Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.
For those of you who are regular readers of this blog, you’ll know that every year around this time I go on a snowboarding/ski trip with groups of friends that I went to grad school with and/or grew up with.
We have been doing this for a decade now. Last year we were in Jackson, Wyoming (my favorite place so far). And this year we are in Austria.
Here is a photo that I took — of paradise — this afternoon:
I’m not sure there’s anything to say after a photo like this. So I’ll leave it at that. See you tomorrow.
Bloomberg recently published a good summary of Zillow’s business and their move into algorithm home buying and flipping. (They are trying to avoid the “flipping” moniker because of the negative connotations associated with it.)
Zillow started buying homes directly from owners last spring. They charge the seller between 6-9%, so more than using a typical agent, but inline with their competitors. There’s clearly a segment of the market willing to pay a premium for the added convenience.
The thinking used to be that discount brokerages were the way to disrupt the housing market. This is the opposite strategy.
Interestingly enough, Zillow felt that they needed to make this pivot with their business model. It used to be about selling ads. They were definitive in that they were not a disruptor of real estate agents.
But now:
If getting an offer from an iBuyer became a crucial step in the selling process, they worried, Zillow could lose its audience and its advertising base. What’s more, market researchers kept finding that consumers said they’d pay a modest premium to get a cash offer. “People expect to press a button and have magic happen,” says Rascoff, a 43-year-old former Expedia executive who’d earlier started the travel search engine Hotwire, which he sold to Expedia for $700 million. Getting into the business of buying homes directly, Rascoff says, was “the only way to remain in a leadership position.”
Here is a map of the companies in this particular space and the cities in which they operate:
Some investors aren’t sold on this strategy and have begun short selling Zillow (according to the Bloomberg article). I keep getting the sense that there’s a greater end game in the cards here. It is about building up A (algorithmic home buying and flipping) in order to unlock B.
But what’s B — a new end-to-end transactional model for the housing market?
It looks at four possible approaches to improving housing attainability/affordability in the city:
Micro Living: Well-designed micro units can offer a cost-effective alternative to conventional apartments, particularly in central locations where higher land costs can be a barrier to affordability.
Shared Space: Co-living, where residents share amenities and services, can improve affordability and create a sense of community, particularly in walkable, transit-connected neighbourhoods where housing costs are high.
Home Unbundling: Features, finishes and amenities unbundled from the unit price of condominiums can allow greater choice and reduced costs for homebuyers.
Equity Options: With more households renting, and the transition from renting to owning growing ever more challenging, new shared-equity models can help families invest in their home, even if they rent.
In addition, the report also provides a number of project case studies from around the world. If you’d like to download a copy, you can do that here.
Yesterday’s post was about Amazon pulling out of NYC. Today I thought we’d talk about another contentious city building debate that is happening closer to home.
This week Sidewalk Toronto announced that it would like to expand its development focus beyond Quayside to the entire Port Lands district along the waterfront.
To pay for all of this, the Alphabet company is looking for a share of the city’s property taxes and development charges (impact fees), and they want to capture some of the increase in land value.
Not surprisingly, many reacted poorly to this announcement. Some people are already grouchy about what Sidewalk is up to at Quayside and so this was inevitable.
But sharing revenue and upside is not necessarily a pioneering idea. It is called a partnership. Perhaps the partners have different skill sets. That is usually a good thing. But regardless, the best partnerships are when all parties win.
What Sidewalk allegedly wants to do is shoulder more risk upfront in exchange for a kicker on the backend. This, too, also has a name. You can call it real estate development.
I don’t know the specifics of the deal being proposed, but the question that comes to mind is: What is the net present value to the city — both quantitative and qualitative — with and without Sidewalk?
(No links in today’s post because I’m writing on mobile while standing at the airport.)
As I am sure you have all heard, there’s a lot of debate in New York right now (city and state) about whether they should reject Amazon’s decision to open up a new headquarters in Queens.
Urbanist Richard Florida has been arguing that one of the richest companies in the world shouldn’t be receiving taxpayer subsidies and that Amazon should do the right thing here. They should open up in New York but without any inducements.
As a counter argument, Kenneth Jackson, professor of history at Columbia University, recently opined that this is actually business as usual. American cities have a long history of competing for companies because the benefits outweigh the costs over the longer term.
Here is an excerpt from his op-ed in the New York Times:
They are right about one thing. It is absurd that any city would agree to such a deal. But this is how the game is played. Paying companies to relocate has been the American way since 1936, when Mississippi established the nation’s first state-sponsored economic development plan. Under that plan, since followed by many other jurisdictions, cities and states agreed to pay companies to relocate by promising them new factories and low or nonexistent taxes. With those inducements, numerous businesses relocated in the decades after World War II, usually from the union-dominated Northeast and Midwest to the business-friendly South.
Perhaps for obvious reasons, I am interested in how important issues get debated. I have written before about how I think the community engagement process for new developments is largely broken. I think it naturally incents certain kinds of feedback.
Recently, I’ve been playing around with an online platform called Kialo. They call themselves “an easy to use, yet powerful tool to engage in thoughtful discussion, understand different points of view, and help with collaborative decision-making.”
