March 6, 2021
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225 Brunswick Ave is yet another example of why the missing middle is so damn hard to deliver

Building buildings is really hard.

It’s hard for countless reasons, but one reason in particular is that it can be difficult to please everyone. Take parking, for example. This is often a primary concern when you’re trying to develop something new. Too little parking and people might be concerned that cars will start flooding the surrounding streets in search of a spot. Too much parking and people might be concerned about traffic congestion. So it can often feel like you’re damned if you do and you’re damned if you don’t.

I thought of this as I was reading through Alex Bozikovic’s recent opinion piece in the Globe and Mail called, “Yes, in my backyard: How urban planning must shift to meet our postpandemic challenges.” In it, he mentions a small missing middle-type infill project at 225 Brunswick Avenue here in Toronto. A century-old office building located in a residential neighborhood, a small developer has been working (with Suulin Architects) since 2018 to convert it into seven apartments.

Here are a few photos:

This is the kind of infill housing that planning staff and many councillors are trying to encourage across the city. And yet, the year is 2021. This developer is on year three in a process that will, maybe, deliver a total of seven new rental homes. There are also many other examples that we can point to in the city that have faced similar challenges, like this one here on Gerrard Street East. While not nearly as interesting architecturally speaking, it would have delivered 10 new homes proximate to transit. Maybe that will still happen. I can’t say for sure.

I’m not going to get into the specifics of any one proposal, but two things are clear to me: (1) Our city, and many other cities around the world, have a need for more missing middle-type infill housing and (2) our system is greatly flawed if it takes years and years to ultimately green light the delivery of only a half dozen or so new homes.

Time equals money. And when we make the process this difficult it means that many developers aren’t going to bother (because the math probably doesn’t work) and that the ones who are successful will need to absorb a bunch of unnecessary costs in the end pricing/rents of their homes (i.e. make the homes more expensive than they need to be).

225 Brunswick is exactly the kind of project that I would love to work on: a small-scale adaptive reuse project where design is clearly a priority. But with a 3-4 year entitlement timeline (perhaps longer?), it’s simply not worth it (though I do commend the efforts of the project team). I’m sure many others feel the same way that I do and that’s unfortunate when you’re trying to build a more vibrant, inclusive, and competitive global city.

March 5, 2021
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Future flexibility in multi-family buildings

It was recently reported that Jimmy Fallon and his wife are selling their New York City Penthouse in Gramercy Park. It’s listed for $15 million. In looking at the photos, it’s pretty much what I would have expected. It’s fun and quirky. And they have a “saloon room” that looks like it could be in Wyoming. But what I also find interesting is how they assembled this apartment over time.

It started in 2002. Jimmy Fallon was single and he bought his first place in the building — a one bedroom for $850,000. According to the article, he couldn’t really afford it. But as he was nearing the end of his run on SNL, Lorne Michael encouraged him to buy his own place. So he went and did that in Gramercy Park in a building that dates back to the 1800s.

As life evolved and as Jimmy got married, he and his wife started buying contiguous apartments — three more to be exact. Their penthouse apartment is now about 5,000 square feet and spans three floors in the building. It’s an interesting case study in the flexibility of multi-family buildings. Here is a building that was built in the 1800s and has probably seen a myriad of changes over its lifetime.

Future flexibility is something that is talked about here in Toronto in the context of new construction. We talk about “knock-out panels” so that someone like Jimmy can grow into a larger suite. I’m not sure how often this actually happens, but I would imagine the frequency is relatively low. But it’s very possible and not just in older buildings like The Gramercy Park.

March 4, 2021
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Opendoor launches cash-backed offers

Opendoor is best known for allowing homeowners to instantly sell their homes online. Enter your address. Get a cash offer. And then choose a closing date. (The commissions are around 5%.)

Today, Opendoor announced something new called cash-backed offers. What it does is help to reduce the friction on the buy side and how it works is that Opendoor literally backs your offer with cash.

If for whatever reason you can’t come up with suitable financing, Opendoor will buy the home themselves and you’ll have 240 days to figure out your affairs and buy it back from them for the same price and at the same terms.

The idea is that it helps to improve the attractiveness of your offer, which is particularly useful in competitive low interest rate environments, such as the one we’re living through right now. (Already about 36% of the market in the US is compromised of all-cash homes sales.)

Opendoor started by dramatically reducing the barriers to selling a home (supply). And now they’re trying to make things easier on the demand side of the marketplace. At the same time, the process is going digital. I think this is great for consumers.

For more on the trends shaping home buying in the US, check out this report that was published by Opendoor last month.

Full disclosure: I am long $OPEN.

