Investors may find more value in a move-in ready, commoditized unit.
Before they built their latest luxury projects, San Francisco-based development company Trumark Urban compiled market research on what it calls “warm shell” properties, meaning those that have electrical, mechanical, structural and plumbing systems in place, but are otherwise unfinished. Right away, a few things stood out.
First, they found that these units, which are also known as “vanilla shells,” “custom shells,” “white boxes” or “decorator-ready,” were most often purchased by buyers who had undertaken a gut renovation project before or built a home from scratch.
Many homeowners who buy in the $5 million to $20 million range have done this many times over, said Arden Hearing, Trumark Urban’s managing director.
“They prefer to set up a unit exactly as they see fit, from the layout to the finishes,” he said, and have the financial means and the team in place—including a contractor, architect, engineer and designer—to execute their vision.
Second, Trumark Urban found that selling unfinished units didn’t necessarily mean offering them at a lower price-per-square-foot rate than comparable finished units in similar locations. For instance, in Manhattan, where most of their market research was based, Mr. Hearing saw interesting examples where a finished, luxury penthouse—either new or resale—would sell for a similar amount to an unfinished shell penthouse.
“This would be surprising in the context of a normal condo,” he said, in which the finished product would likely be worth more. “But if someone isn’t putting any value on the finishes, because they plan on ripping them out to do their own thing,” this isn’t the case, he said.
Finally, Mr. Hearing said, they discovered that some people who were interested in these units didn’t want to undertake a massive renovation. In these cases, it was beneficial to offer an option in which they could come in and pick out the specific finishes—like you might if you purchased an Italian sports car—and return six months later to move in when the property was ready.
To address these findings, Trumark Urban included the option for a white glove buildout concierge program at its The Pacific development in San Francisco, which originally featured eight “warm shell” properties—three of which remain available, offered for $6.495 million, $9.95 million and $13.85 million.
The development company also recently offered two unfinished, now-sold penthouse units in its downtown Los Angeles Ten50 project. And the company isn’t the only one selling such units. “Warm shell” properties are common and have been around for decades in prime cities, such as New York and Miami, where high-net-worth individuals often buy, experts say.
“They’re popular because everyone has different tastes, and wants to express their individuality—especially at the high end of the market,” said Miami-based developer Gil Dezer of Dezer Development, who’s offered only designer-ready, unfinished units in his Porsche Design Tower and Residences by Armani/Casa projects in Sunny Isles Beach.
“We figure there’s no sense in installing an expensive cream marble that someone rips out because they want dark marble,” he said. “The market likes it this way.”
Because unfinished units require a significant amount of money and time to get right, experts say they’re most often purchased by end users as a primary or secondary residence. “This tends to be a home that the buyer has a significant emotional investment in,” said Garrett Frakes, managing partner of Polaris Pacific, the San Francisco-based company that handles sales and marketing for The Pacific. “Warm shells” are also most often delivered on penthouse floors, where units are 2,500 to 4,500 square feet or larger, Mr. Frakes said, noting that on lower floors and in smaller, less expensive units, people want something that is finished and move-in ready.
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