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.
Decentralization, in the crypto/blockchain/web3 sense of the word, is a crucial thing. Here is an excellent article talking about why it is the key innovation of blockchain technology and why it is a central feature in this new emerging web3 world.
But of course, it can all get very complicated. So I thought this — and in particular the sentence in bold below — was a good way of describing the benefits:
“…decentralization enables web3 systems to be credibly neutral (they cannot discriminate against any individual stakeholder or any group of stakeholders, which is critical to incentivize developers to build within ecosystems) and composable (to mix and match software components like Lego bricks). As a result, web3 systems function more like public infrastructure than proprietary technology platforms. In contrast to the gated software of Web2, web3 protocols provide decentralized internet infrastructure on which anybody can build and create an internet business. Crucially, in web3, this can be done without the permission of the original deployer of the protocol or the need to use a centrally controlled interface.“
This resonated with me because think about how important public infrastructure is to our cities. Most of us take it for granted that, when we need it, we can just plug in and access electricity, water, sewer, and other public infrastructure.
But throughout history, these services have been fundamental to the growth of our cities. They empowered scale and better health outcomes, among other things. So it’s exciting to think that we are now living through the creation of something kind of similar in tech.
Cities are complicated. And we have spoken before about how it can sometimes feel like they never really reach homeostasis. In extreme cases, it might seem like they’re either decaying and losing people, or they’re too successful.
I was reminded of this again this morning while reading an article about how Rome’s historic city center is being overrun with Airbnbs and tourists, and how it is pushing out the locals. It has, arguably, become too successful as a tourist destination.
But the question I have is: What’s the right amount of tourism? If 25,000 listings is too many for Rome, what’s the right number? And do cities ever really achieve homeostasis, where, you know, things feel just right? Here’s an excerpt from the above article that describes what parts of Rome were like before the tourism boom:
Ms. Rapaccini remembers when Monti was a quiet, authentic haven for arty types and locals. She and her late partner, the film director Mario Monicelli, who received six Oscar nominations, moved to Monti in 1988. The area wasunfashionable, dirty and full of prostitutes, but beautiful in its gritty way, “like a little village” even though it was in the heart of a big, bustling city, she recalls. The apartments were cheap and the area began to attract film types, journalists and artisans – none of them rich – who mixed easily with local workers and shop owners.
It’s a romantic description of what sounds like a pretty gritty area. Unfashionable, dirty, and full of prostitutes is apparently better than full of annoying American tourists. And perhaps it is. But then what was the area like before it was unfashionable, dirty, and full of prostitutes? Was that also better?
I have no idea. But cities are constantly changing and evolving, and they were doing it long before any of us arrived, especially in the case of an ancient city like Rome. Maybe that’s what makes it so difficult to hang onto that exact moment in time when everything was just right.
When interest rates are low, people generally want to buy more highly-levered assets, such as real estate. This, of course, makes perfect sense, because lower rates mean more buying power. But how badly someone wants to buy more real estate should, at least in theory, depend on their particular situation.
If you’re buying a pre-construction home, the current rate should matter less than what it might be in the future when it comes time to close (usually you can only lock in a rate for so long). That said, lower rates can help people feel richer because it buoys the value of their other assets/investments. So in this regard, low rates do help the pre-construction market.
On the other hand, if you’re buying a home to immediately close on, then current rates matter a great deal. This is the rate that you are going to be paying. However, in Canada, the typical term for a fixed-rate mortgage is 5 years. Meaning that after 5 years the rate resets to whatever market is at that time. So eventually, the mortgage does become an adjustable-rate one.
In the US, this isn’t the case. The most popular mortgage is a 30-year fixed-rate loan, meaning the rate stays the same for the entire 30-year period. What this means is that Americans should — again, in theory — want to buy more real estate — the most — when rates are low. That’s the time to back up the truck and lock in a sweet rate for the next three decades.
