Brandon Donnelly

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.

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Month: February 2022

  • Opendoor is creating too many rentals

    Steven Levy over at Wired recently wrote a short piece comparing Opendoor’s iBuying approach to what Zillow was doing when it was in the space. (Thank you Robert Wright for forwarding me the article.)

    As we have talked about before, the fundamental problem with Zillow’s model is that it couldn’t accurately predict where home prices were going. It was losing too much money and so they shut down that side of their business.

    The article talks about Opendoor’s approach and how they’ve spent the last 8 years refining a valuation model/approach that is now apparently pretty accurate. That’s positive. But here’s another excerpt that I found particularly interesting:

    There’s one controversial aspect of the business model that Wong didn’t bring up. It appears that when companies like Zillow and Opendoor can’t easily sell a home, the fallback is what’s called an “institutional sale.” All iBuyers sell a small but not insignificant percentage to institutional investors with aspirations of being “mega-landlords.” While the marketing materials of the iBuyers emphasize clean sunny rooms and frictionless transactions, that segment of the market involves hedge funds like KKR and Blackstone snapping up properties for rental, limiting the inventory available for families seeking homes. Even the Biden administration has weighed in on the evils of this trend: “Large investor purchases of single-family homes and conversion into rental properties speeds the transition of neighborhoods from homeownership to rental and drives up home prices for lower cost homes, making it harder for aspiring first-time and first-generation home buyers, among others, to buy a home,” said a recent White House dispatch.

    It’s interesting for two reasons.

    First, these highly tuned valuation models are now being used to scale the acquisition of single family homes. No specific figures are given, but Levy speculates that some iBuyers could be feeding up to 20% of their homes to institutional buyers. Economies of scale are a challenge with this asset class. Here technology is helping.

    Second, I don’t like the tone toward renters in the above White House dispatch: “[It] speeds the transition of neighborhoods from homeownership to rental.” This line in particular implies that renting is perceived as being suboptimal to homeownership and that “speeding”’ towards the former is something that should be avoided for reasons of social good.

    Even the words that are used here suggest biases. A single-family home is called, well, a home. But a rented one is a rental property. I reckon that a home is a home regardless of whether it’s low-rise, high-rise, rented, or owned.

  • The Russian gas network

    Reuters recently published an extraordinary set of diagrams (here in this article) that help to explain the energy dynamics at play right now across Europe. Above are two examples. Among other things, the graphics show the various gas pipelines in use (or planned), which countries they flow through, their vintages, and ultimately who depends on who. It’s worth a read or, at the very least, a scroll through.

  • Density bonus as inclusionary zoning offset

    Somebody on Twitter responded to my recent post about inclusionary zoning and asked: Aren’t all the upzonings that the City is already doing a kind of density bonus? In other words, and this is me elaborating here, why is there an economic “shortfall?” Why does there need to be any other sort of subsidy in order to mitigate the economic impacts of inclusionary zoning?

    A density bonus can mean and can be used in a number of different contexts. Sometimes it is used as an incentive with landowners, whereby they get a bonus on top of their sale price if the developer manages to achieve a certain amount of density on the site. But in this particular case — IZ subsidies — we’re talking about something else.

    We’re talking about density above and beyond what you might normally achieve on a particular site in order to directly offset — maybe partially or maybe entirely — the economic shortfall brought about by inclusionary zoning. The fact that upzonings are happening all over the city doesn’t necessarily qualify them as bonuses. In the case of Toronto, the market is just responding to out-of-date zoning.

    Here’s a specific example.

    Let’s say you have a development site with in-place zoning that would allow you to build 20,000 sf of density. This is the as-of-right or by-right density. No need to rezone the site. Just file your building permits and you’re off making things. If this is the most you could build, then the market would value the land based on this density. As we have talked about before, land is the residual claimant in a development pro forma.

    However, if the zoning was out of date and it was fairly clear that one could rezone the site and build up to 100,000 sf, then the market would no longer value the site based on its in-place zoning. It would instead value it based on its future expected density. Again, because land is the residual claimant, more density = higher land value.

    In this second scenario, the additional 80,000 sf is, in my view, not a density bonus. Give or take a bit here and there, it is the density that everyone is generally expecting. The market has already priced it in. A true bonus / subsidy, would be something above and beyond the base of 100,000 sf. Something that is only available to developers if they do X — which could be build affordable housing.

