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.
One generally accepted investing adage is that you “make money on the buy”. Meaning, what you pay for an asset will largely determine your fate. Price matters a lot. Some/many would even argue that it’s the single most important thing when it comes to investing.
Said differently, if you had to choose between paying above market for a high-quality real estate asset or paying below market for a low-quality real estate asset, you would choose the latter, because you have a higher probability of doing well.
In some ways, I agree with this. If you’re buying an asset below what it’s actually worth, then in theory you could turn around and sell it tomorrow for the market price. So you are quite literally “making money on the buy.”
On the other hand, if you’ve paid above market for even a high-quality asset, you’ve now just lost money (at least in the immediate term). Because if you also turned around and sold it tomorrow, you’d lose money.
But is this always the right way to think about investing? One of Warren Buffett’s many famous lines is that he’d rather buy a wonderful company at a fair price, than a fair company at a wonderful price.
And this would suggest that “cheap” isn’t the only metric to consider. Especially if you think like Buffett does and you want to hold assets forever and benefit from the compound growth that comes along with wonderful assets.
So as obvious as it may seem, a better way to think about “making money on the buy” might be that you need to consider both price and the quality of the asset. Cheap could be a feature, or it could not be. But cheap and wonderful are generally always a good thing.
Swiss architecture firm Herzog & de Meuron has just completed what is being called the world’s largest floating infinity pool.
Located in Lake Como at The Mandarin Oriental, the pool — which is built out of dark Cardoso stone in order to blend in seamlessly with the lake — was fabricated off-site in Finland and then assembled in Italy.
In order to reduce the impact of waves, the pool has also been carefully secured to the bottom of the lake.
If you were a city-state only slightly larger in area than the City of Toronto, you would think about space very differently. There would be no option to just sprawl further out. And that is the case for Singapore, which is approximately 734 km2 compared to Toronto’s 630 km2.
So it’s no wonder that Singapore carefully manages how people use and own cars. Not only were they the first country in the world to implement a congestion charge (road pricing), but they also force people to buy 10-year “Certificates of Entitlement” in order to own one.
These are auctioned off every 2 weeks and the overall supply of them is controlled by the government.
Currently, the starting price for a COE is S$104,000 (roughly the same in Canadian dollars). This is a record high and up nearly 3x compared to 2020 when fewer people wanted to own a car. However, if you’d like a COE that works on all sizes of cars, that is right now S$152,000.
It’s hard to imagine a system like this ever flying in a large country like Canada. But if Canada were the size of just Toronto, you can be sure that we would likely have no other choice. That said, this is more or less how we treat new housing: we’ve made it difficult and expensive for new entrants.
Urbanist Alain Bertaud — who is author of Order without Design — was recently in Vancouver for a talk about planning and housing matters.
One of the things that he argued, according to The Hub, was that Vancouver “cannot complain about high housing prices and, at the same time, drastically limit the amount of land available [for development].”
This should be an obvious thing. But then again, many people seem to believe that housing follows its own unique set of rules when it comes to supply and demand. So let’s look at some basic math to illustrate what it means to, not even stop or limit development, but just slow it down a little.
Consider a development site that yields 300,000 sf of gross floor area. If I were to pick a number out of the air and apply a land price of $175 per buildable square foot, this is a site worth $52.5 million.
In today’s environment, a land or acquisition loan for a site like this might come with a 50% LTV and an interest rate of 10%. What this means is that in a simple interest-only scenario, the annual debt service on this loan would be around $2.6 million ($52.5 million x 50% x 10%).
Now let’s think of this on a per suite basis. Assuming an efficiency of 80%, 300,000 sf of GFA might equal 240,000 sf of saleable/livable area. Divide that by an average suite size of 625 sf, and you end up with 384 new homes on this piece of land.
If you now divide the debt service by this many homes, you get to an annual land loan debt service cost of approximately $6.7k per home. This means that if it takes two years to start construction (and take out the land loan), that’s about $13.5k of land interest costs per home.
Of course, if the approvals process takes even longer, this cost goes up. Let’s say that it gets decided that a “community working group” should be formed in order to further consult the community on the impacts of this proposed development.
If this adds another year to the timeline, you now have an over $20k bill per home just to cover the land loan interest. And this does not just get magically “absorbed”, it needs to be added to the cost of the new home.
This also does not include the cost of the actual construction loan, or any of the other hundreds of costs associated with building new housing.
Obviously this is one of the costs of doing business. It is what developers sign up for when they look to build new housing. But I think it’s important to remember that limiting development, or even just slowing it, has real financial implications: it makes housing more expensive than it needs to be.
As an add-on to yesterday’s post about ground floor retail in mixed-use developments, I thought I would provide a few illustrative and real-world examples to demonstrate some of the challenges that I was trying to describe.