As many of you know, I am an advocate for high-speed rail in Canada. Specifically along the Windsor-Quebec City corridor, which is the most densely populated part of the country. And so I found this comparison interesting:
“If there is one project that would create thousands of jobs, improve business productivity, clean up the air, reduce the output of greenhouse gases and cut the demand for endless highway construction, it would be high-speed electric rail between Toronto, Ottawa and Montreal, where population densities are high enough to make the project sensible. Cost estimates are all over the map. The University of Toronto’s Munk School of Global Affairs & Public Policy put the price tag at about $12-billion, which is $2-billion less than the bucks being thrown at the Volkswagen battery plant alone. But forget it – the Canadian government wants more cars, not fewer. Canadian cities will remain car sewers forever.”
The above excerpt is from this opinion piece talking about EVs and the public subsidies being paid to encourage battery production within Canada. I get that we want to be part of this important mobility shift. But we are way behind when it comes to high-speed rail.
And by behind, I mean that we don’t have it at all in this country.
Global super-prime ($10m+) residential sales bounced back in Q1 2023, with 417 sales across the 12 markets tracked in Knight Frank’s new Global Super-Prime Intelligence report. That’s up 11% on the 376 recorded in Q4 2022 and the highest volume since Q2 last year.
The biggest market in Q1 this year was Dubai (88 sales), followed by Hong Kong (67), New York (58), Los Angeles (46), Singapore (37) and London (36). While volumes rose in Q1, the total value of sales fell 4% to $7.2 billion. The most expensive average super-prime sales took place in Geneva ($23.8m) and London ($20.4m)
What is perhaps most interesting, though, is how central Dubai has become in the flows of global capital. In 2019, Dubai accounted for 2% of all super-prime sales in the 12 markets that Knight Frank tracks.
Today, looking back at the most recent 12-month period, Dubai now accounts for 17% of all super-prime sales, placing it ahead of London, New York, and Los Angeles.
Part of this jump likely has something to do with the “housing disaster” that Dubai was going through back in 2019. But even still, it is impressive to see just how quickly the city has managed to build and position itself as an alpha global city.
I much prefer walkable cities, but clearly there are enough other people who don’t care about that sort of thing.
Last month, Waymo (Alphabet) and Uber announced a new multi-year partnership that will bring Waymo’s autonomous vehicles to Uber in the Phoenix area later this year. Already, Waymo operates across 180 square miles of the city, making it the largest fully autonomous service area in the world. But now, or I guess later this year, people will be able to order a Waymo AV through the Uber app.
Not a lot of people seem to care about autonomous vehicles anymore. For a while, every conference had people talking about how they were going to reshape our cities. But then the technology didn’t arrive quite as quickly as people were hoping, and so everyone lost interest and move on to other more exciting things. But clearly things are still happening. And this announcement strikes me as being an important one.
Okay, so I haven’t tried it yet. But Apple Vision looks pretty awesome and the people who have tried it seem to be very impressed by it. The best article that I have read, so far, is this one here by Ben Thompson (of Stratechery). He gets into some of the tech details and explains why Apple is probably the only company in the world that could have created a device like this.
For those of you who are interested, Apple Vision is still technically a VR device, even though it is being marketed as an augmented reality (AR) device that allows you to stay engaged with the world around you. This last part is true, but it is all done digitally through 12 cameras that capture the world around you and then display it back to you.
So experientially, yes, it is an AR device; however, the tech behind it is actually just exceptional VR.
But this is not the point of today’s post. The point I would like to make is one that Ben raises at the end of his article. After praising Apple Vision’s achievements, he goes on to argue that the arc of technology is one that is leading toward “ever more personal experiences.” In other words, it is increasingly about individual, rather than group, use cases.
And this is one of the first things that I thought of when I watched the Vision Pro keynote. “Wow, this looks like a really cool way to watch and experience a movie. But how do I do that with my partner? I guess we both now need Vision Pros. And what about families with a bunch of kids? That is a lot of Vision Pros.”
But maybe this doesn’t matter. Ben’s point is that it’s probably not an accident that this technology arc is happening at the same time as a larger societal shift away from family formation and toward more feelings of loneliness. Indeed, the number of single-person households has been steadily increasing in the US since the 1960s. The current figure sits at more than 1 in 4 households.