    Maybe the bonus is perfectly tuned to exactly offset the economic drag of doing X, or maybe the bonus is designed to serve as an incentive to do X. In this latter case, the bonus would more than offset the drag and be accretive to the pro forma, which would mean that every sensible developer would now want to do X. More carrot, less stick.

    One of the challenges with this hypothetical scenario is that, for such a bonus structure to work, you need to know the baseline that you’re bonusing against and you need to ensure that nobody gets the bonus unless they do the thing — the X. Using the above example, that means that the 100,000 sf needs to be fairly firm and that anything above that number only happens with the delivery of affordable housing.

  • Be a global citizen — my new NFT photography collection

    I have enjoyed photography for as long as I can remember. But I got into it in earnest during undergrad while studying architecture. At that time, Toronto-based photographer Sam Javanrouh was in the early days of running his decade-long photoblog called daily dose of imagery. And I remember checking it religiously to see his captures of the city. This was a fairly novel medium for photos at the time. Instagram wouldn’t arrive for another 7 or so years. So I found it deeply inspiring.

    So much so that I went over to Henry’s at the corner of Queen and Church, bought a refurbished Canon Rebel, and started capturing my own photos of Toronto — often at night after school. I’m positive that I’d be embarrassed if I ever pulled out those old photos from the archives, but regardless, photography more or less stuck with me as a hobby. It also formed an integral part of the design portfolio that I used to get into graduate architecture school. (My photos proved to be less useful for business school.)

    I later moved onto shooting with Fujifilm cameras (currently a Fujifilm X-T3). And nowadays I mostly shoot when I’m traveling and have some free time. But two decades after buying that refurbed Rebel, I can’t help but feel like we are at yet another important turning point in the evolution of photography (and, of course, art more broadly). We now have tools and technologies that allow for the ownership of digital assets. (See non-fungible tokens.)

    So I have decided to start minting and making my photography available for sale on Foundation. The first collection is called “Be a global citizen”, and the plan is to slowly add my photography from around the world to it. The floor price is currently set at 0.25 ETH. And all of the photos were taken on my Fujifilm X-T3. I hope you like it. To check out the collection, click here.

  • Do the best cities have a lot of immigrants?

    I tweeted this out last night while watching old reruns of Anthony Bourdain’s Parts Unknown series. This was a great show. If I were to give everything up and become a YouTuber, this is the kind of travel and food channel I would want to make, except that I would naturally have to add in some equal parts around architecture, planning, and real estate.

    The responses to my tweet were of course mixed. Some people agreed and some people didn’t. And a few people provided examples of great cities that aren’t particularly known for their openness to new entrants — places like Tokyo. This kind of response is not at all surprising given how divisive this topic has always been throughout history.

    But here’s what I was thinking:

    1/ There are some obvious current case studies. Consider places like Toronto and Miami, where foreign born residents now make up the majority of the population. These are two fast growing and dynamic cities that wouldn’t be anywhere near as interesting without their immigrant populations. Certainly the food wouldn’t be as good.

    2/ Many of the most beautiful cultures in the world are the result of different cultures coming together. Brazil is one example that comes to mind. Throughout history they have been one of the largest recipients of immigrants in the western hemisphere. Sadly, Brazil was also the last country in the western world to abolish slavery.

    3/ Rome and Tokyo were cited (in the comments) as two great cities that frankly aren’t all that diverse. According to Wikipedia, less than 10% of Rome’s population is non-Italian. But Rome, while nice, is provincial these days. And Tokyo, while awesome, has a bit of a demographic problem.

    4/ Even if you think a place doesn’t have a lot of immigrants and maybe isn’t all that diverse, it is still probably the result of diverse cultures coming together at multiple points throughout history. Maybe because of immigration. Or maybe because of something bad like war. Think of the Moors from northern Africa who crossed the Strait of Gibraltar and conquered the Iberian Peninsula.

    5/ An openness to new people could signal and probably does signal an openness to other things. And since we are living in a world that thrives on innovation and new ideas, being open strikes me as being a fairly good and useful characteristic to have.

