sales or leasing velocity, and/or lower operating expenses, then you have tangible value. You can start to figure out the return on your investment, and that helps with decision-making.
Three, good design can also just mean cool and luxurious materials and details. Here, you’ve got the highest cost of our three options, but it may be important in order to differentiate your offering, drive scarcity value, and create prestige. This one can be harder to evaluate quantitatively.
All of these approaches ultimately intertwine with the overall brand of a project and of the developer, and that’s the next piece for us to discuss.
The concept of brand equity has always been fascinating to me because on some level, it’s simply the premium people are willing to pay “for a name” because of the perception they have of that name. It is, by one definition, the “sum of consumers’ thoughts, feelings, and attitudes about your brand that influences their willingness to pay for your product.”
The challenge with brand equity is that it takes a long time to build, which is one of the reasons developers often borrow it (i.e., license it) from established consumer-facing brands to use on their projects. The other reason is that real estate tends to be local and slow-moving, so it’s objectively difficult to build a global brand.
Design and brand work together. If you’re developing an Aman Residence, the brand will dictate its standards so you don’t negatively impact the equity it has built up over time. But now we get back to our original question: To what extent does it make sense to invest in design and brand?
In economics, the definition of a luxury good or superior good is that demand increases more than proportionally as incomes rise. What this effectively means is that when times are good and people are feeling wealthy, they tend to overspend on luxury goods. And when times are not so good, they will often underspend on luxury goods and focus on normal or necessary goods.
What this means for real estate is that there is an opportunity to capture additional value through investments in design and brand when the overall market supports it. But during downturns, this pricing premium may feel like it disappears. Still, prudent investments in design and brand can lead to selling or leasing when the rest of the market isn’t. Your investments bought liquidity.
When Steve Jobs launched the original NeXT computer, he overshot the market by a wide margin, and it was a commercial failure. And when he launched the iPhone, critics similarly said it was too expensive. Apple ended up having to lower its initial pricing slightly, but the product turned out to be exactly what consumers wanted.
Finding the right sweet spot depends on local market conditions and the point you’re at in the development cycle. This involves as much art as it does science. But perhaps the above framework can start to help you think through the options.