Note that this post is not meant to be critical of any specific projects; instead, it’s intended to further explain some of the challenges facing developers, architects, policy makers, and everyone else involved in the built environment.
Let’s start in Toronto. Below is an aerial photo of Ossington Avenue. For those of you who aren’t familiar, this is one of the most desirable and coolest main streets in city. I mean, check out this recently completed office/retail building at 12 Ossington by Hullmark.
However, when the above townhouse complex was built (circa 2005), Ossington was not the street that it is today. In fact, it used to be pretty scuzzy. When I moved to the US for grad school in 2006, I don’t recall anyone going out on Ossington. Then when I returned in 2009, suddenly, everyone was going to restaurants and bars on Ossington.
So when this project was being planned, residential directly on the street, was probably the highest-and-best use, which is why that’s what was built. But looking at it today, it feels like a suboptimal outcome for one of the most desirable retail streets in the city. And now that it has been built, it’s unlikely to change anytime soon. Should retail have been mandated?
Here is another example from Toronto. This is the north side of High Park. In this case, the street (Bloor Street) is not a great retail street. It’s single-sided because of the park. There’s only a scattering of restaurants and small businesses. There are a lot of single-use buildings. And even some of the newish developments don’t have any ground floor retail.
In this particular instance, it’s certainly more of a stretch to force retail. But at the same time, I think there’s an argument to be made that the edges of Toronto’s primary urban park should do more. The buildings should be taller. The street walls should be more defined. And yes, maybe there should be more retail.
Now here’s a counter example from Paris:
This is the 7th and there’s absolutely no ground floor retail in sight and pretty much only blank and non-active facades. It’s hard to imagine retail opening up here today or anytime in the future — and that’s okay. The streets are still narrow and walkable. And the buildings are just what you’d expect from the capital. The point here: ground floor retail can’t and doesn’t need to go everywhere.
Finally, let’s return to Salt Lake City:
This is maybe the antithesis of our Paris example. 300 W is a wide street clearly designed for Toyota 4Runners. It’s hard to imagine a lot of people walking around here. Even though it’s relatively close to the central business district and it’s on the edge of the emerging and very cool Granary District. (This is The Post District.) But you know what, retail seems to work just fine here:
You just need to think about it in the right way. SLC’s wide streets and large blocks may not make for a broadly walkable environment. But they do give you the room to create your own internal street network and, of course, build a bunch of parking. And that’s what was done and needed here.
I also find it interesting to think at this sub-block level and consider how it might become a new network and layer to the city over time. Maybe Salt Lake needs its own version of Barcelona’s superblocks. And maybe this has already been considered.
So once again, ground floor retail is good. Everyone wants that cool coffee shop in the bottom of their building. But sometimes we miss the boat. Sometimes it’s unclear what we should do. Sometimes it’s not necessary or viable. And sometimes we get it just right. That’s, I guess, retail.
Earlier this year, Salt Lake City enacted new policy called the Downtown Heights and Street Activation Ordinance. As the name suggests, the ordinance addresses building heights, allows for taller buildings in the city, and works to improve ground floor animation. This is among other things.
We all recognize that blank walls (at street level) are suboptimal for urban vibrancy. But the thing about retail is that it doesn’t work everywhere. Even if we really want it everywhere, that may not be possible, at least in the short-term. Retail is usually a lagging indicator. The demand typically needs to be already in place for it to do well.
That said, in really central areas, the correct decision could be to just mandate it everywhere. And that is what SLC has done in its central business district:
However, things get trickier in transitional or emerging areas where you’re kind of just hoping that retail might someday work. From a development perspective, if we weren’t convinced that the retail would work and if we were being forced to build it, we would underwrite it very conservatively. This might mean applying zero (or even negative) value to it. This way if we can’t lease the space and it remains empty, at least it isn’t fatal. But it does mean that the rest of the project needs to carry this loss.
Of course, now you still have a ground floor animation problem. You have empty storefronts. Though one argument might be that at least you’ve provisioned for a future where retail does eventually work. And if this does happen, then somebody was clairvoyant and you’re happy that you built it. But if the area doesn’t ever support good retail, well then you’re stuck with an underperforming ground floor.
One alternative solution that can work on non-obvious retail streets is live/work. This way you build in some flexibility for the spaces to move toward retail (or other non-residential uses) if/when it becomes viable. But it’s not a perfect solution. It’s hard to make live/work suites entirely interchangeable. The ideal design parameters for retail are usually different than that of a home. Still, it can work reasonably well and provide needed flexibility.
It’s all very tricky. But at the end of the day, I think we can all agree that the objective is to limit blank and non-active faces on our principal urban streets. How we do that is the question. And sometimes it’s more art than science.
