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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Category: Business

  • Thinking long-term and telling the right story

    With the recent announcement that Jeff Bezos will be stepping down as CEO of Amazon later this year, there have been countless articles about the legacy that he will be leaving behind, as well as about the next act that is expected to follow. A big part of this legacy is centered around innovation.

    Do any of you remember Amazon’s Fire Phone? Perhaps not. It was a complete failure. But that doesn’t matter because most people only remember the successes — everything from Amazon Prime to AWS, the latter of which was heavily doubted at the time. Isn’t this a distraction from the core business of selling books?

    This recent FT article by Dave Lee also makes a good point about another one of Amazon’s innovations: thinking long-term and getting the market to buy in to that approach.

    But another Bezos innovation has been his relationship with Wall Street, a world he was intimately familiar with, having previously worked at investment firm DE Shaw.

    Starting with his first letter to shareholders in 1997, Bezos consistently warned investors that profits would forever be secondary to growth, in what would become a recurring theme throughout Amazon’s history as it expanded its distribution network from seven dedicated facilities in 1999, to more than 1,500 today.

    “Bezos has an unparalleled ability to peddle his vision to Wall Street,” says Stacy Mitchell, from the Institute for Local Self-Reliance, who advocates breaking Amazon into smaller pieces.

    “He was given this incredibly long leash, selling books at a loss. Independent bookstores could have multiplied across the country with that business model. But of course, they weren’t allowed to lose money.”

    It reminds me of a blog post that Fred Wilson penned at the end of last year, where he argued that speculative frenzies tend to be off in their magnitude, but directionally correct.

    The point he was making was that who knows what the market cap of a company like Tesla should be. With its current market cap, it has been able to raise a lot of money without much dilution and that is going to accelerate our shift toward electric vehicles — a good thing and the right path forward.

    Of course, if you’re an independent bookstore owner, you may not look at Amazon’s approach as being all that innovative. In fact, you may have another word in mind.

    But if you look at the parcel room in any condo or apartment building (as I do all the time), it’s pretty clear to me that the majority of ecommerce transactions are happening on Amazon. A machine has been built that seemingly renders people what they want, how they want it.

  • Amazon reveals spiraling building design for HQ2 office campus

    Amazon unveiled the design for part of its new HQ2 campus in Arlington today. The plan is a cluster of new office and retail buildings that will accommodate some 13,000 employees. When fully built out, its HQ2 is expected to house upwards of 25,000 employees.

    The centerpiece of the proposed campus is something that is being called the Helix, which is a spiraling building with outdoor walkways housing native trees and plants from the Virginia area. The idea is that it will become a place for people to go for walks and hikes “outside.”

    Here’s what that looks like (image from architecture firm NBBJ):

    In addition to a cool spiraling building, it’s of course also noteworthy that Amazon (along with many other companies) is continuing to forge ahead with its plans to build and occupy more office space in important urban centers.

    Here’s a quote from a recent WSJ article talking about the HQ2 announcement:

    While numerous tech firms have pledged to allow employees to work from home even after the coronavirus pandemic is contained, Amazon, Facebook Inc., Alphabet Inc.’s Google and others have continued to expand their urban office footprints. By investing heavily in big city real estate, they are betting that office space will be an important part of their corporate culture after the pandemic is over.

    “We have to think about this as a long-term investment,” said John Schoettler, Amazon’s vice president of global real estate and facilities. “These buildings will begin to deliver in 2025. And so we believe that the world will be a much improved place than it is currently.”

    Like most companies, they are naturally questioning to what extent some employees won’t be going into the office every weekday. But even still, the above announcement is yet another great example of why office space — and spiraling outdoor spaces — will continue to form an important part of the future of work.

  • The origins of carried interest

    In the world of finance, carried interest is the share of the profits in an investment that a manager (of said investment) earns in excess of what they may have contributed to the partnership. For example, let’s say that a manager is putting in 10% of the cash that is required for a particular project. If the project goes really well, the manager, through carried interest, could earn more than their 10% share of the profits. Put another way, it is a performance fee that is intended to incentivize and reward the manager.

    Today I learned (credit to Lucas Manuel) that the origins of carried interest go all the way back to the Middle Ages. The concept and term supposedly came about because the captains of European ships would take a share of the profit from the “carried goods” that they were transporting. This was to compensate them for the work and for the risk of sailing all over the place. Keep in mind that, just like today, any number of things could have gone wrong. Maybe you don’t make it or maybe pirates steal all of your goodies.