So there is an obviously dystopian narrative that we could all tell ourselves here. It is one where everyone works from home, plugs into virtual workplaces, and then flips over to other, more exciting, virtual worlds when it’s time to unwind from the stresses of the former. And if you think about it, this isn’t that much of a stretch compared to what many of us do today.
Whatever the case, in my mind, none of this is any reason to become bearish on cities. Humans will still be humans. And none of this tech is going to replace the feeling of enjoying a perfect pesto gnocchi in an impossibly narrow laneway in Milan, or drinking a caipirinha on the beaches of Rio de Janeiro while being surrounded by shockingly beautiful people.
The typical way to do it looks something like this:
Hire a creative agency
Come up with a new name and brand identity that speaks to your target market
Create a new website and new social media accounts
Start marketing the project with this new single-purpose brand and identity in the forefront (the developer’s brand is usually far less prominent)
Of course, this is the typical way and things do vary. What I would like to discuss today is this last point: the interrelationship between new project-specific brands and developer brands. Because in most other industries, the brand of the company is paramount. It is everything. When BMW releases a new car model, it is BMW and then the something. It is not the something, with BMW hidden at the bottom of the page.
So why is real estate any different?
One possible explanation is the entrepreneurial and opportunistic nature of development. New projects are often the result of people and groups coming together to make a specific “deal” happen. And unless you’re an established player with a long history, you may not have a consumer-facing brand with much equity in it. So you rely on a new single-purpose one instead.
But perhaps the main reason is that, as an industry, we have never really succeeded at making buildings a product (architects sometimes despise when you call buildings this). It is for this reason that every building can feel like a prototype and that prefabrication remains this dream that never seems to become a reality. A product implies something repeatable and producible at scale. And buildings are generally not that. Every market and site are unique.
All of this said, there are ways that developers are building meaningful brands for themselves.
The first way is to obviously focus on building your own brand alongside or in lieu of strong project brands. One example of this is Toronto-based Urban Capital. They build a specific kind of condominium building/product and, to the extent that it’s possible, it doesn’t change whether they’re building in Saskatoon or in Halifax. David Wex, one of the partners, describes this as branded vs. opportunistic real estate development.
Another example is Toronto-based Fitzrovia (which I wrote about, here). They are one of if not the most active rental developers in the city. And if you go into one of their apartment buildings, you’ll find the same No. 10 Dean coffee shop and bar in the lobby; the same rooftop pool (called LIDO); the same gym (called The Temple); and the list goes on. Their goal is to build a consistent and hospitality-like experience for apartments.
The second way to go about building a brand is to make it so attractive that other developers will pay you to use it. The best example that I can think of is London-based YOO. A partnership between John Hitchcox (a developer) and famed designer Philippe Starck, they have built a business out of creating branded residences for third-party developer clients. And this is in some ways the holy grail of development: you get paid without taking on the risk of building.
Of course, this same licensing model is also used with hotels. And hotel brands are globally the most common kind of branded residence. What this obviously tells us is that brands matter a great deal in real estate. They matter so much that developers will pay to use the right one, because it will likely command a premium and it will likely increase sales/leasing velocity.
It is for this reason that I’ve always felt it important to grow the parent brand alongside any project-level brands. And it’s why we never bother creating new social accounts for our individual development projects. Brand building takes time. If you’re going to invest time and money into one, why not take advantage of the compounding at the very top of the house.
The roots of French dominance lie in a luxury ecosystem that dates to the court of Louis XIV, and a culture of corporate raiding that began with Bernard Arnault. After gaining control of LVMH in 1989, he set out to build the first house of luxury brands through serial acquisitions. Rivals followed his lead. Increasingly, the global luxury industry is based on goods that are still made by small Italian firms but sold by big French conglomerates. Gucci, Bulgari, Fendi — all are Italian brands now under French owners.
While US tech firms overshadow all rivals, the same can be said of French luxury. Among the top luxury firms, the French have annual sales three times higher than the Swiss, more than four times the Americans and Chinese and 12 times the Italians.
