I was recently on RAD Marketing’s Future Frontiers podcast talking about real estate stuff with Daniel Marinovic (CEO and Managing Partner of Forest Gate) and Sean Zahedi (Vice President at RAD). I haven’t watched the video yet and I honestly don’t remember what I said (it was a few weeks ago), but if you’re interested, you can listen to it here and watch it on YouTube here.
Month: March 2022
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Miami rents increased 55.3% on a year-over-year basis
All of the talk of people moving to Miami over the last two years is certainly coming through in the numbers. According to this recent rental report by Realtor.com, residential rents in the Miami-Fort Lauderdale-West Palm Beach metro area increased 55.3% on a year-over-year basis (as of February 2022). And the next 2 metro areas on the list are also in Florida. This is compared to a 17.1% increase for national rents, which is quite a bit lower, but still a massive increase. These are clearly unsustainable numbers and eventually things will settle down. How exactly things settle down is yet to be determined. But for right now, the above figure feels to me like a pretty good answer to the following question: If you had the flexibility to work from anywhere, where would you go? Somewhere sunny, I guess.
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How do you charge an electric vehicle if you park on-street?
Last year, about 10% of all new motor vehicles registered in Canada were some form of electric vehicle (battery, hybrid, or plug-in EV). But this number is rising. And even though we’re still early on in the adoption curve, you can live a pretty great life with an electric vehicle today.
The caveats are perhaps as follows: (1) it really helps to have some kind of garage or driveway (so you can install a dedicated charging station) and (2) depending on your lifestyle, you may encounter the occasional feeling of “range anxiety.”
I drive to the mountains to go snowboarding every winter and my sense is that we need to get far more serious about blanketing our most densely populated regions with charging stations.
But here’s another problem that came up this week in conversation: How do you charge your EV if your only option for parking is on-street?
Do you have to run a cable from your home across the sidewalk? And then what happens if the spot in front, or nearby, isn’t available? Is it really going to be feasible/desirable to have charging stations on the sidewalks of every residential street when EV penetration reaches the majority?
This is clearly a problem that will need to be solved, and I know that many people and cities are working on it as we speak. I don’t know how advanced this is, but Norway, for instance, is working on wireless charging roads that power up vehicles from below.
What other possible solutions have you seen out there?
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Shares vs. tokens
Crypto tokens are kind of like shares in a company, or at least they can be pretty similar if one wants them to be. Here is an interesting post by Tomasz Tunguz comparing the two. More specifically, he looks at inflation and deflation for both kinds of assets. According to Tomasz’s numbers, the average annual change in share count for software companies is about +5% (see above chart). Though there are some notable exceptions, such as Apple, who are aggressively buying back shares and decreasing their counts.
The median inflation rate for crypto tokens, on the other hand, is much higher. Based on the projects that Tomasz chose for his post, the median rate is about 25%. Given the age of most of these crypto tokens, this generally makes sense. Younger companies also tend to have higher inflation rates as they raise outside money and issue new shares to attract talent. But this is likely to change as the space matures. Those of you who are following closely, will know that Ether is set to become deflationary sometime later this year.
But going beyond these inflationary and deflationary numbers, what is more interesting to me is how similar shares and tokens can be, but also how meaningfully different they can be at the same time. They are similar in that they represent some sort of value, they can be bought, sold, loaned and generally used to earn a yield, and they can be used for governance matters, among other things. Where they are the most different is that (1) we don’t really know how to value most tokens right now and (2) tokens can have utility.
I am confident that (1) will change as the space evolves. It is still very early days and valuation methodologies will get figured out. (2) will also grow and evolve into things that are unimaginable today, but even right now you have the option of using your crypto tokens to buy things like NFTs. This option should, in theory, have some sort of value attached to it. Though nobody has any clue what these NFTs will be worth ten years from now and so it’s pretty easy to poke fun at JPEGs of Apes. But with some new NFT projects seeing over $52 million in trading volume in their first 30 days, my instinct is to learn as opposed to eschew.
Not every crypto token will have enduring value, just like not every share in a company has enduring value. Some are worth a lot and some are worth nothing. At the end of the day, what matters is the underlying business or project or city that you are becoming a part owner of. And I can tell you that lots of exceedingly smart people are working on exactly this for the token space.
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Toronto breaks ground on new Ontario Line
This past weekend it was announced that ground has been broken (i.e. construction has started) on the new Ontario subway line that will connect Exhibition / Ontario Place to the Science Centre by way of the light purple line labeled “C” on the above map. (The other image is a rendering of the proposed Exhibition station.)
This transit line has gone through many permutations over the years and was previously called the Downtown Relief Line (but that was seen as too downtown-centric); the Yonge Relief Line (still too specific); the Relief Line (not Ontario-specific enough, I guess); and probably a bunch of other names corresponding to various lines on a map.
So it is exceedingly easy to be cynical when you hear of an announcement like this. Is it really happening? Are we actually building new and much-needed transit? And as you might imagine, if you read through the chatter on Twitter, you will find an overabundance of this sort of cynicism, along with what appears to be a general dissatisfaction with the current state of everything.
But in my simple view, I reckon that it is far better to be starting construction on an important new transit line than not starting construction on an important new transit line. So this is exciting! Let’s go! If you’d like to learn more, I also tweeted out the initial renderings for the 14 stations that are planned for the Ontario Line.
Images: Province of Ontario
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Location always matters
Well this is interesting, yet not surprising: According to RBC’s annual “Home Ownership Poll”, three out of every five respondents (so nearly 60%) said that location is more important than buying a larger home. Now, there’s only so much you can glean from a single survey question, but the overarching sense is that people’s home-buying attitudes are now starting to revert back to pre-pandemic levels.
