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

  • More retailers are buying real estate in New York

    Last week we spoke about how many businesses don’t want to own their own real estate, but that some do. We then spoke about Prada’s recent acquisition of 720 and 724 Fifth Avenue for $835 million. However, they’re not the only ones. According to New York’s The Real Deal (thank you John Bell for the article), last year saw the following transactions:

    • Swiss fashion house Akris bought a property from SL Green for $40.6 million
    • Japanese coffee retailer Geshary bought a property on Fifth Avenue from the Riese Organization for $38 million
    • And Dyson bought a building in Soho for $60 million

    Now, some, or a lot of this, is strategic. New York is New York, and global brands need to be there. Another part of this is that there was less competition last year. Fewer real estate companies wanted to buy retail and office buildings, and so end users seem to have stepped in at what they presumably saw as favourable prices.

    But it’s also not totally foreign for retailers to want to own their own real estate. Perhaps the most famous example is McDonald’s, which owns its own real estate and then leases it out to franchisees. Though as I alluded to last week, it’s important to know what business you’re ultimately in. And McDonald’s knows it’s in the real estate business.

  • Live from the co-working space at Junction House

    Yesterday’s post was written in the co-working (/lobby) area of Junction House. I wrote about this space nearly a year ago when it was under construction, but now it’s complete and people like me are using it:

    I spent a few hours working in the space yesterday, and it was amazing to see residents and guests coming and going. Some people were waiting to meet someone. Some people were just playing on their phones. And others, like me, were jumping on and off calls and writing blog posts. Later in the evening, it transitioned to guests carrying bottles of wine and flowers.

    This was always the intent of this “amenity.” We wanted to create a social space for residents and guests, replicating a bit of the feeling that you might get in a hotel lobby bar. But ultimately, this is the kind of space that will almost certainly evolve over time, depending on how residents choose to use it. It’s not rigidly defined; it’s more of a flex space.

    It’s also worth mentioning that this space was designed well before COVID. A lot of people have asked us if this was in response to that, hoping to identify tangible ways in which design has responded to the pandemic. But honestly, we didn’t change anything. Gathering spaces were important before, and they remain important today.

    I guess in many ways this is a space that sits somewhere in between a “first place” and a “third place.” It’s almost a first place in that it’s in a building that people call home. But it’s also a more public social environment that isn’t technically home or work. So I’m really looking forward to seeing how it settles in and evolves over time.

    I’ll report back.

  • Real estate commissions are probably going to come down

    Real estate commissions on homes in the US are typically between 5-6%. And it is usually split between the seller’s agent and the buyer’s agent (or it goes all to one agent in the case of dual-ended deals). It is also customary for this commission to be paid entirely by the seller (through the proceeds of their sale), though you could argue that buyers end up paying for it indirectly. All of this is generally true in Canada as well.

    This is a good set up:

    • Sellers don’t pay until they sell and have fresh cash
    • Money being deducted from proceeds (the “take rate”) is a lot less noticeable and has a lot less friction than cash you just have to pay out
    • Buyers kind of don’t pay

    This last point is one of the most important features of how real estate commissions work. Because you have one side of the transaction that feels as if they’re mostly not paying, it generally helps to perpetuate the status quo. If both sides had to directly fork out cash, you’d likely have a lot more people saying, “hey, why don’t we consummate this transaction over here, on the side, and not pay these fees.”

    But it turns out that the US Department of Justice isn’t happy about some of these policies and practices. More specifically, when the National Association of Realtors does things like this:

    • Prohibiting multiple listing services (“MLSs”) from disclosing to prospective buyers the amount of commission that the buyer broker will earn if the buyer purchases a home listed on the MLS (“NAR’s Commission Concealment Rules”);
    • Allowing buyer brokers to mislead buyers into thinking that buyer broker services are free (“NAR’s Free-Service Rule”);
    • Enabling buyer brokers to filter MLS listings based on the level of buyer broker commissions offered and to exclude homes with lower commissions from consideration by potential home buyers (“NAR’s Commission-Filter Rules and Practices”); and
    • Limiting access to lockboxes that provide licensed brokers physical access to a home that is for sale to only those real estate brokers who are members of a NAR-affiliated MLS (“NAR’s Lockbox Policy”).