One of the most interesting things that LVMH is doing, though, is a combination of tech and luxury goods. In 2021, they announced, along with founding partners Prada and Cartier, a new luxury goods blockchain called Aura.
The idea behind Aura (an appropriate name, in my opinion) is to create a kind of digital passport that proves authenticity and ownership, and also allows for traceability. So if you want to sell one of your luxury items or you need to service it, now someone can easily see the chain of ownership and determine that it’s real.
This to me is a perfect use case for the blockchain technology and, as of March of this year, the group was reporting 24 brands on board. At the same time, they also announced a new feature that allows brands to participate through public chains such as Ethereum or Solana.
All of this is probably still very esoteric to most. But eventually the tech will recede into the background and most will probably just see it as, “I’m buying this expensive purse and along with it I get this digital passport thingy that lives on my phone. I don’t know or care how the tech works, but it makes me feel even more special.”
However, a big question remains: What does all of this innovation do to industry concentration? (Which is one of the main points of the above article.) One promise of crypto is that it will be a decentralizing force in our economy. And while I believe this to be directionally true, I obviously understand that LVMH has an empire to maintain here.
For those of us who deal in real estate, it is also interesting to think about this topic of brands and authenticity when it comes to property. And so we will talk about that later this week on the blog.
We have spoken about this topic — of larger family-sized suites — many times before on the blog. And my argument then, as it is now, is that the largest barrier is cost. We can talk about cultural biases (which I do think exist in North America) and, sure, we can talk about how to better design for families. But until we solve the problem of costs or until low-rise housing gets so prohibitively expensive that it tips the scales in favor of multi-family buildings, I’m not sure we’re going to see a meaningful shift.
To be fair, it does appear that the number of families living in apartments and condominiums is increasing here in Toronto. My neighbor is one data point. However, broadly speaking, I don’t think it’s happening with the “larger family-sized suites” that most people imagine in their minds when they talk about this opportunity.
So how do we address this? There are a number of interesting ideas in the above Twitter thread that I would encourage you to check out. Ratcheting down or eliminating development charges (and other government levies) on larger suites is one of them. But what is obvious is that this is a challenging problem to solve. So the brutally honest answer is that I don’t really know what will be most effective. But here are three potential places to start.
As-of-right mid-rise buildings
Remove the barriers to building more mid-rise. One irony of mid-rise buildings is that they are probably the most desirable form of multi-family housing and yet they’re the most expensive to build. A lot of this has to do with construction costs and other unavoidable diseconomies of scale, but there are other things we can do. In my view, we should target to make all mid-rise buildings fully as-of-right. This means no rezoning costs, no community meetings, and overall simpler designs. Instead, the rough process should be: buy site, work on permit drawings, and start marketing new homes.
“Growth Pays For Growth” is one of the big lies at the root of Canada’s housing crisis. https://t.co/IW5LMr5tns
— your local self-inflicted housing crisis ouroboros (@itsahousingtrap) June 3, 2023
This is also something that we talk a lot about on this blog. But most people outside of the industry don’t think of it in this way, or they don’t care. The mantra is that “growth pays for growth”, which obviously sounds good. Tax new housing based on its impacts. But in reality this is not what’s happening. What is happening is that “growth pays for as much as possible as long as new home prices keep rising.” And it persists partially because nobody except evil developers see these large bills. But if we really want to make new housing more affordable and if we really want to encourage more families in new multi-family buildings, then we need a more equitable solution.
Financing new family-sized homes
The way we finance new homes impacts the kind of housing that gets built. Here in Toronto, new condominium projects generally require a certain percentage of pre-sales, because construction lenders want as much certainty as possible that they will get their money back upon completion. In theory, it also reduces the chance of overbuilding because you’ve pre-sold most/all of the homes. So there are obvious benefits to this approach. However, the problem is that you need people to now buy in advance. And oftentimes, the people buying early aren’t families who expect to need 3 bedrooms in 5.2 years. Should there be another financing solution for larger homes?
Once again, these are just three potential places to start. But I think they’re all critically important. If you have any other suggestions or ideas, please leave them in comment section below.
