Month: February 2014

• Turning post into talk

  I’m going to be turning one of my blog posts (“Why Toronto should stop complaining about all its condos”) into a talk at Ryerson University’s Ted Rogers School of Management on March 10th, 2014 at 6:30pm. But since it’s an academic setting, they wanted me to make it more impartial and so the talk instead, asks a question, and is called: “Should Toronto stop complaining about all its condos?” 

  You can register for the event here. It’s primarily geared towards students, but I’m told it’s also open to industry and the public. I haven’t completely figured out what I’m going to talk about yet, but I plan to focus on the issues of supply and demand I raised in my blog post and then tie that into a discussion about the rise of midrise development—specifically through DUKE and Kingston&Co (both TAS projects).

  If you have any other suggestions, I’m all ears.

  2014.02.28

• Home as machine for living

  Earlier this week I wrote a post talking about how maybe developers need to position their homes as more of a “product”. After that post, somebody asked me about my thoughts on home automation and how I thought technology was going to creep into the home.

  Then today, I came across this networked washing machine prototype from the folks over at Berg. If you can’t see the video below, click here.

  Just like Nest, this is the start of taking really unsexy home devices—thermostats, smoke alarms and washing machines—and making them sexy and networked. The “internet of things” is a trend that I think we’ll definitely see a lot more of.

  Because more broadly speaking, our homes today are actually really dumb machines. Swiss-born French architect Le Corbusier used to refer to the home as a “machine for living”, but the thermostat is really the only adaptive device most people have in their homes. And it’s not even very good.

  When the temperature drops, most homes have one sensor (the thermostat) to tell the mechanical equipment that it should flip on the heat. It could be incredibly hot upstairs or in another room, but your home has no understanding of that. The decision is binary: heat on or heat off.

  There’s a lot more we could do.

  Zoned heating and cooling is an obvious solution, but I’m also imagining buildings that physically adapt and change to their environment. Designing buildings for climates like Toronto’s—where we have both extreme heat and cold—is incredibly challenging, particularly because our buildings are so static (other than operable windows in most cases).

  So while I do think that networked devices are great progress, I also think that we need to be looking at the bigger picture. Let’s think about the actual architecture of our homes and how we can truly make them responsive machines for living.

  2014.02.27

• What I see as the fundamentals of real estate investing

  Earlier this week my father sent me this article containing an excerpt of Warren Buffet’s upcoming shareholder letter. His annual letter—which started in 1965—is well known in the investment community. And in many ways, it’s like his own annual blog, started well before anybody knew what a blog was. His letters are personal, genuine and engaging—just like a good blog should be.

  But for me, what was really interesting about the letter is that it provided a number of lessons about investing in real estate. Lessons which, in my view, really represent the fundamentals of the business. The way I think about it is that there are really 2 ways in which to make money as a real estate investor over the long term. You can develop/reposition real estate and/or you can collect rent.

  Develop/Reposition

  If you’re developing or repositioning real estate, it means you’re doing something to increase the value of the property. It could be by rezoning, building new, or through an aggressive leasing strategy. It’s whatever you believe will unlock additional value. Once you’ve done this, you then either sell the property or you move onto the 2nd way of making money in real estate.

  Collect Rent

  By collecting rent, I really mean that you’re buying yield. This means you’re saying to yourself:

  I can buy this property for $1,000,000 and the net operating income on it is $100,000 (per year). So that means I’m buying at a 10% cap rate (or return). 

  Or maybe you’re saying:

  I can buy this property for $1,000,000, but the net operating income is only $25,000. However, the rents are well below market and I think I can easily get this thing up to a “10 cap.”

  Either way, you’re buying a stream of cash flows and you have an understanding of where that cash is going to come from.

  Speculate

  If on the other hand, you’re buying solely on the expectation that prices are destined to rise, you are—as Buffet points out in his letter—speculating. You’re not doing anything to create value and so you’re not developing. And if you’re counting on price growth to generate your investment returns, then you aren’t buying yield either.

  While many people have made large sums of money by speculating on real estate, I don’t consider myself capable of doing that in any sort of sustainable way. Hell, if Warren Buffet doesn’t think he can do that, why should I think I’m special.

  But some of you may disagree with this framework. If so, I’d love to hear from you in the comment section at the bottom of this post.

  2014.02.26

• Do homes need to become more of a product?