This is an interesting chart from Bloomberg Green comparing some of today’s innovations against innovations of the past. At the top of today’s innovations are EV batteries, which from 2010-2020, saw annual deployment growth similar to that of US WWII aircrafts. However, when it comes to reducing costs, both EV batteries and solar PV modules come out on top with annual declines approaching almost 20%.
Of course, these probably aren’t perfect comparisons. If you look at EV batteries and solar PV modules from 2020 to 2023, their growth rates jump to 72% and 39%, respectively. So who knows if these are the right time slices to be using in order to accurately capture the “key expansion periods.” Regardless, it does provide some historical context and it does say something. These are important innovations.
In a recent interview with FT, the CEO of Airbnb, Brian Chesky, said that the company is looking at the following expansion plans:
Offering long-term rentals of up to one year (currently, only about 18% of bookings on the platform are for 30 days or longer)
Offering more “things to do on your trip”, including car rentals and dining
These brand extensions make natural sense. You book a trip and then maybe you need a car, or something fun to do. I have used Airbnb “experiences” on a number of occasions to book things like boat tours and photographers. It’s a great service.
Perhaps more interesting, though, is how the housing component of their platform is evolving. They started by offering excess or found space for rent (which was very clever). Then it grew to become a short-term rental platform that competed with hotels.
This has created a significant amount of regulatory risk for the company (see New York), and so it’s not surprising that they’re looking at other ways of slicing up housing: rooms, nights, months, and now years.
Longer stays are less contentious.
If you’re renting on a nightly basis, then you’re an annoying tourist that is taking away housing. And if you’re renting on a monthly basis, then you might be an annoying digital nomad and that is similarly problematic. But if you’re renting for a year, well, then, that’s perfectly fine.
Now you’re just a normal city dweller.
Is there a world where Airbnb becomes a major platform for traditional long-term rentals?
Well, that project is now complete and stabilized, and it turns out that it was the first CLT apartment building ever built in NYC, which is quite an accomplishment.
On her blog, Joanne describes the project as being a “labor of love”, and that certainly sounds right. But they are now also onto their next CLT apartment building at 122 Waverly Avenue (called Frame 122).
This would suggest that whatever their development model is, it is working for them. My assumption is that they want to both make our cities more sustainable and own high-quality rental assets for the long-term (possibly forever).
If you’d like to see how 122 Waverly was assembled, here’s a short video that Joanne recently posted on her blog:
I was in Toronto’s Kensington Market over the weekend and so naturally I decided to tweet out a glib remark about how the neighborhood should be mostly pedestrianized. This, as many of you know, has been an ongoing debate in this city for as long as I can remember. But there are, in fact, things happening. Watermain replacements are scheduled for the area in 2024 and 2025 and so the city is rightly using this as an opportunity to rethink the area’s streets. Here’s the official website for the project. Here’s the staff report that was adopted. And here’s what design changes are right now being proposed.
One of the things that you’ll find in these documents are answers to the following question: “How supportive are you of the proposed design for the Pedestrian-only Zones?” And the results are pretty interesting. When the question was proposed to all respondents (the total number being 1,165), 90% were either very supportive or supportive of the Pedestrian-only Zones. And when narrowed to “visitors” of the area, the number appears to increase to 94% supportive. However, when this same question was asked to “people who live/work/own within the affected streets” the number drops to 55% supportive, with 28% being “very unsupportive” of the idea.
One of the concerns with pedestrianization is that it could make it difficult for businesses to operate in the market. This is an understandable concern. But in my lay opinion, this is a problem that has already been solved in many other cities around the world. Delivery vehicles would still be allowed to load/deliver, and you control their flow through things like mechanical bollards. The other concerns raised by community seem to suggest something different. They seem to suggest that pedestrianization might make the area too desirable. More specifically, it might “accelerate gentrification” and cause “traffic and other issues in the neighborhood.” I’m assuming the traffic being referred to here is non-vehicular, because we are, after all, talking about pedestrianization.
This dichotomy is an interesting one. On the one hand you have visitors and customers who overwhelmingly want the area to be pedestrianized or, at the very least, have pedestrian-only zones. But on the other hand, the businesses themselves seem to be concerned about their operations and the area becoming too successful. On some level, I guess, this makes sense, if your concern is displacement and/or the area becoming too corporate or whatever. But it’s also counterintuitive. Usually when you run a retail-oriented business you like things that (1) make your customers happy and (2) drive foot traffic.
So how do we go about reconciling this city building divide? Well, like many/most urban initiatives these days, you run a pilot! And that’s exactly what the city plans to do. There will be more consultation sometime next year, and then construction is planned for 2024-2025. Once that wraps up, the plan is to test out the various pedestrian-only zones. So I reckon we could be 2026 before we truly know where this is landing. I remain optimistic. But until then, please continue to refer to my glib weekend tweets.
