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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Author: Brandon Graham Donnelly

  • Rebalancing retail sector taxation

    Back in 2006, online shopping in the UK represented about 3% of total retail sales. As of March 2020, right before the pandemic, this number had increased to about 22%. Online shopping then spiked during the pandemic, as we all know, but it has since normalized and the January 2022 figure was about 27.1%. But if you exclude grocery sales (because food is special), I believe the percentage of online sales is now in the range of 35-40% for the UK.

    What is clear is that there is a longstanding shift towards more online shopping. It has just become so easy. However, UK retailers, as well as many others I’m sure, have been arguing that part of the reason for this systemic shift is an unfair tax advantage.

    Physical retailers tend to be located in high-traffic areas and so they are naturally subjected to higher municipal taxes. Online retailers, on the other hand, get to locate their warehouses and distribution centers in lower cost locations and so aren’t taxed at the same kind of rates.

    Because of this perceived imbalance, the UK is now studying the pros and cons of implementing an online sales tax (OST) as a way “to help rebalance taxation of the retail sector.” Tax online so offline seems more attractive.

    But this is a tricky thing. Nobody wants to see our main streets and urban centers void of retail activity. That would be like walking through a financial district that had decided to bury all of its retail activity underground or something. But at the same time, does it make sense to shift taxes to what the market seems to like and want? Though I suppose it could be a lucrative tax since you generally want to target things with inelastic demand.

    What are your thoughts?

    More info on the OST consultation, here.

  • Climate and economy

    I have long been interested in the possible relationships between climate and economy. Because my unproven hypothesis is that, given the choice, most city dwellers would probably prefer to hang out on Ipanema beach and drink caipirinhas in the sun than sit in a windowless cube farm toiling away on cover pages for TPS reports.

    Well it turns out that there is some science to support this theory. A 2012 study by professors at Harvard and the University of North Carolina did in fact discover that people tend to work a little harder and focus a bit more when the weather is crappy outside and they’re not distracted by the promise of glorious sunshine.

    This Scientific American article from 2013 also argued that there are physiological reasons for why we’re maybe not as sharp in extremely warm weather. The possible science is that excessive heat is more taxing on our body (compared to the cold) and so more energy is required to maintain homeostasis. That leaves less mental capacity for TPS cover pages.

    Of course, these sorts of ideas aren’t all that novel. For centuries, economists as well as many others have posited that climate could be one of the reasons why geographies like northern Europe have historically had a higher standard of living than the south. It instilled work ethic and an awareness of deadlines. If you didn’t plan accordingly, you would starve to death in the winter.

    But we also know that climate alone won’t do it. There are many examples of tropical cities with advanced economies and high-functioning societies. (The invention of air conditioning surely played a meaningful role.) And on the flipside, there are many examples of cold shitholes. So it’s complicated. But all this being said, doesn’t a caipirinha on the beach sound nice right about now?

    Photo by TAIS HELENA DE CARVALHO on Unsplash

  • Florida proposes stricter condo rules

    In response to the tragic collapse of the 12-storey Champlain Towers South building in Surfside last year, the state of Florida is set to pass new stricter condominium rules around inspections and reserve funds. And according to the WSJ, the requirements would be some of the strictest in the US.

    Under the House bill that has already passed, condominium buildings that are three or more stories would need to be fully inspected and recertified once they are 30 years old. For buildings within 3 miles of a coast (salt water is impactful), the requirement would be 25 years old. Following this recertification, the buildings would then need to be inspected every 10 years. Under the proposed Senate bill, the inspection process would start after 20 years and be required every 7 years. In both cases, the reports that come out of these inspections would need to be submitted to all unit owners and to local building officials.

    If approved, these rules would have an immediate impact on the market given that about 900,000 of the approximately 1.5 million condominium units in Florida are older than 30 years old.

    But is all of this enough? I think the devil is in the details.

    Under the House bill, unit owners would no longer be able to waive the collection of certain building reserves. But under the Senate bill, the requirements for waiver would simply be tightened. How tight? In all honesty, I don’t know the specifics. I haven’t read the bills. But the collection of reserve funds is paramount. And after reading the above WSJ article, I can’t help but feel like these new policies might still be less stringent than what we already have here in Ontario.

    Here are two excerpts from Ontario’s Condominium Act:

    Put more simply, all buildings and structures need to have regular inspections. Materials and systems naturally depreciate over time and so the point of a reserve fund study is to determine (1) what will need to be repaired/replaced, (2) when it will need to be repaired/replaced, and (3) how much it might cost. You then need to ensure that the money is in place to carry out the execution of said study. In all cases, there should be zero compromises around life safety.