    There is also a compelling argument (made here) that this simple concept has been instrumental, since the Medieval Period, in improving the fortunes of many, but most notably those that weren’t born into riches and that were starting out with limited means. Carried interest allowed Medieval merchants to (1) initiate sailing ventures for which they didn’t have the requisite money and (2) earn a disproportionate amount of the profits so that they could more quickly improve their socioeconomic position.

    Do good work, take on some risk, and then hopefully make a few bucks. That’s still how things work today. Supposedly David Rubenstein, cofounder of The Carlyle Group, also talks about the origins of carried interest in his recent appearance on the Tim Ferriss Show. I say supposedly because podcasts generally take too long for me and I haven’t listened to it.

  • Restoration Hardware to develop first “ecosystem” in Aspen

    At the beginning of this month, Restoration Hardware announced that it was making a $105 million equity investment in a development project in Aspen, Colorado. When completed, the project will house what the company is calling their “first RH ecosystem,” which will include an RH Gallery, RH Guesthouse, RH Bath House & Spa, RH Restaurants, and RH Residences. All of this is fascinating to me from an experiential retail, brand ecosystem, and real estate development standpoint. It also reinforces my belief that differentiated hotels and high-touch hospitality aren’t going anywhere, notwithstanding the fact that Airbnb is arguably now the largest “hotel company” in the world. People are hungry for these kinds of curated experiences, and they’re going to be positively starving once we get through this pandemic.

    Here’s a bit more about the concept taken from the company’s press release:

    Aspen has been selected to develop the first RH ecosystem inclusive of an RH Bespoke Gallery, RH Guesthouse, RH Bath House & Spa, RH Restaurants, and our first RH Residences. The RH Gallery on Galena, currently under development, will offer two floors of the RH Interiors, Contemporary, Modern, and RH Ski House collections, plus Interior Design, Architecture, and Landscape Architecture services. Additionally, the Gallery will include a transparent glass rooftop restaurant with views of Aspen Mountain, a Wine & Barista Bar, plus two private dining rooms with fireplaces and retractable roofs. The RH Guesthouse at the Historic Crystal Palace, also currently under construction, will feature guest suites with fireplaces, a live fire restaurant, wine vault, private rooftop pool and dining terrace with views of Aspen Mountain, and the brand’s first RH Bath House & Spa. The RH Residences at the Historic Boomerang Lodge will include up to five fully furnished four bedroom custom homes, and The RH Residence on Red Mountain will be a fully furnished six bedroom home with multiple terraces and an infinity pool with views of downtown, Aspen Mountain and Independence Pass. All of the RH Residences will include membership to the RH Bath House & Spa, plus priority reservations at the brand’s restaurants and private dining venues.

  • Smart-lock company Latch to go public

    The WSJ announced today that smart-lock company Latch is getting SPAC’ed (i.e. going public). The deal, which is sponsored by commercial real estate firm Tishman Speyer, values the company at about $1.56 billion.

    One of the things that is attractive about Latch is that they’re a lot more than just a smart-lock company. They really bill themselves as being a “full-building operating system.” Their platform, called LatchOS, offers everything from access door solutions to guest/delivery management.

    If you operate a multi-family apartment building, one of the first things that you would like to do away with is all of your suite entry keys. They are a pain to manage. So smart entry locks are a huge value-add. I guess that’s why 1 in 10 apartments in the US are now being built with LatchOS, according to the company.

    Another thing that is attractive about Latch is that they operate as a SaaS/subscription service. So reoccurring revenue and (probably) a higher multiple. Given that changing all of the locks in a big apartment building is no simple task, there are also some natural barriers to churn.

    To learn more about today’s announcement, you can check out the WSJ or TechCrunch.

  • The development value chain

    When I was in graduate school, my plan was to create a vertically integrated design and development company. I loved designing things and wanted to remain close to those sorts of details, but I had already decided that I wasn’t going to be an architect in the traditional sense and that I was going to be a developer. And so my objective was to figure out a way to combine everything under one roof. How could we be designers, but also be the entrepreneurs that make buildings happen?

    In some ways, Mackay Laneway House is a manifestation of that model. Through a partnership with Gabriel Fain Architects, we (Globizen Studio) have been heavily involved on the design side. Gabriel did all of the drawings and the overall architecture, but we weighed in (more than your typical client), selected most of the FF&E, and even designed things like the kitchen (with Scavolini) and the exterior signage. I wouldn’t call it true vertical integration, but we did start to blur the lines between architect/designer and developer.