March 3, 2021
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How to model a wealth tax

I just came across this post by Paul Graham called, “modeling a wealth tax.” It’s from last year, but it recently resurfaced. In it, he paints a scenario. Let’s say you’re a successful entrepreneur in your twenties (i.e. you make some money) and then you live for another 60 years. How much of your stock would the government take with various wealth taxes?

With a 1% wealth tax, it means that you would get to keep 99% of your stock each year. But assuming the wealth tax gets applied every year, you would be left with 0.99^60, which equals 0.547. Put more simply, a 1% wealth tax would mean that over the course of the 60 years after you built your company, you would be giving the government 45% of your stock.

How did this number get so big?

The reason wealth taxes have such dramatic effects is that they’re applied over and over to the same money. Income tax happens every year, but only to that year’s income. Whereas if you live for 60 years after acquiring some asset, a wealth tax will tax that same asset 60 times. A wealth tax compounds.

Of course, Paul also points out that giving away a portion of your assets each year doesn’t necessarily mean that you’re becoming net poorer, so long as your assets are increasing in value by more than the wealth tax rate.

Still, these are massive numbers. A 2% wealth tax would translate, over this same 60 year time period, into the government taking 70% of your stock. A 5% wealth tax works out to 95%. For more on this, check out Paul Graham’s post.

March 2, 2021
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What are you serving at your restaurant?

Warren Buffet’s annual letter to Berkshire Hathaway shareholders was just published for 2020. It can be downloaded here. I have made a habit out of reading his letter every year and his overall approach has been instrumental in shaping the way I think about investing.

What is clear to me when I look at the first page of each letter — which contains a comparison of Berkshire’s performance to that of the S&P 500 — is that he and Charlie Munger have got to be the most successful stock market investors of the last century.

They have consistently outperformed the market. And they have done that by focusing on fundamentals, doing what others are not (i.e. being contrarians), and being incredibly patient, among other things. All of this isn’t rocket science. It’s simple, understandable, and repeatable.

The other thing we can learn from his widely read letters is that clear and concise writing is a powerful tool. I have said this many times before, but to explain something clearly it means you need to really understand it. Things tend to get complicated when you don’t know what you’re taking about.

And with that, here’s an excerpt from this year’s annual letter:

In 1958, Phil Fisher wrote a superb book on investing. In it, he analogized running a public company to managing a restaurant. If you are seeking diners, he said, you can attract a clientele and prosper featuring either hamburgers served with a Coke or a French cuisine accompanied by exotic wines. But you must not, Fisher warned, capriciously switch from one to the other: Your message to potential customers must be consistent with what they will find upon entering your premises.

At Berkshire, we have been serving hamburgers and Coke for 56 years. We cherish the clientele this fare has attracted.

The tens of millions of other investors and speculators in the United States and elsewhere have a wide variety of equity choices to fit their tastes. They will find CEOs and market gurus with enticing ideas. If they want price targets, managed earnings and “stories,” they will not lack suitors. “Technicians” will confidently instruct them as to what some wiggles on a chart portend for a stock’s next move. The calls for action will never stop.

Many of those investors, I should add, will do quite well. After all, ownership of stocks is very much a “positive-sum” game. Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at a board listing all of the S&P 500, will – over time – enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original “selections.”

Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees. Still, investors must never forget that their expenses are Wall Street’s income. And, unlike my monkey, Wall Streeters do not work for peanuts.

When seats open up at Berkshire – and we hope they are few – we want them to be occupied by newcomers who understand and desire what we offer. After decades of management, Charlie and I remain unable to promise results. We can and do, however, pledge to treat you as partners.

And so, too, will our successors.

March 1, 2021
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An architect’s lot

In this short video about the Harry and Penelope Seidler House in Sydney (which is a beautiful heritage-listed modernist house), Penelope talks about how her and her late husband, Harry, used to drive around looking for the ideal block of land in which to build their own home.

When she begins to talk about the property they ultimately chose (pictured above), she is about to call it a challenging lot, but then immediately corrects and says that it is “an architect’s block” — it’s steeply sloping. I thought this was interesting for two reasons.

One, there are countless examples of famous homes built into steep and sloping terrain. Think, for example, of the Douglas House by Richard Meier. A personal favorite. And two, I myself am drawn to these sorts of lots. Topography creates challenges, but also opportunities. It forces you to engage the site and also really study the section as you design.

Is this really an architect thing?

