Question No. 3: This was the first residential project FCR had undertaken. What does this imply? How should they think about the different facets of residential vs. other development types? What makes this project unique? How does architecture and design affect the project?
Answer:
As discussed in the case study, the FCR had enjoyed great response from the customers regarding their development projects, but they were anxious about this development project as this has been their first ever residential project. So, it was obvious that the FCR team was very much concerned about 8 Spruce Street project and were hoping to do well through the project life.
The team along with Gilmartin has realized that initial 38 floors would lower the revenue since, they had only studios and one bedroom. On the other hand, the next 38 floors would generate higher rents per square feet as they offer better views of the NYC. The last story would be penthouses, the highest among all towers in the city.
As the architect suggested, from floor 40 to 75, they would build 215 one bedrooms, 122 two bedrooms, 24 three bedrooms, 26 more studios and four Penthouses. Gilmartin and the FCR team estimated that they would be able to charge around $100 per square foot and expected that the rent would be around $200 per square foot for the penthouse.
The early market conditions and marketing efforts were paying off as 8Spruce had already received too many requests for the units in the lower 38 floors. But on the other hand, they were not certain about the stability and certainty of this demand and not even about the upper floors since, the prices of the upper floors were too high than those of the lower floors.
The architecture and design surely affected the project. As discussed in the case, the World’s most famous architecture Frank Gehry made around 600 models of the project of 8 Spruce Street, and after the withdrawal of the Pace University, he has to restructure and redesign the models.
The original plan was to build condos after the first 38 residential stories, but, there were a couple of main issues with condos. The first main issue was the demand for condos. In the New York City, the demand for condos had begun to diminish and fade.
The second reason was that the investor has to sell other units quickly to acquire condos investment. Because of this reason, the internal rate of return was continuously decreasing each day long when the condo was left unsold. On the other hand, the FCR was originally a long term holder of the real estate and they had managed the assets, so developing and selling condos was never a core business for FCR. Gilmartin, on the same side, has expected that they would not be able to sell the condos as quickly as they would have liked to.
Question No. 4: How can FCR keep costs low to mitigate market risk? How could FCR mitigate the risk of cost overruns?
Answer:
The management of FCR and Gilmartin was more concerned about the cost overruns and have decided to cut down the costs of the project, which was on a rising trend because of the certain events. As the studies suggested, the management should have done their homework regarding the feasibility of the project in all possible circumstances, in this area, the FCR team and Gilmartin seem to be completely unaware.
They can mitigate the market risk by seriously making adjustments in the work plan. They should work hard to get the favorable results. Costs were overrun because of the withdrawal of the Pace University from the project and the costs were also increased against what was projected because of the decline in the demand and market conditions across New York City. The easiest way to cut the costs was to stop building more stories and stay with the current 38 stories.
It was estimated that the management of FCR and Gilmartin could easily stop making more stories after the first 38 stories and walk away with the 10% internal rate of return and could achieve breakeven at this point. Although, by deciding in favor of stopping the project, the 8 Spruce would lose its uniqueness, but as far as the cost perspective is concerned, the company could moderate the risk of loss in capital amount invested............................
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