  Yesterday evening I moderated a panel on innovation in real estate at the Rotman School. The panelists included Subhi Alsayed (Innovation Manager at Tridel); Michael Lio (President of buildABILITY Corporation); Alison Minato (VP of Sustainability at The Minto Group); and Tad Putyra (President and COO, Low Rise Development at Great Gulf).

  Though the general consensus was that the real estate industry is terrible at innovation, it was comforting to hear that a number of both low-rise and high-rise developers are working on and/or towards building “net zero” homes. A net zero home is a home with no net energy consumption. What this means is that the home produces as much as energy as it consumes.

  The general strategy with these homes is to design the building so that it’s as energy efficient as possible (as in R-40 walls and triple-pane glazing) and then use renewable energy sources (such as solar) to fulfill any remaining energy needs. Of course, the next step would be homes that actually produce more energy than they consume so that they become net contributors to a city’s energy grid. But let’s not put the cart before the horse.

  There are a number of challenges to achieving this goal—one of which is on the consumer side. Many of the panelists mentioned that consumers simply don’t care enough about building performance and energy efficiency. Instead of worrying about air tightness, they’re worried about cosmetic things, like granite countertops and hardwood floors. That’s not to say that these pieces aren’t important, but they’re only one aspect of a home.

  So what’s the solution? Do developers and home builders need to get better at consumer education? Or should utility companies be the ones shouldering this responsibility? After all, improving energy performance means lower utility costs.

  One thought that came to mind (and I’m testing this for the first time with the Architect This City community), is that maybe homes need to become more of a product. Today, developers often market projects and communities ahead of themselves. But maybe that’s not the best way to drive innovation within the real estate industry.

  For example, think about how car brands segment the market. When you buy a Mercedes, you expect a certain level of performance and quality. You probably don’t know about every little technological innovation in the car, but you assume that they’re pretty damn good.

  With a new home on the other hand, you’re buying (insert generic name) on the Park or the Residences of (something regal sounding). The developer’s brand is secondary. And maybe that’s the wrong approach. Maybe it’s making consumers believe that the only thing that matters is whether you’re getting stainless steel appliances and granite countertops.

  Maybe consumers need to know whether or not they’re buying from the Mercedes developer or from the Ford Pinto developer. After all, consumers make decisions based on heuristics. They need to be able to say to themselves:

  “This home is $50,000 more, but it’s from the Mercedes developer so I can justify it. I’ll have less problems in the future, I’m sure.”

  Instead, consumers are saying to themselves:

  “This home is $50,000 more. Why is that? They both have stainless steel appliances and granite countertops. I’ll just go for the cheaper one.”

  I refuse to believe that the real estate industry can’t be as innovative as other industries. There’s always a way. We just need to figure it out.

  What are your thoughts?

  2014.02.25

• John Tory is running for mayor of Toronto

  Yesterday I was at brunch for a good friend’s birthday and a few of us started talking about politics and the future of Toronto. We immediately became depressed by the fact that Rob Ford, could actually, get in again. For those of you outside of Toronto, I know this sounds like pure lunacy.

  We then speculated as to whether John Tory would ultimately run again. Though it would split the conservative vote (between Ford and Karen Stinz), I was hoping he would. Then, just like magic, Tory announced his candidacy. Here’s the video:

  
  

  While some would call it an oxymoron, John Tory is often painted as a “Red Tory”. He’s fiscally conservative, but then holds socially liberal views on issues such as same-sex marriages.

  But perhaps more importantly for the Architect This City audience, Tory is also a city builder. He’s Chair of the Greater Toronto CivicAction Alliance, which is non-profit group focused on transportation and economic development in the region. And this comes through in his clear support of the Yonge relief subway line (see above video).

  So even though this risks splitting the conservative vote, I will be supporting John Tory’s candidacy during this year’s mayoral election in Toronto.

  2014.02.24

• Gentrification, animated

  A friend of mine sent me a link this afternoon to an art project called “Vacated”. The artist (Justin Blinder) reverse engineered Google Street View images to create a series of animated GIFs intended to demonstrate New York’s “changing urban landscape during the Bloomberg administration.”

  In his description of the project, Blinder ends by saying that “it’s up to the viewer to decide whether this change represents widespread gentrification.” Given the recent discussion we’ve had (here on Architect This City) about gentrification, I thought this post might be a good addendum.