Other evidence includes how quickly urban residential rents/prices have bounced back and, in many cases, now exceed their pre-pandemic levels. Below is a chart from the WSJ showing residential net-effective median rent prices in Manhattan. The low came in November 2020 when the median rent price hit $2,743 per month. But today it is well over $3,500, which is the highest it has been in a decade.
Certain aspects of how we will continue to live and work in our cities is admittedly still evolving (see my recent post on office utilization). But part of our pandemic narrative was that location was no longer going to matter, or at least not matter nearly as much. New York City, to give just one example, had died forever. But that was obviously bullshit. And what we are seeing in the residential space is an important leading indicator. Location always matters.
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Higher gas prices impact cities differently
Gas prices are up. And here is a chart to support this statement:
If I were trying to be as sensational as possible, I would likely leave things here. But since that is generally not what I try and do with this blog, here is another chart showing gas prices over a longer time horizon.
Shown this way, gas prices don’t seem as crazy. In fact, we’re only now returning to where prices were back in 2008.
That said, these swings do impact things. And it is interesting to consider how these impacts might be felt differently across different cities.
So here is one more chart from City Observatory looking at the average number of miles driven per person prior to COVID:
One way to think about this chart is that it generally speaks to built form. Compact cities with higher densities and greater access to public transport, generally translates into people driving less.
The result is something that City Observatory refers to as a “green dividend.” Less driving, means you save money on cars and gas. And so when gas prices go up, so does your green dividend.
Of course, if you were to get really serious about calculating your green dividend, you’d also want to look at your housing costs, as land prices tend to decline as you sprawl outward.
Ultimately, this is a trade off between housing costs and transportation costs (both direct and indirect, such as the cost of your time).
But I think that there should be another dimension to this green dividend and that is the environmental benefits of less vehicle miles travelled. That too, of course, can be measured.
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The great housing supply debate continues
The great housing debate continues: Are we building enough housing, or are we not?
Right now the media is talking about a new report from the Union of B.C. Municipalities, which is claiming that cities in British Columbia are actually building enough housing to keep pace with population demand.
Between 2016 and 2021, the province’s population grew by 7.6% and the number of new dwellings grew by 7.2%, according to the report. So supply appears to be lining up with demand.
One problem with this robust analysis is that many people, including the Housing Minister, don’t agree. Here’s an excerpt from the Globe and Mail:
“The overly naive analysis comparing housing to population growth to declare the adequacy of our housing supply fails to understand that housing and population growth are intimately related,” said statistics analyst Jens von Bergmann, a regular decoder of housing statistics for Vancouver and Canada. “It’s a slap in the face of those who have been pushed out, or those who failed to move here, because of the unavailability of housing.”
And on a related note, here is a recent piece by Shawn Micallef (Toronto Star) talking about why the left can’t get Toronto’s housing right.
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Shrinkflation in the housing market
We all know that inflation is a thing right now. Prices are rising. One way businesses can choose to respond to this is through something called “shrinkflation”, which the Financial Times writes about here. The idea behind shrinkflation is that, instead of just raising end prices to absorb higher costs, you instead shrink or reduce your product or service offering. Of course, you could also do a combination of both things: increase your price and shrink your offering.
This shrinking can take many forms. A few less chips in your bag. A slightly smaller chocolate bar. Smaller food portions at the restaurant. Or maybe opt-in room service for your hotel room. It can also take the form of less space. Average apartment sizes in most big cities have trended downward over the years for this exact same reason. Developers are working to maintain some kind affordability in the face of rising costs.
I think a lot of people like to scoff at these sorts of practices. Why can’t we just build bigger family-sized suites? But the reality is that it is being driven by real market constraints. Without something giving, like suite sizes, urban housing would be multiples less affordable compared to current levels. The developers I know don’t have any sort of deep-rooted philosophical aversion to selling 5,000 square foot estates in the sky. The problem is simply that most buyers and renters won’t like the sticker price.
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Per buildable square foot
Let’s say that you were comparing and thinking about buying two different pieces of development land. Both are about 25,000 square feet in size, but one is priced at $5 million and the other is priced at $50 million. If you were to calculate how much you were paying per square foot of actual dirt, you might conclude that the $5 million parcel is the cheaper one.
But as we have discussed many times before on the blog, the value of development land depends on what you can build on top of it. So what matters more is the price per buildable square foot. And to calculate this, you simply divide the purchase price by the allowable gross floor area (GFA) on the site (or, in many cases, the GFA that you believe is likely achievable on the site).
For example, if you could build 50,000 sf on the $5 million parcel and 500,000 sf on the $50 million parcel, both sites would have a price per buildable square foot of $100. This makes them, in theory, equal, assuming all other things are equal. That said, one could argue that 50,000 sf is maybe too small of a build, and so the $50 million lot is actually a better buy because you can hope to achieve some economies of scale.
Of course, if you could build even more than 500,000 sf on the one lot, then your price per buildable square foot would come down even further and that would make it the more attractive site (again, assuming all other things are equal).
There are a lot of other details to consider when evaluating a development site. Maybe the $5 million one actually has a bunch of environmental contamination that will cost you an additional $5 million to clean up ($10 million in total costs). In that case, your price per pound would actually be double the other lot, assuming the other parcel doesn’t have any contamination or other factors that might impair value.
Permitted uses also greatly affect value, with residential often being the most valuable kind of urban density. And so this is ultimately why you need to create a full and detailed pro forma in order to properly evaluate a new development opportunity. But even before you get to that stage, you can tell a lot with just the price per buildable square foot. If you know the market, you’ll usually know right away if it’s too high or if it’s an opportunity that may be worth exploring.