The site works by trying to create a structured hierarchy of pros and cons around debatable questions. You participate by making claims (supported by links). Duplicate claims are neatly grouped together. And unthoughtful suggestions are moderated out.
The UI looks like this (top level question shown):
But you can then drill down into specific claim groupings (note the org chart looking graphic at the top):
I’m not yet convinced that it creates the “collaborative reasoning system” that they are after (maybe because I haven’t used it enough). But I do really appreciate the structure and civility that they are trying to introduce to topics that are often vehemently debated.
According to Amazon’s recent annual 10-K filing, the company leased and owned (most of their space is leased) about 288,419,000 square feet of space around the world at the end of 2018. Of this number, about 80% is used for “fulfillment, data centers, and other.” Amazon doesn’t break out this line item any further, but GeekWire reckons that a good 3/4 of their real estate is dedicated to their fulfillment warehouses.
Here’s the full summary of their facilities (from the 10-K filing):
Given that fulfillment is such a large share of their properties, I am most interested in understanding the geography of their warehouses and how that impacts their core value proposition, which is largely all about convenience.
In the early days of online retail, the decision of where to warehouse had meaningful tax implications. Because (in most cases in the US?) you only had to collect sales tax if you had a physical presence in the same location as your purchasers.
As that changed, it then made more sense to create a broader distribution network and minimize the distance between fulfillment center and purchaser. By 2016, Bloomberg estimated that nearly 78 million Americans lived in a zip code where Amazon offered free same-dame delivery. That number has obviously increased since.
And in the paper “Economies of Density”, they discovered the following cost savings as a result of Amazon’s growing fulfillment network:
We find that Amazon saves between $0.17 and $0.47 for every 100-mile reduction in the distance of shipping goods worth $30. In the context of its distribution network expansion, this estimate implies that Amazon has reduced its total shipping cost by over 50% and increased its profit margin by between 5 and 14% since 2006. Separately, we demonstrate that prices on Amazon have fallen by approximately 40% over the same period, suggesting that a significant share of the cost savings have been passed on to consumers.
The interesting question for real estate people and city builders — which is brought up in the Knowledge@Wharton podcast but is difficult to answer — is whether there are diminishing returns to this “economies of density” phenomenon. In other words, how dense does Amazon’s fulfillment network want to be?
This is last year’s news and some of you may have already seen it, but here is a video of Zaha Hadid’s only completed private residence:
It was built in the Barvikha Forest near Moscow. The client, Vladislav Doronin, is a real estate developer. He owns/runs Capital Group, OKO Group, and Aman. Zaha used to call him the Russian James Bond.
The central idea behind the house is the raised master bedroom suite. Vladislav wanted to wake up and only see trees and sky. And so Zaha raised the bedroom 22m above grade.
Look at it in section (those stairs!):
It wouldn’t be my first choice, but I can appreciate its boldness. What are your thoughts on this house?
I just finished watching this Bloomberg video on Shenzhen, called “Inside China’s High-Tech Dystopia.” The video obviously has a particular point of view, but there are parts of it that I wasn’t overly fussed about, such as the push toward increased factory automation. Jobs evolve. We used to have elevator operators. Now we don’t. Presumably those people found other empoyment.
What stood out to me was Shenzhen’s solution to jaywalking. They use cameras, facial recognization software, and a “wall of shame” to fine and then discourage people from illegally crossing a street ever again. One guy in the video explains how he once had the fine automatically withdrawn from his WeChat account. No authorization required. And it happened within seconds following the infraction.
That feels unsettling. (If you only want to watch the jaywalking part, skip ahead to 5:35 in the video.)
This Toronto Life article about a 32-year-old who has managed to buy 10 homes in the city is very Toronto Life. At a time where many young people are struggling to afford housing, here is a millennial who has bought 10 of them (albeit with some partners). The underlying message: You’re not working hard enough.
I am fairly certain Toronto Life writes these sorts of articles because they know they’ll enrage people. As Facebook has taught us over the last few years, getting people pissed off is good for engagement. And engagement is what drives advertising-based businesses.
One of the best ways to manipulate attention is to appeal to outrage and fear, emotions that increase engagement. Facebook’s algorithms give users what they want, so each person’s News Feed becomes a unique reality, a filter bubble that creates the illusion that most people the user knows believe the same things. Showing users only posts they agree with was good for Facebook’s bottom line, but some research showed it also increased polarization and, as we learned, harmed democracy.
If you take a look at the Twitter conversations surrounding the above Toronto Life article, you’ll see the reactions you would expect: Troll article. Yeah, but how much debt has he taken on? He had help from wealthy friends. Here’s how a 32-year-old is eroding housing affordability in Toronto.
I appreciate all of this, but I will never understand the need to shit on other people because of their successes, regardless of whether they are self-made or were born with a competitive advantage. Billionaire isn’t a bad word in my books. I am a first generation real estate developer, but I wouldn’t be at all upset if my great-grandparents had decided that buying land in Toronto was a good idea.
Here is a guy that moved to Canada for University. Lived in a basement with cockroaches after leaving his first job after school. Took some risks. And saved his money instead of doing bottle service at the club on the weekends. I can respect that.
But again, these sorts of articles are bound to make a lot of people cranky. And Toronto Life knows that.