  One of the big takeaways from our discussion, I think, was idea that there’s good gentrification and bad gentrification. Gentrification, after all, is really just another word for investment. And so generally I would consider this to be a good thing for communities.

  But there are instances when investment comes in and ruins what made the community worth investing in, in the first place. Perhaps the investment brought about the destruction of heritage buildings or the loss of the fine grain urban character that initially made it a great place to be.

  In these cases, I would say that this is bad gentrification. Sure there has been investment, but now the community has lost what made it cool. And as Jane Jacobs rightly pointed out: “When a place gets boring, even the rich people leave.”

  2014.02.23

• It’s all about people

  Yesterday evening I met up with a talented Toronto-based technology entrepreneur who also happens to be passionate about cities. The conversation meandered between both worlds, but we ended up coming back to one central theme: It’s all about people.

  Facebook didn’t just buy WhatsApp for the technology. It spent $19 billion on almost half a billion active users. That’s what matters. Do people want to occupy your (real or virtual) space? Have you created a community? Whether it’s an app, a building or a neighborhood, you’re useless without engaged participants.

  And to be perfectly honest with you, that’s my ultimate goal for this blog. Ideally I’d like each and every post to inspire conversation and debate (just like this one did on gentrification). A one-sided conversation can only take you so far. The real value happens within communities.

  2014.02.22

• Developer Dirt: Site selection and acquisition

  I’ve already spoken about why I became a developer and offered some insights into how you might be able to transition from architecture into development. So now I’d like to start focusing more on the day-to-day of what it means to be a real estate developer.

  And since I seem to be getting a lot of questions from readers on career and development related topics, I’ve decided that I’m going to turn these posts into a regular blog series. Right now the working name is “Developer Dirt”, but if you have a better name I’m all ears (let me know in the comments below).

  So let’s start with step 1.

  You’re ready to develop a new project and you’re now in the market for some land (also known as a site). It could be a greenfield site (meaning it’s virgin land that hasn’t yet been tainted by humans) or, on the other end of the spectrum, it could a brownfield site (meaning it probably once housed industry, it’s contaminated as all hell, and you’re going to need to clean that puppy up before you build).

  Without going into further detail about all the different kinds of sites you could potentially buy (which is a post in itself), here are 3 high level things to keep in mind as you move forward.

  Land is the residual claimant

  What this means is that you want to start with your top line. You want to start with revenue. What can I build on this site (use and square feet) and how much can I ultimately sell or lease that space for?

  Let’s say, for example, that you think you can build 100,000 square feet. If it were office space, you’d want to know that rents in your area are $30 per square feet and that that’s going to render you $3M a year in rental income. If it were residential condos, you’d want to know that the market is absorbing $500 per square foot and that if you sold 100,000 square feet worth of condo, that your revenue would be $50M. But remember this is top line.

  Once you know your top line, you then need to figure out what it’s going to cost to bring you that revenue stream. In other words, what are the hard costs (construction costs), the soft costs (consultant fees and other non-construction costs), the return my investors are going to demand, the money I need to keep the lights on in my business, and so on.

  Hopefully, once you’ve calculated all of these numbers, you’ll have some money left over from that original top line number. That residual money is what you can reasonably afford to pay for the land, which is why it’s often referred to as the residual claimant. But even though it comes last in this example, it comes first in development. If you overpay at the onset, it’ll be an uphill battle the rest of the way.

  You often don’t know what you can build

  But here’s the rub: You often don’t know exactly what you can build. When developers buy land they often consider what they can build “as-of-right” and what they think they can build as a result of variances, rezoning and other discretionary actions.

  As-of-right basically refers to what the current zoning permits. It’s what you could go out tomorrow and build (after you get the requisite permits of course). Unfortunately though, as-of-right uses and densities are not often inline with what’s actually happening in a neighborhood. So you need to go into the city for things like a zoning by-law amendment.

  Similarly, vendors want the most for their land and so they’re going to be aggressive on this front. As a developer, this is the point where you surround yourself with a team of smart people who can help you figure out what’s reasonably attainable for the site in question. And sometimes you have to worry about the politics as much as the planning.

  Approvals are uncertain

  During the due diligence phase, the goal is obviously to mitigate as much of your risk as possible. Nobody wants to get stuck with a piece of land that they overpaid for that they now can’t (profitably) develop. But sometimes shit happens.