  • Price of carbon permits has fallen

    At the beginning of this year, I predicted that we would see the price of carbon continue to rise, and in particular the price of EU carbon permits. Well the year is still young but so far the opposite has been happening. Back in January, the price of EU carbon permits were hovering around €80 per tonne. Since Russia bullied its way into Ukraine at the end of February, this market has corrected and now hovers around €66 per tonne. Generally carbon prices tend to increase alongside energy prices, but the opposite dynamic is happening right now because of all of this geopolitical uncertainty. But over the long-term, I don’t believe that this will remain true. So this feels like possible mispricing to me. Climate change may be a relatively less important issue in Europe right now, but it’s not going away.

    Chart: Trading Economics

  • Columns vs. shear walls in residential and office construction

    If I were to make a broad generalization for the way that we typically design the structural systems for residential buildings and office buildings here in Toronto it would be as follows: office buildings tend to have a big structural core with perimeter columns and residential buildings tend to have a smaller core accompanied by both columns and shear walls (long structural walls essentially). There are a myriad of other differences, but for the purposes of this post, I’m going to run with this broad classification.

    When something is typically done a certain way it often means that it is generally what the market wants and it is a cost effective solution. In the case of office buildings, this sort of structural system is essential for maintaining open plans and future flexibility. You can’t have shear walls interrupting your floor plates. And because big office buildings also tend to have a lot of elevators, the structural core is usually what provides lateral stability to the building (or at least this is what the structural engineers tell me).

    But this same imperative for open plans isn’t usually there for residential buildings. In this case, the unit demising is often fairly fixed and the individual resident/tenant spaces tend to be smaller than in office buildings, which makes frequent structural elements a lot more palatable. And since the elevator cores also tend to be smaller (fewer elevators), there is usually a need to introduce other structural elements that can provide the building with lateral stability. (Again, this is what the engineers tell me.) So enter all the shear walls.

    But every now and then, somebody in Toronto will ask: Is this the right way to be building? Other cities don’t build their residential buildings with all of these shear walls and so should we really be limiting the future flexibility of our multi-family housing supply by constructing in this way? These are good questions. The short answer is that it tends to be easier/cheaper to build this way. Our market is used to it. And generally end-users are just fine with it.

    However, this method of building isn’t necessarily a universal truth. The structural system for One Delisle, for example, is far closer to that of an office building than it is to that of a typical residential tower. Much of this was driven by the building’s architecture and its continually changing floor plates. I have also heard of instances where purpose-built rental developers are choosing to go column over shear wall so that there’s greater flexibility in the future. There’s certainly a case to be made for this.

    As developers, it is impossible to know all there is to know about any one discipline. You need the right team in place for that. But we do have to look at the bigger picture, weigh all of the constraints, and then hopefully make a reasonably good decision. This is one example of that.

    Image: Bay-Adelaide Centre North, Toronto

  • Office utilization update

    Some of you might remember my Jimmy the Greek Reopening Index. It has become my crude way of measuring office utilization in Toronto’s CBD. Based on this I can tell you that utilization is firmly up this week. Most lunch spots in Toronto’s PATH are back to having lines and the people working at these fine establishments are saying things like “finally” and “the people are back.” All of this is, of course, anecdotal. And I am not saying that we are back to pre-COVID levels. But there was a clear and meaningful uptick this week, which happens to coincide with the lifting of a number of COVID restrictions.

    Now let’s consider some actual numbers. I don’t know what they are for Toronto’s CBD (if you do, please share them in the comments below), but Kastle Systems has what seems like accurate “office swipe card” data for the 10 largest US cities. What this data tells us as of the end of February 2022 is that there has been a “return to normal, but not to the office.” Compared to 2019, NBA games are at 93.3%, movie theater ticket sales are at 89.4%, TSA checkpoints are at 87.8%, OpenTable reservations are at 87%, and yet office utilization sits on average at 36.8%.

    The “best” performing city is Austin with an average utilization of 53.4% as of February 23. And the “worst” performing city is San Francisco with an average utilization of 26.1% as of the same date. This makes intuitive sense given that tech has been pretty much leading the charge when it comes to remote and flexible work. Still, things are heading up and to the right. And as I argued at the beginning of this year with my annual predictions, I continue to believe that the majority of office workers will return at some point. Offices aren’t going away. And I think they’re going to remain the dominant place of work.

