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.
Like many cities these days, Boston has a program in place to incentivize the conversion of office buildings to residential. Here is generally how it works:
City to provide an average tax abatement of up to 75% of the fair market assessed residential value for up to 29 years.
City to fast track the development review process (only 1 community meeting). Zoning would be considered as-of-right.
Construction must start before October 2025.
Per the city’s inclusionary zoning policies, 17% of all newly created residential suites must be restricted to households making up to 60% of AMI (Area Median Income), and another 3% of the suites must be reserved for voucher holders.
Projects cannot be ground-up construction. Adaptive re-use only. Though additional height/FAR is a possibility.
Program is not intended to create micro-units (I’m not sure how firm this restriction is).
Any ground-floor retail and public uses must be maintained.
Transaction charge of 2% on any future gross sale of the property.
And here is one example project that is using the program. It is interesting to look at how different cities are approaching this vacancy problem.
Many of you have probably heard of the concept of a “digital twin.” Put simply, it is a digital representation of a physical thing. This could be a thing that already exists or, in the case of a new building, it could be a thing that you’re about to make exist.
But there’s no reason to stop at the scale of a building. Right now, there are groups working on modeling entire cities. Sadly, in Ukraine, it is being done to document important buildings that could get destroyed. But in other places, it is being done in order to create a new kind of urban testing environment (via FT):
“In the city, you don’t have a development environment; you only have one city. The laboratory is the place where the planners go to test. So test in a digital twin and then develop or implant in the city. That’s going to be the value.”
The thinking is that if you combine a digital twin with good real-time urban data and AI, then you might actually be able to start testing new city building initiatives. For instance, maybe you could ask it: What would happen if we added a traffic lane, here? Would it actually help congestion or would it induce new demand?
It’s hard to model this kind of stuff today, which is one of the reasons why there’s usually fierce debate about seemingly everything. But if we had accurate models that could tell us something close to reality, that feels like it would be a game changer for city builders.
If you’re an architect, you’re sort of expected to have a somewhat eccentric home (or at least a really cool home). And that was certainly the case for architect Paul Rudolph. Paul is perhaps best known — at least in my mind — for being the chair of Yale’s architecture program and for designing its Brutalist building. But he also designed himself a pretty interesting apartment. In 1976, he bought the 19th-century townhouse at 23 Beekman Place in New York. He then constructed himself a now historically-landmarked penthouse on top of it. Now, technically, it is four levels. But spatially, it’s more like a series of connected platforms — 27 of them to be exact. So the penthouse is often described as being 27 levels, and as not having any doors and walls. Because those are totally overrated. I joke, but it’s a beautiful and interesting space. And the two founders of New York’s Gachot (and their two teenage boys) recently got a chance to live in it for three years. If you’d like to hear and see what that was like, click here.
These are the current (well, 2019) and targeted (2028) mode share splits for Dublin city centre (sourced from here):
The biggest planned change is a ~41% reduction in cars, taxis & goods entering the city centre. More specifically though, the plan contemplates a reduction in the number of cars in the core. The number of taxis and goods being moved around are both expected to increase.
To achieve this, the city is targeting drivers that pass through rather than stop in the city centre. Supposedly, about two out of every three drivers are currently doing this, and so the goal will be to redirect them.
Though, to be clear, this is not a plan to stop people from driving into the city centre. It is rightly about reducing the amount of road space allocated to private vehicles, prioritizing other modes of transport, and creating more “traffic-free civic spaces” for Dubliners and visitors.
Of course, this is what many cities around the world are trying to do. So perhaps the most noteworthy aspect of this plan is that most Dubliners actually support it.
According to The Irish Times, the plan received more than 3,500 public submissions, and 81% supported “reducing road space for private vehicles to facilitate a more efficient public transport system.” Further, 82% said they wanted more pedestrianized public spaces.
There were, however, some concerns expressed. The carpark operators in the city centre are naturally worried about the impact to their businesses. This is expected and self-serving.