  It may seem like a no brainer. You could have a site that’s surrounded by transit with lots of great precedences (this matters) for the height and density that you’re hoping to obtain and that you feel will be appropriate for the neighborhood. But sometimes the stars don’t align.

  And that’s why development is a risky game.

  2014.02.21

• Revisiting the Gardiner East debate

  Last week I argued that the eastern portion of the Gardiner Expressway (Jarvis Street over to the Don Valley Expressway) should be torn down and replaced by an enlarged Lake Shore Boulevard.

  To quickly summarize, here’s why I support removing the Gardiner East:

  • Now is the time to do it (before we develop the surrounding area and it becomes both more expensive and more difficult to do it).
  • It would go a long way to stitching our disconnected downtown back to the lake and realizing our ambitions for the revitalization of the waterfront.
  • Unlocking the full potential of our waterfront is hugely important.
  • In my opinion, the only way to build a big, well functioning city, is on the backbone of public transportation. And this—the tearing down of the Gardiner East—could represent that paradigm shift.
  • It is a portion of the Expressway that has relatively low traffic volumes.
  • It’s the cheapest option on the table.

  Somewhat surprisingly though, a lot of people disagreed with me. They told me that adding anything to our already long commutes would be simply unconscionable and that they would not support it, no matter how much it improved our waterfront.

  So in the spirit of avoiding confirmation bias (that is, only seeking out things that reinforce an already established belief), I thought I would share the following article: “Like It or Not, Most Urban Freeways Are Here to Stay.” It’s from Atlantic Cities and there are 3 key take-aways that I’d like to point out.

  First, I thought it was interesting that the interstate system in the United States was, from the onset, always conceived of as a solution to urban congestion. I always thought it was about connecting the country, but that, apparently, was a secondary goal.

  Second, cities all across North America are engaging in the same debate about what to do with their aging highways. Detroit is debating. New Orleans is debating. And so is Syracuse. Toronto is not alone. But we could be alone in taking the lead on this issue.

  Third, the author basically acknowledges that, while not ideal, we’re stuck for the time being with all these freeways and that the better solution is going to be a really tough slog:

  “This is not an easy assignment, seeing as how cars are purchases we make with our hearts, more than our heads. Logic won’t convince Americans to change their ways. What will? Maybe, over time, prohibitive fuel prices and withering tolls, and, most importantly, investment in useful and convenient public transit. Only when the carrot is irresistible, and the stick stings too sharply to bear, will the shift begin, and it will take years to play out.”

  And while I would agree that it’s not going to be easy, that’s par for the course with anything truly worthwhile. If it were easy, everyone would be doing it. But they’re not. And that’s why there are leaders and there are followers.

  People in Toronto like to talk about how our City sometimes lacks vision. Well, here’s our chance. I’m not worrying about what the commute is going to be like tomorrow, because I know there’s an even better solution for that problem. I’m worried about something even bigger. I’m worried about the kind of city we’re all going to leave behind to our children.

  2014.02.20

• Is gentrification really the problem?

  James Frank Dy Zarsadiaz (a Ph.D. candidate at Northwestern) published an article in Atlantic Cities a few days ago called, “Why gentrification is so hard to stop.”

  In it, he essentially talks about how neo-liberalism has allowed private interest to trump public good and how it has dramatically changed cities and the expectations of its residents:

  “…those who can afford to live in a city now expect a personalized, “just for you” urban lifestyle. For-profit companies chase these urbanites with upscale housing and creative marketing campaigns, transforming blighted and blue-collar neighborhoods into “livable” urban nooks.”

  Now, as a developer I know I’m biased here, but is gentrification really as evil as he makes it out to be?

  One of the most insightful comments on the article had the following to say:

  “I’ve always maintained that gentrification is what occurs when demand exceeds supply and blight is what occurs when supply exceeds demand.”

  I like it because it’s a simple way of saying that what we are seeing is a natural market outcome. What’s wrong with somebody wanting to buy a house in a marginal area and fix it up? Can we reasonably expect to stop people from doing this so that wealth never increases within a neighborhood?

  The bigger issue, in my view, is rising income inequality. We know that this is becoming more and more of an issue. The benefits to being smart and educated today are huge. So how do we ensure that we’re not creating a society of haves and have-nots?

  Let’s figure this out and let people buy whatever homes they want.

  2014.02.19