    One of the interesting things about this approach is that it begins to create some consistency and a bit of a branded product. The hope is that when Mackay Laneway House is fully complete, it will read as a Globizen project, which is not that dissimilar from what David Wex of Urban Capital was talking about in this recent podcast. Their projects are a specific kind of product. They generally repeat it, and if that’s not what you’re interested in, then you don’t buy an Urban Capital home.

    But this also raises an important question: what is the role of architects and architecture in the case of buildings as very specific products? (This is something that we have discussed before on the blog.) Is the job of the architect to create an interesting exterior shell that then gets populated on the inside by a specific product offering? Or is it even worse, is architecture sometimes just an “empty vessel” that gets interior design and a brand slapped onto it? In some cases and with some projects, it does feel this way.

    I am a firm believer in the value of architecture and design. An “empty vessel” is not architecture. It is, well, an empty vessel. And that is not what I aim for in any of the projects that I’m involved in. Creativity, function, thoughtfulness and, yes, beauty, are all important. At the same time, I think this is a valuable debate. These sorts of questions are helpful in dissecting the architecture/development value chain. And so I would be interested in hearing your thoughts in the comment section below.

  • A few thoughts on working from home/anywhere

    One of the big questions for this year is about whether or not work from home (WFH) and work from anywhere (WFA) policies are going to stick following this pandemic. It’s something that I mentioned in my 2021 predictions at the beginning of this year because it is something that would obviously have a massive ripple effect. So today I thought that it would be interesting to look back on data and articles that were published prior to 2020, before everyone really started prognosticating about the rise of fully distributed workforces.

    What is clear, at least from census data, is that working from home was on the rise before COVID-19, but that it still only represented a relatively small percentage of the overall workforce. The numbers are significantly higher if you consider people who maybe occasionally worked from home, but for those who were 100% remote, it was estimated to be only about 5.2% of the US workforce in 2017 (~8 million people), about 5% in 2016, and about 3.3% in 2000. But the question still remains: Now that many/most people have had a taste of the increased flexibility, to what extent will it stick?

    There’s a ton of research out there about the impacts of working remotely — covering everything from productivity to morale. But one takeaway that makes intuitive sense to me is that WFH/WFA flexibility is perhaps best when two things are present: 1) the employees already know how to do their job really well and 2) the work that these employees are doing is fairly independent.

    The corollary to this is that remote work is probably not the best environment for newer and younger employees who would benefit from being around other more experienced people, and for situations where collaboration among coworkers and outside humans is essential for the job. When I think of the job of a real estate developer, I would place it high on the collaboration scale. Building a building involves a full orchestra of people that all need to be playing in sync. Personally, I find that easier to do when you’re sitting across a table.

    My belief continues to be that we are are greatly exaggerating the extent to which work is going to disperse in the short-term. I recognize the trend line that existed prior to this pandemic and I recognize that some jobs are perhaps well suited to decentralization. But I think we will continue to see real limits on how much of this sticks as we move past this moment in time and into 2022.

  • Carleton University’s Certificate of Real Estate Development

    Next Tuesday, January 19, I am helping to teach the introductory class of a Certificate of Real Estate Development program that is jointly offered by Carleton University’s Sprott School of Business and Azrieli School of Architecture & Urbanism. Here is a full list of the instructors and key note speakers that will be participating in the program. Obviously it is all being done online this time around.

    One of the great things about this program is that it’s a partnership between their school of architecture and their school of business. As you might expect given my background, I am biased in my view that this is a great way to teach real estate development. And it’s one of the reasons why I enjoyed my time so much at the University of Pennsylvania. I was free to take classes at whatever “school” I wanted to.

    When I later went on to study at the Rotman School, I actually tried to advocate for a better real estate development curriculum and for increased collaboration across the business and architecture schools (both alma maters). The response I got, at least back then, was that Rotman already had a real estate major and that it was fine just the way it was. Cool.

    For more information or to register for Carleton’s Certificate of Real Estate Development program, click here. I think there are only a few spots remaining.

  • My 2021 predictions

    Life will feel a lot more normal by spring/summer (Q2). By this time, the various vaccines should be broadly available (at least in the developed world). This is something that never happened during the Spanish Flu. From what I have read, the Spanish Flu lasted about two years and there were four major waves, the second of which was by far the most deadly. Ultimately, a vaccine was never found. It just petered out as people developed immunity. But medicine then was not what it is today, so surely we are destined to do better.