    In fact, these practices were found to be anti-competitive; they were arguably keeping commissions artificially high. So much so that a federal court recently awarded $1.8 billion in damages. It was also decided that no rule or practice should exist that:

    • Prohibits, discourages, or recommends against an MLS or MLS Participant publishing or displaying to consumers any MLS database field specifying the compensation offered to other MLS Participants;
    • Permits or requires MLS Participants, including buyer brokers, to represent or suggest that their services are free or available to a client at not cost to the client;
    • Permits or enables MLS Participants to filter, suppress, hide, or not display or distribute MLS listings based on the level of compensation offered to the buyer broker or the name of the brokerage or agent; or
    • Prohibits, discourages or recommends against the eligibility of any licensed real estate agent or broker, from accessing, with seller approval, the lockboxes of those properties listed on an MLS.

    Some believe that this ruling — which will create more competition — could reduce the $100 billion or so of commissions paid each year (in the US) by as much as 30%. This is possible. I have no idea how this estimate was calculated. But it does make intuitive sense that commissions should come down. This ruling gets at the heart of what sustains the industry: one side of the marketplace needs to feel that they’re, mostly, not really, paying.

  • Turquoise for autonomy

    One of the realities that we will have to face in, oh I don’t know, 5 or so years, is that there will be a mixture of different cars on the road. Some will operate with drivers. And some will operate with no drivers. Assuming that the cars with no drivers do well at their job, I would imagine that this will become the default. But in the interim, it’ll probably be useful to know which is which. And that’s why Mercedes-Benz (and probably others) has been working to establish a new internationally-accepted signal for computer-driven cars.

    The decision so far: turquoise lights.

    The company has just received permits from the states of California and Nevada for its Drive Pilot system, and as part of this, turquoise lights were earmarked for this exact purpose. Supposedly turquoise was chosen because it’s distinct and because there’s nothing else on the road that uses it. But I think the real reason is that it looks cool and kind of cyberpunk. So I hope this does become the standard way that we all visualize our shift toward autonomy. I can already imagine the long-exposure photography that will follow of our roads.

    Images: Mercedes Benz via The Drive

  • Prada just bought a lot of real estate in New York

    We have spoken before about how hotel brands don’t typically own their real estate. But the same is also true of many other businesses. And one common reason for this is that it ties up a lot capital that could be otherwise deployed in the core business. If, for example, you’re in the business of producing exclusive handbags, it usually makes sense to spend your excess cash on making better handbags. And if you find that you’re actually making more money on real estate, then it could be a sign that you’re in the wrong business.

    There are, however, instances where owning your own real estate may make the most sense. Maybe you have an irreplaceable location that you want to secure for the long term. And so there’s real strategic value. Or maybe you keep having annoying legal fights with your landlord and you just want to get back to focusing on luxury handbags. There are other motivating factors to consider here, but these two seem to be behind Prada’s recent acquisition of 724 Fifth Avenue in New York.

    Prada has had a flagship 5-storey retail store at this location since 1997 (and most recently was paying US$22 million in rent). In December, they announced that they had acquired the entire 12-storey building for US$425 million. (That works out to be about $5,395 psf on the gross building area!) And then shortly after, they announced that they had acquired next door — a hard corner — for another US$410 million (total US$835 million).

    All of this makes the deal one of the largest in New York last year. But was it a good deal? I would need some more information to answer from a quantitative real estate perspective. But if I’m Prada, I know that I need to be on Fifth Avenue for the foreseeable future. And now I get access to a hard corner and I no longer have to deal with my landlord. These are clearly strategic things. Last year was also a pretty good time to be buying retail/office buildings with all cash, which is what Prada did.