    Chart: Bloomberg

  • The world’s top performing luxury residential markets

    Knight Frank just released the 16th edition of its Wealth Report along with the disclaimer that, with everything going on in Ukraine right now, this outlook is of “little relative importance” and kind of doesn’t matter in the grand scheme of things. In any event, it includes the latest edition of their Prime International Residential Index (PIRI 100), which looks at the annual % change in luxury residential prices around the world. The chart is interactive, but I screenshotted (above) the top risers and fallers. Toronto is 4th in the Americas and 7th globally with a 20.3% year-over-year increase. Miami is also no surprise and came in 4th globally. The top three cities were Dubai, Moscow, and San Diego. Thankfully though, the number two city is in serious jeopardy right now and I suspect that its position will look quite different next year. Money will go where it feels safe and secure.

  • Sensible, balanced, affordable, and livable

    I just discovered a new alliance of non-partisan, non-profit resident and ratepayer groups in the Greater Toronto Area that have come together in opposition of what they see as “unregulated overdevelopment and the lack of sensible growth vision for the GTA.” If you’d like to read through their public letter to the Premier of Ontario, Doug Ford, you can do that over here.

    In it you will learn that the Toronto region is vying desperately for the title of the most densely populated place on earth by trying to compete with already established locales like the slums of Mumbai and Monk Kok in Hong Kong. One has to admire ambition.

    But what is not clear to me is what exactly “sensible, balanced, affordable, and livable developments” should look like. Should we quash our low-rise “Neighbourhood” designations (the majority of our land area) and instead blanket the region with mid-rise buildings similar to Paris? This is one option and, by the way, Paris is far denser than Toronto (relevant reading here and here).

    Or should we maintain our low-rise “Neighbourhoods” exactly as they are and simply reduce overall housing supply by limiting height and/or density at our transit stations? Is this the ask? I’m not sure. But this is a good question for city builders: What should sensible, balanced, affordable, and livable development look like? Is the 33-storey building that I live in sensible?

  • Money as social construct

    In Matt Levine’s latest Money Stuff newsletter he talks about how money is really just a social construct. In his words, money is “a way to keep track of what society thinks you deserve in terms of goods and services.”

    But over the years, we have learned that it can be manipulated through the actions of central banks and other authorities. This, he argues, has become more obvious in the last 15 or so years. Which is one of the reasons why people continue to argue that cryptocurrencies are both a good thing and something we need more of.

    Crypto is neutral, or at least that is the intent. But at the same time, it too remains a social construct. Cryptocurrencies have value because that is what we have collectively decided to layer on top of their math-based blockchains — a global market cap of nearly $2 trillion.

    Ironically, the more value we ascribe to them the less neutral they are likely to become. Because the more they ingratiate themselves into mainstream society, the more likely they are to get regulated. But Matt’s overarching argument is that this is in fact a good thing.

    Monies exist through webs of interdependencies that generally keeps us all in check by encouraging “prosocial behavior.” So the fact that authorities can intervene, when needed, isn’t a bug, it is a feature. It means that when you clearly misbehave, the world can punish you by doing things like freezing your foreign reserves.

  • Canada is a suburban nation

    Statistics Canada has started releasing some of the results from its 2021 survey and there is a new classification that is now being used in its analysis of Census Metropolitan Areas (CMAs). Instead of organizing city regions jurisdictionally, it is now using a new functional classification that is based on travel times to downtown.

    This has resulted in five new geographic categories: Downtown, Urban Fringe (<10 min to downtown), Near Suburb (10-20 min to downtown), Intermediate Suburb (20-30 min to downtown), and Distant Suburb (over 30 min to downtown). Below is chart from a recent Globe and Mail article that summarizes these classifications, but keep in mind that percentage growth is different than total population growth (the next chart from New Geography covers this one).

    This is more granular than their previous approach, which used to be fairly binary: city core vs. the suburbs. But at the same time, it reflects a very suburban and monocentric view of cities. Downtown is in the middle. People generally need to drive to said downtown for things like work and entertainment. And so how long does it take to do that?

    Though in all fairness, this lens is our reality. When you apply the above classification and look at Canada’s 41 largest metropolitan areas, only 4.7% of us live in a downtown and only about 28.5% of us live in what is presumably an urban setting (downtown + urban fringe). And the numbers are actually less urban in a CMA like Toronto, where 11.5% live in the urban core (downtown + urban fringe) and 88.5% live in the suburbs, whether near or distant.

    However, one could argue that we are at least becoming slightly more urban. Only 11.5% of Torontonians might currently live in the urban core (2021), but 16% of our growth from 2016 to 2021 went to it (see above chart). Of course, this is an incremental kind of shift. About 84% of our population gain also went to the suburbs, with the vast majority of it going to distant suburbs (a 30 minute commute in Toronto is nothing after all).

    As Wendell Cox points out in this recent New Geography article, Canada remains a suburban nation.