    6/ Lastly, I come from a family of immigrants. I self-identify as being entirely Canadian. But I had to come from somewhere (multiple places, in fact). And so it strikes me as being odd and entirely selfish to want to block the flow of people now that I’m here and established.

    What are your thoughts?

  • The inclusionary zoning shortfall

    Colliers recently hosted a webinar about inclusionary zoning here in Toronto. On the panel was Jeremiah Shamess (SVP at Colliers / moderator), David Bronskill (partner at Goodmans), Giulio Cescato (senior planner at IBI Group), and Richard Witt (principal at BDP Quadrangle). I wasn’t able to attend (either because of a critical meeting or because I was off attending to a gluttonous lunch burrito), but the slides are now available online. I was going through them this morning and I came across this chart from NBLC:

    What you are seeing here is a comparison between a typical market development before IZ and a development after IZ. As you can see, soft costs remain the same, hard costs remain the same, and the profit margin remains the same. What changes is the overall revenue. Market revenue goes down because you now have fewer market-rate units and a new IZ revenue is added, which is the revenue generated from the addition of affordable units to the project.

    But when you add up the market revenue and the IZ revenue, you don’t get back to the same economic equilibrium. In other words, there has been a destruction of value, and so something is going to have to give in order for this project to pencil and remain financeable. Otherwise, no development will take place. This shortfall is the red box area in the above graph that says, “impact of inclusionary zoning.”

    We have discussed this red box gap a lot on the blog, because how you think this gap gets filled might determine how you think of inclusionary zoning as a policy tool. In this particular instance/graph, the gap is filled by a reduction in the value of the land. Everything else remains static. So what is effectively happening in this model is that the landowner, who has decided to sell their land to the above developer, is now the one who has to indirectly pay for this new affordable housing.

    This may seem like a sensible way to go about it. I mean, people who own land must be rich. Let’s make them pay. But is this actually what is going to happen in practice and over extended periods of time? Soft costs — things like development charges — are always going up. Why aren’t land values perpetually declining in order to offset these additional costs? It is largely because market revenues have also been increasing. Housing keeps getting more expensive. And that is what has been keeping the market going.

    I suspect that over an extended period of time, the same thing will happen here.

  • Do rent controls actually function as intended?

    In 2020, Berlin implemented a rent cap that applied city-wide to both new and existing rental housing contracts. The policy was later found to be unconstitutional and so as of April 2021 this is no longer in place. But for a brief period of time, and for better or for worse, Berlin had a blanket rent control policy. Berlin is, of course, not alone when it comes to rent caps. They are seen by some as a solution to rising home prices, gentrification, and displacement. But do they actually work?

    This recent working paper argues that the answer is no. And that there are other better tools available. Yes, overall rents do tend to decline. But when you have a city-wide policy, it means that rents also decline for high-income households. And in this paper, the economists argue that this tends to benefit the rich more than the poor. Rent caps also tend to decrease overall housing supply, which, as we all know, is counterproductive when you’re trying to make something more affordable/accessible.

    But perhaps the key argument is this one here: Rent controls create a misallocation of housing that can actually decrease overall welfare for lower-income households. The reason behind this is that homes stop getting allocated to those who value it and need it the most. Instead, you get people who may be overhoused or underhoused, but who remain firmly put because of what are below-market rents.

    There are a number of ways in which this distortion might play out. But it could involve someone with a very large older apartment who now no longer needs a large apartment, but is staying put because of their favorable and irreplaceable rent structure. This in turn precludes someone who desperately needs a large apartment from finding a suitable place. And since overall supply has also decreased because of the controls, the problem is exacerbated.

    It can all get a bit complicated, but if you’re interested in this topic, here is another technical research paper from Edward Glaeser and Erzo Luttmer that deals specifically with the misallocation of housing under rent controls.

  • Architecture is a zero-sum game

    Witold Rybczysnki recently had this to say about the American Institute of Architect’s plans to ensure better equity across the profession:

    But the architectural profession is not the post office. It depends on the availability and preferences of clients, it depends on the swings of the economy, and success relies on individual drive and talent. Architecture is a zero-sum game, of course: there are a limited number of building commissions at any one time and if one architect gets the job, another doesn’t. Some of the most prominent commissions—the ones that build a reputation—are the result of architectural competitions. In these blind auditions, only the most talented have a chance to shine. And talent is not evenly distributed; “cream rises” as Stewart Brand memorably wrote in the Whole Earth Catalog. Hard to put your thumb on that scale.