Image: Monocle

February 28, 2021
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Venice in numbers

Here are some interesting figures about Venice take from this recent FT article by Chris Allnutt:

  • Tourist visits to Venice last year were estimated to be about 1/5 of what they usually are
  • Short-term rental bookings as of December 2020 were down about 74% year-over-year
  • It is estimated that short-term rentals normally represent about 12% of homes in Venice (this is significantly higher than the “typical city” which is estimated to be about 1-2%)
  • Even before the pandemic, average property prices had declined from about €4,500 per square meter in 2018 to €4,341 in 2019 (2020 data is still coming)
  • Pre-pandemic, the population of the city was about 50,000, which is less than a third of what it was back in the 1950s
  • A 2018 study by Airbnb reported that for every local Venetian the city had 74 tourists on average (wow)
  • Being a dominant port city, the city has generally been disproportionately impacted by plagues and other health crises throughout its history
  • The Lazzaretto Vecchio, which still stands today, is a small island in the Venetian Lagoon that was founded in the 15th century as a hospital to care for plague victims; apparently it was the first of its kind in the world
  • During the 15th century, Venice saw its population drop by about two-thirds as a result of an epidemic
  • At the height of the Republic of Venice in the 1790s, the city had a population of about 170,000; after falling to Napoleon it halved to about 96,000
  • It’s worth pointing out that the “height of the republic” occurred after many great epidemics; the subsequent population decline was seemingly the result of a conquest and not pestilence

Photo by @canmandawe on Unsplash

February 27, 2021
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What will be the new New York City?

Peggy Noonan argues, in this recent WSJ article, that the world has changed forever. A human habit was broken during this pandemic and city life, including office life, will never be the same in New York City. She qualifies this by saying that some people will return to offices, potentially in significant numbers. (People like being around other people.) But that things will never be what they once were. We’ve learned that we can decentralize and still get work done.

As many of you know, I am bullish on cities and I am bullish on offices. So I found myself disagreeing with many of her arguments. But Peggy does raise some valid concerns: How are cities going to pay for what just happened over the last 12 months? According to the Partnership for New York City, the city lost about 500,000 private-sector jobs since March 2020. About 300,000 residents from high-income neighborhoods also filed for a “change of the address” during this time period.

Given that the top 5% in New York represent about 62% of the state’s income tax base, the movement of people to low-tax states (and warmer places) is something to watch. It’s also a trend that existed well before this pandemic.

At the same time, I’m not necessarily convinced that (at least some of) these fleeing rich people aren’t coming back. I was speaking with a real estate agent over the weekend who is based in a popular US resort/recreation market and while he told me that, yes, he’s seeing a massive influx of people from expensive coastal markets, these people are largely choosing to rent. They want to take the lifestyle for a test drive and they are also waiting to see what happens with the world once city life returns.

There will be real financial challenges coming out of this. But as I’ve said time and time before, cities are remarkably resilient. And as Jack Shafer argued in this recent article about “memorializing the pandemic,” humans tend to have short memories, especially when it comes to bad things. The Spanish Flu has been regarded by many as a forgotten pandemic. We moved on and the same will happen this time around.

February 26, 2021
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Biden revokes Trump’s executive order encouraging classical architecture

This week it was announced that US president Joe Biden has revoked a number of Presidential Actions, one of which is Executive Order 13967 — Promoting Beautiful Federal Civic Architecture.

Signed on December 18, 2020 by former president Trump, the order, which I wrote about last February, encouraged the use of “classical and traditional architecture” for all federal buildings.

Part of the argument was that too many buildings are being made for only architects to appreciate. This includes, you know, modern architecture and styles like brutalism.

Well that order has been revoked and that means that “beautiful” federal civic architecture is now free to be anything it wants. Look to the past, look to today, and/or look to the future.

This is the way things should be.

February 25, 2021
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Thoughts on electric vehicle adoption

Nathaniel Bullard’s latest Sparklines article for Bloomberg Green makes some interesting arguments around EV adoption.

First, he shows that cars in general have been getting a lot more expensive. Looking at new vehicle market share in the US according to price (above), you can see how quickly cars over $40k have become about half of the market. Only some of this is inflation.

Nathaniel then goes on to show just how many people lease a luxury vehicle (apparently this is called lease penetration). For Infiniti it’s 55.6%, for BMW it’s 49%, and for Mercedes it’s about 40%.

When you consider that “upfront cost parity” between EV and internal combustion vehicles is supposed to arrive sometime in 2024, there is an argument to be made that people are destined to start buying a lot more EVs in the near future.

They’re already buying expensive cars and EVs will soon be cost neutral in that regard. At the same time, a lot of people lease their cars and will be in a position to easily switch when it makes sense to do that.

I think the greater barrier to adoption at this point will be the charging network and “range anxiety.” Too many plug types and not enough charging stations, except maybe if you have a Tesla. But at some point that too will change, I’m sure.