Guinness (owned by Diageo) is also asking about how its delivery trucks will get to and from their brewery. This is obviously a crucial consideration. But I’m confident in saying that, whatever gets implemented, I’m sure that nobody is going to mess with the operations of St. James’s Gate Brewery.
In fact, I’d be surprised if this weren’t written into the Constitution of Ireland somewhere.
I sometimes wonder if I wasn’t born and raised in Toronto if I still would have gone to architecture school and become a real estate developer. I mean, if I grew up in Paris, maybe I would have become a fashion designer. Or if I grew up in Park City, maybe I would have started a snowboard company, slash become a ski bum. I would enjoy doing all of these things. And places certainly do influence us, more than most of us probably appreciate.
My point with all of this is that Canada likes to somewhat paradoxically over index on housing. I say paradoxically because we never seem to have enough of it for Canadians — certainly the affordable varietal — and yet:
“Canada relies heavily on its real-estate sector to power the economy. Housing investment in Canada as a share of gross domestic product reached 8.9% in 2022, according to the Organization for Economic Cooperation and Development, much higher than the 4.8% on average for the 38 member countries in the OECD.“
If you look at all of the industries that make up the Canadian economy, “real estate and rental and leasing” is at the top with 13.01% of GDP (as of 2020). And if you add “construction” on top of this, the total is about 20.09% (again, as of 2020). This feels suboptimal. And I say this as a developer and builder of real estate.
Real estate is largely a byproduct of economic growth. When someone starts a business and then needs something like an office or a warehouse, that is a positive thing for the economy. Jobs are being created by the business and further jobs are being created by the people who will deliver the space they need. But if you aren’t creating new jobs in the first place, then just dealing in real estate will only take you so far.
Immigration helps, but it can also create a mirage of growth and prosperity. If you look at real GDP growth across the G7 from 2019 to today, Canada looks pretty good. We’re second (+4.5%) only to the US (+8.9%). But if you look at GDP per capita over the same time period, we’re dead last (-2%), whereas the US remains on top (+7.2%).
I’m not an economist; I just build things. But in my opinion, this is a problem. We should be doing everything we can to foster a stronger culture of innovation and entrepreneurship in this country. We have the talent. I mean, Ethereum has roots in this city! We just need more people turning this intellect into wonderful new companies.
Ten years ago when I was working on development pro formas (here in Toronto), we used to assume that we would launch condominium pre-sales, and then start working drawings once we hit somewhere around 50% sold. And for our hard costs, we would carry a modest inflation rate of say 2-3% per year.
The thinking at the time was that construction documents are expensive, let’s not spend the money until we know that we have a good amount of sales under our belt. In Toronto, you can also use purchaser deposits toward project costs, so this is an equity efficient way of managing your cash flow.
But then this go-to-market strategy started becoming too risky, probably around 2017-2018. Sales were happening faster and costs started increasing a lot faster, and so now everyone wanted to minimize the lag between their pre-sales (your revenue) and when they procured construction (your costs).
So as an ideal and totally risk-averse approach, the objective was to be ready to start construction and to know what your hard costs would be before you even started selling condominiums. It didn’t matter that you were going to spend a bunch of money on technical drawings, because it was still going to be many multiples less than your cost escalation exposure if you didn’t do it. There was also a high degree of confidence that you would get the pre-sales once you did launch.
This is how things mostly worked during the pandemic. But strategies once again changed in the second half of 2022. Pre-sales slowed and people started wondering, “wait a minute, could hard costs actually come down?” The answer turned out to be yes and, this year, most people in the industry expect them to come down even further.
This is a good example of how quickly and dramatically things can change in development. In 2021, it was “we need lock in construction costs immediately or we might get hit with a 40% increase on glass.” Now it is, “let’s wait as long as possible because we’re in a deflationary cost environment and I’m sure it’ll be cheaper later.”
To some extent, you can look to leading indicators like architecture billings and home pre-sales to determine what the future might look like. But it’s far from perfect. I don’t know anyone that accurately predicted what we just went through over the last number of years.
So as a developer, you just have to do your best to stay ahead of what’s coming and manage your downside risk as best you can. In all cases, you’re going to need to be creative and nimble. Because clearly a lot can change in the span of even a single development project.