  • Thinking about the things we’re used to

    This is a powerful perspective:

    We evolved to be wary of change. Our attention is limited, new things can be a threat and the status quo feels comfortable.

    As a result, we spend a lot of time and energy being afraid (and arguing about) the upcoming changes in our lives, but almost no time at all thinking about the things we’re used to.

    As an example of this tension, check out this “exit interview” with Toronto’s former chief city planner, Gregg Lintern. The underlying theme is change and why it’s desperately needed.

    But of course, that’s not easy.

    The interviewer, Victoria Gibson, mentions this survey stat: nearly half (47%) of all Torontonians think the city is building too little housing, and yet only about a quarter (27%) think their area could handle more.

    We need this, but not here. Probably because we’re used to the way things are.

    But if you read the interview, you’ll see that the answer, or at least one answer, is to make the conversation personal, and ultimately think critically about, you know, the things we’re used to.

    Change starts with not giving the benefit of the doubt to the status quo.

  • Nearly 1 out of every 10 cars sold is now electric

    I’ve said this before, but the car I currently have will certainly be the last internal combustion engine vehicle that I own. I truthfully even felt a bit weird buying it 6 years ago, but at the time, there weren’t that many options other than a Tesla. And I didn’t want a Tesla.

    Today, there are lots of EV options, and the numbers are starting to show that. When the final figures come in, it is estimated that the US will have sold 15.5 million new cars last year. And of these, about 1.44 million units are expected to have been electric.

    This means that we are just under 1 out of every 10 new cars sold in the US. The trend line is also working in the right direction. 1.44 million new EV units is roughly the total number of EVs sold between 2016 and 2021 in the US. 

    So things are accelerating. And presumably there are other people like me waiting on the sidelines. I am deliberately roughed in for an EV charging station in my new parking spot and, if/when it comes time to purchase a new car, that’s exactly what will get installed.

    (I added “if” because, depending on how mobility evolves over the next 5-10 years, there’s a chance I may no longer want to own a car.)

  • What might happen in 2024

    Yesterday we looked in the rear-view mirror. Today we’re looking forward:

    • The market consensus right now is that this cycle of interest rate increases has come to an end, and that we should see rates start to come down next year. Having confidence that rates won’t go any higher in the near future is what markets need in order to start making more decisions. So this is, of course, positive. At the same time, I don’t think anyone should expect a return to ultra-low rates. Rates today are still low when viewed historically.
    • Lower rates are good for levered assets such as real estate, but I don’t think that our industry has fully felt and processed the impacts of higher rates. Unfortunately, I think that things will get worse (in 2024) before they get better (maybe toward the end of 2024 or perhaps in 2025). This is when a “risk-on” approach will return in commercial real estate. A year ago today, I thought 2023 would be the year for this, but as I said yesterday, I was overly optimistic in terms of my timing.
    • On the residential resale side, I think we will see greater optimism sooner, certainly for the most in-demand cities and areas. There is pent up demand waiting on the sidelines and, once we can get past the current bid-ask spreads and deadlock, I believe we’ll return to a more balanced market in 2024. To be clear, I’m not expecting bidding wars and the like. And because of our housing affordability crisis, I also think the Bank of Canada will be more resistant to lowering rates compared to other central banks. This will help the Canadian dollar.
    • If you’re a buyer of real estate, I generally believe that 2024 will turn out to be a pivotal year for you. Roughly speaking, you win acquisitions in one of two ways: either (1) you pay the most or (2) you believe in something that most other people in the market don’t. This second approach is harder to achieve in bull markets. But in slower markets, the door is open and history has taught us that it can be the foundation in which great fortunes are made.
    • As I mentioned yesterday, I agree with the prognostications that hard costs will soften further next year (perhaps even more than 5% on average). Obviously every market is different. But here in Toronto, I just don’t see us returning to the level of construction starts that we have seen over the last number of years.
    • Since 2021, I have used my hyper scientific Jimmy the Greek Reopening Index to keep tabs on office utilization and the overall return to office. And based on this, 2023 was a positive year. Initially, souvlaki consumption appeared dramatically lower on days like Monday. But I noticed discernible increases as the year went on. However, if you look at actual data, such as what we have from swipe cards, the great return to office seems to have stalled out at around 50%. I don’t think this will hold, though. I continue to believe that of the people who work in offices, most will spend > 50% of each week there. And we will see that in 2024.
    • 2023 was the year of AI. But Fred Wilson makes an excellent point, here. AI is 40+ years in the making. Last year only became the year of AI because a consumer-facing app — ChatGPT — was revealed that captured everyone’s attention. Crypto will eventually have this moment, but it will likely need to marinate a bit longer. Instead, I think 2024 will be the year of augmented reality (AR) and a further blurring of our offline and online worlds. Think digital art, fashion, and other collectibles (such as NFTs).
    • Right now, autonomous vehicles feel like they’re in the trough of disillusionment (within the hype cycle). There were moments last year where it felt like we were finally moving beyond this phase. But then some very suboptimal things happened. I think AVs are our reality in the next 5+ years, which means that for next year we likely want to be focused on the inputs: vision/LIDAR, battery tech, etc.
    • Zooming out, we should be thinking about the above two trends in the context of a broader shift toward greater automation. I think it will feel more insidious than immediate (certainly in 2024), but the longer-term impacts are going to be profound for our society. The so-called gig economy is likely to be impacted first. Eventually the overall economy will create new jobs, but we are still going to need to manage this transition toward more automation.
    • TikTok Shop is where to look for the future of shopping. I think the platform will continue to see strong adoption and ultimately prove to be a dominant e-commerce platform throughout 2024. Amazon, Meta, and others will see this, and try their best to catch up and copy it.
    • At the time of writing this post, the total crypto market capitalization is about $1.74 trillion. This is down from nearly $3 trillion at the peak of the market in 2021. The recent gains suggest that the so-called “crypto winter” might be over, and so combined with lower interest rates and more real-world use cases, I think that 2024 will be another strong year for crypto. Total crypto market cap at the end of the year will exceed its 2021 peak.

    And there you have it. My current thoughts for this upcoming year. I should note that I’m not an economist, analyst, or an expert on souvlaki demand for that matter. But I enjoy writing this post as an annual discipline. It forces me to think critically about the topics that interest me. And in the paraphrased words of Howard Lindzon, it gives me an archive that I can go back to and either cringe at or think to myself, “hey, I could have been a somebody!”

    And with that, a big thanks to everyone who has read this daily blog over the last year. This year marked its 10th anniversary. I wish you much success and happiness in 2024. Happy new year!

  • What happened in 2023

    As per tradition around here, I like to bookend the new year with two posts: a post that revisits my random predictions for the year and a post that talks about what might happen in the year to follow. Today’s post is the former. So let’s see how I did:

    • I thought the interest rate hikes would come to an end in Q1-2023. But that didn’t happen until the summer. I also thought this would lead to a mild recession in Canada. Technically, we are not actually in one, but according to some, we kind of are.
    • I thought the real estate sector would start seeing some distress in the first half of the year, and that a new equilibrium would be found in the second half. This proved to be overly optimistic in terms of timing. A lot ended up being on pause for the entire year, and I now think that my forecast was at least a year too early. The sea change is still underway.
    • Given the overall slowdown in real estate, I felt that construction costs had to see some softening. This did, in fact, happen with some of the “earlier trades”, such as shoring and excavation, and we did see some specific trade pricing, such as concrete formwork, come down by as much as 30%. The smart cost consultants we work with now expect to see overall hard costs come down by a further 5-6% next year in Toronto. This makes sense given construction starts are way down.
    • With me expecting the interest rate increases to stop in Q1, I thought that pre-construction condominium sales would return in a meaningful way by the spring. While we did see some buoyancy around that time, it was short lived. Sales remained nearly shutoff for the entire year, but for maybe a handful of projects. The more successful projects tended to be outside of the Toronto core and at lower price points.
    • With respect to home prices in more tertiary/fringe markets, my sense then, as it is now, was that these prices would remain below the peaks for many years. In addition to the upward momentum created by low rates, my view was/is that some of this pricing was the result of a bet on urban decentralization. I don’t think that has played out as many expected it to, so that’s why I think it will be many years before the pricing we saw in early 2022 returns.
    • The momentum around “expanding housing options” in our low-rise neighborhoods is many years in the making. And a lot of progress was made in 2023. Here in Toronto, we adopted new multiplex policies that now allow fourplexes plus an accessory dwelling (so 5 homes in total) on an as-of-right basis. I continue to believe that this momentum is only going to grow. I also think we will see the arrival of more mixed-use opportunities.
    • I believed that, broadly speaking, urban transit ridership would remain below pre-pandemic levels for all of 2023. This proved to be the case for most US and Canadian cities. But things are improving. For Canada as a whole, it looks like we’ll see full recovery sometime in 2024 based on this trend line.
    • I thought 2023 was going to be the year I took my inaugural ride in an autonomous vehicle. Sadly, this didn’t happen. The sector as a whole also saw some setbacks. Hopefully I’ll get a chance next year.
    • I assumed that Apple would finally release its augmented reality device. And though they didn’t technically release Vision Pro, they did announce it. So I guess that counts for something. I also thought that 2023 would be a big year for “phygital” goods. Maybe it was. Or maybe it was more of a building year. A lot of people are curious to see how Vision Pro does in 2024. It’s not set up for the mass market, just yet, but I think it will do exactly what it is supposed to once it’s out in the wild.
    • Finally, crypto. I know that a lot of you like to skip over these posts, but it is something that I feel strongly about. A year ago, though, I was pretty bearish on Solana. Boy was I wrong. Solana ended the year as the best performing major crypto asset — up 933% at the time of writing this. Oops! However, Ether is also +91%, and I continued to dollar-cost average in all throughout the year.

    Next up: What will, or more accurately, what might happen in 2024.

  • When do iconic chairs actually become iconic?

    Search for the most iconic chair designs in the world and you’ll likely come across a list that includes:

    • Wassily Chair by Marcel Breuer (1928)
    • Barcelona Chair by Mies van der Rohe (1929)
    • Grand Consort by Charlotte Perriand, Le Corbusier, and Pierre Jeanneret (1928)
    • The various Eames Chairs (starting in 1945)
    • Wishbone Chair by Hans Wegner (1949)
    • Wiggles Side Chair by Frank Gehry (1972)
    • And the list goes on.

    Most of these chairs also look as if they were just designed yesterday. Meaning, they’re timeless and have stood the test of time. But they are mostly older designs. Which raises an interesting question: How much does the passage of time play in a role in determining whether or not something is “iconic”?

    There are some more recent designs that you could call iconic. The Roly-Poly Chair by Faye Toogood (2014) and the Louis Ghost Chair by Philippe Stark (2002) come to mind. This suggests that really great designs can become immediate classics. (Though, this latter example is a reinterpretation of a classic French chair that in and of itself is an icon.)

    What I think is the mostly right answer is that, yeah, sometimes you can catch lighting in a bottle. The Louis Ghost Chair, for instance, is one of the top selling chairs of the 21st century. It’s a clever and modern take that used new technologies (as is often the case) to revisit an old classic. Starck nailed it.

    But more often than not, you probably need time. Time is what allows the object to form cultural associations in our mind and to prove that it is, in fact, timeless. However, if this is truly the case, then it makes it difficult to determine if we’re still producing as many design icons today as we did in the past. We won’t really know until they become old.

    Image: Louis Ghost Chair via Knoll