    When I read this I couldn’t help but think of Malcolm Gladwell’s account of what happened when orchestras first started conducting blind auditions in the 1980s. I think he talks about this in his book Blink. As soon as selection committees could no longer see the sex of candidates — and could only hear their musical output — orchestras immediately started hiring more females.

    This is a neat and tidy example that seems to demonstrate that women are perhaps better classical musicians than men, even though the opposite was believed to be true before large screens started obfuscating our inherent biases.

    But the selections process for architects isn’t always as simple. This makes it a bit more difficult to determine if we truly have a meritocracy or if there are in fact some deep rooted prejudices that we maybe aren’t aware of.

    Of course, there is also the possibility that we have more or less a meritocracy, but that we have structural issues which are precluding certain people from fully developing their merits in quite the same way.

    Whatever the case may be, I agree with Witold that blind design competitions are probably a fairly reasonable way to level the playing field. The problem is that design competitions are not universally used. We have never done one when searching for an architect.

    I would like to think that we simply look at their portfolio (in search of both cool and relevant projects), objectively assess their abilities, and then consider their fees. But I also know that us humans are riddled with biases.

  • Pre-fall fashion and Le Corbusier in Firminy-Vert

    I’m not exactly sure what a “pre-fall” menswear collection is all about. But Louis Vuitton recently honored the late and great fashion designer Virgil Abloh by photographing one of them in and around Le Corbusier’s Firminy-Vert complex about an hour outside of Lyon, France.

    Abloh was apparently a huge fan of the work of architect Le Corbusier. And he tried to apply the same kind of utilitarian approach to fashion as Le Corbusier had done to cities, buildings, and housing.

    The Firminy-Vert complex is a series of buildings, one of which is the last of his “Housing Unit” designs (1965). Le Corbusier designed and built a number of these, with the most well known one being in the south of France in Marseille (1952).

    They were a utopian model for high-density housing, with “streets” instead of corridors and with schools and other social functions being housed high up and inside the building. They were intended to act as a kind of vertical city.

    To the untrained eye, they might resemble the kind of public housing that today goes unloved in many cities throughout the world. But for whatever reason, these particular renditions have largely stood the test of time.

    Maybe it’s because of their importance to the development of modernist architecture, or maybe it’s because most of them (if not all of them) are now UNESCO World Heritages sites.

    My take is that it shows you that architecture and built form alone can’t solve every problem. The same building in different places and different contexts, can and will perform very differently. In this particular case, in Firminy-Vert, the complex seems to be doing rather well. The perfect backdrop for a luxury pre-fall fashion collection.

  • Ontario proposes target of 1.5 million new homes over the next 10 years

    Yesterday I wrote about our housing doom loop.

    Today, the province of Ontario responded (maybe not to my post) by publishing this Housing Affordability Task Force report. In it, are 55 recommendations to improve overall housing supply across the province, with the end goal of adding 1.5 million homes over the next 10 years.

    I’m still making my way through the report, but the recommendations can basically be grouped into these five main buckets (taken verbatim from this press release):

    • Make changes to planning policies and zoning to allow for greater density and increase the variety of housing.
    • Reduce and streamline urban design rules to lower costs of development.
    • Depoliticize the approvals process to address NIMBYism and cut red tape to speed up housing.
    • Prevent abuse of the appeal process and address the backlog at the Ontario Land Tribunal by prioritizing cases that increase housing.
    • Align efforts between all levels of government to incentivize more housing.

    Reform is badly needed. And I have gone on and on and on and on over the years about a number of the problems associated with how we build new homes and how we expect them to suddenly become more affordable.

    Still, I think that most of the general public would be shocked to learn how long things take, how complicated we have decided to make land use approvals, and how a single person with a vested interested in seeing no development can hold up the delivery of thousands of new homes.

    Progress is measured in years and decades. Months simply evaporate while you wait for the next PDF document to grant you access to some other labyrinthian planning hurdle. It doesn’t need to be this way.