I kept spotting this backpack in Les 3 Vallées and I thought it was awesome because, well, in the words of the late Anthony Bourdain, “you can never have too much cheese, bacon, or starch.” Tartiflette is a casserole dish that is local to the Haute-Savoie region in the French Alps. Its main ingredients are potatoes, bacon, and cheese (reblochon to be exact). And yes, it is as delicious and filling as it sounds.
I also liked that the slogan was specific to the region we were in, and so I went on a hunt to find this mysterious backpack. I must have gone into at least 8-10 stores looking for it. None of them had it. But eventually I learned that it was an online thing. It was for the “I like to ski and hang out in chat rooms” crowd, or at least that’s how one guy explained it to me. So I went online and ordered it back to Toronto.
It finally arrived today, and I’m looking forward to using it when I snowboard, cycle, and attempt to make tartiflette for the first time. Now I just need to locate some reblochon. (Note to US readers: My understanding is that this cheese is considered contraband in your country because it is unpasteurized and does not meet US import laws. So you may need to find some sort of clandestine cheese market if you want to make it.)
For those of you who also like to ski and hang out in chat rooms, you can find the bag and other merch, here. It’s all an extension of the Grenoble-based online magazine, skipass.com.
At the highest level, I agree with the premise of this tweet from The Real Estate God. The overarching argument is that one’s main criteria for selecting a real estate market in which to enter should be “the place with the least competition.” And the reason for this is that less competition equals less price discovery, which then equals more mispriced assets and more opportunities to generate outsized returns.
Going even further, the argument here is that you’re actually taking on less risk by buying mispriced assets in less competitive markets because you can model reality (things like in-place cash flows and market rents) as opposed to betting on the future (things like rental growth and/or cap rate compression). Said in a different way, it’s easier to find deals and “make money on the buy”; and, once again, I would mostly agree with this.
But in my mind there’s a very important caveat. And it’s akin to the advice that the late Charlie Munger supposedly gave to Warren Buffet: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.” While it is true that you might find wonderful pricing in less competitive markets, there remains the question of whether you’re also buying wonderful real estate.
Some four years ago, people were talking about the possibility of New York City being dead. But of course that was nonsense. Last week, New York City published the initial findings of its housing and vacancy survey and the key takeaway is that the city’s vacancy rate dropped to 1.41% last year (2023). This is a drop from 4.54% just two years ago and the lowest measurement since 1968. It’s also even worse at more affordable rent levels:
The problem, as described by the city, is a supply-demand imbalance. Over the last two years, the city’s net housing stock grew by about 60,000 homes (~2%). This is, apparently, pretty good compared to recent years/decades; but it wasn’t nearly enough given that the city added 275,000 new households. This is the opposite of dead, and it’s not going to be addressed by just doing things like restricting short-term rentals.
We have a structural delivery problem and New York City is not alone in facing it.
Urbanation is forecasting that approximately 27,000 condominium suites will finish construction and be ready for occupancy this year in the Greater Toronto Area. This is some sort of a record, and is naturally the result of record pre-construction sales over the last cycle.
This number is going to come down given that construction starts are declining, but before that, these suites will need to get absorbed into the market. And that’s why I think that one of the biggest risks for our industry this year is going to be closing risk.
In other words, you’ve got the pre-sales, but will the purchasers actually show up and close on their homes?
It is for this exact reason that most/all construction lenders want to see pre-construction purchasers pay at least 10% in deposits before they’ll advance their loan. It is also why the most risk-averse developers won’t start construction until they have even more than 10% sitting in trust. The more hard money a purchaser has paid, the more likely they are to close.
It can be easy to forget this when the market is on fire and you’re more preoccupied with holding back inventory because you think that sale prices will be higher in the future. But it’s prudent to remember these times. They are a naturally occurring part of real estate cycles.
The most risk adverse execution strategies will likely leave some money on the table in the best of times. You won’t be profit maximizing. However, they’ll leave you more protected in the worst of times. That’s how risk and reward work.