    What happens with working from home is going to be one of the most important outcomes of 2021. Right now it feels like tech vs. commercial real estate. The tech industry has been quick to renounce offices (while many large tech companies continued to lease more space through 2020). And the commercial real estate industry has naturally pointed out that we’re all still going to need physical offices.

    My view is that, yes, people appreciate the flexibility of being able to work remotely, but that we’re greatly exaggerating the extent to which work is going to disperse in the short-term. I think it comes down to three main things. 1) It’s nice being around other humans, both in the office and for those after work drinks. 2) Collaborative and knowledge-intensive endeavors work better when people are in the same room. And 3) corporate politics will encourage people to return to the office. Who do you think is going to get promoted first, the person who Zooms in from the Caribbean for meetings or the person who shows up to the office and grinds it out every day?

    As the world returns to normal, we will, however, see an explosion in global travel. Many will be questioning how Airbnb’s sky-high valuation makes any sort of sense, but it’ll have the right story for what’s going on in the world (some people call these “story stocks”). The reality is that there will be a massive amount of pent up demand that starts to come out as soon as people start to feel safe and governments start to allow people to travel en masse. I’m already looking forward to the 2021-2022 ski season, which I fully expect to be a blockbuster season.

    Because of this, we will see a decline in recreational real estate. The kind that was fulfilling people’s need for local travel during this pandemic. Instead, people will turn their attention to more international experiences and try and make up for lost time. Many will also come to realize that the whole working from home thing didn’t stick as expected and so they’ll start deriving less utility from their property outside of the city. Expect a kind of reversion to the mean when it comes to prices.

    Urban/downtown real estate will strongly rebound in the second half of 2021. As restaurants reopen, as people return to offices, and as urban life in general resumes, we will see an increase in demand for condos/apartments, and probably larger urban spaces given the run-up in prices for single-family homes that many cities saw last year. (A bit more on this point can be found over here.)

    The trends that are being accelerated as a result of this pandemic are not going to stop, though their rate of increase will temper. The apps and platforms that people started using in 2020, perhaps for the first time, have established new habits. People’s credit cards are now on file and it’ll be very easy for those online habits to remain. But the opposing force to all of this will be the strong desire for socializing, travel, and novel experiences. It’ll be the more routine stuff that will continue to live entirely on our phones.

    The restaurant/food industry will bounce back in a slightly different form. Sadly, many businesses will have failed. But we will also see an explosion in new ideas and new concepts, satisfying our demand to be out socializing and trying new things throughout the new roaring twenties. Ghost kitchens and on-demand food delivery companies will continue to disaggregate how some restaurants are setup. Companies like Uber will see their ride-sharing businesses quickly snap back, which will more than offset the decline in food delivery as people resume eating out.

    Public transit ridership probably won’t return to its pre-pandemic levels until at least the fall. Possibly late fall. This is going to be a serious problem for the various levels of government that subsidize virtually all public transit authorities. Many transit networks have seen ridership declines of 70% or so and, if my timing projections are correct, that will have been the case for about a year and a half.

    The migration from high tax states (like California and New York) to low tax states (like Texas and Florida) will continue. This trend was well underway before COVID-19 and so I don’t see it reversing. What is perhaps more interesting to consider is how this dispersion of economic activity will ultimately play out against some of the centralizing/polarizing forces of the global economy. Urban agglomeration economies aren’t going to go away.

    To end, I will say that I think it’s safe to assume that we’re all looking forward to the world getting back to normal, whatever that happens to mean. But ironically, once that happens, I reckon that some of us might look back on this period of time and feel hints of nostalgia. Perhaps you learned a new skill or perhaps you were able to spend more time with love ones. Time and distance may better reveal these silver linings.

    Onward, my friends. What a time to be alive.

  • The case for speculative asset bubbles (and happy new year)

    This is an interesting perspective. It is from Fred Wilson’s annual what-happened-this-past-year post:

    But here is the thing about speculative frenzies – they are generally directionally correct but off in their order of magnitude. And they finance the trend that they are directionally correct about. It may be the case that Tesla’s market capitalization is too high, but that allows Tesla to raise $10bn without diluting more than a few percentage points. And that $10bn will go towards accelerating the conversion of the auto industry from carbon-based fuel to renewable energy. And that is a good thing for society.

    When I first read this my mind immediately went to tulip mania. Was that directionally correct? Did tulip bulbs ultimately rebound and maintain their value over the long-run? I actually don’t know.

    But if you think about the dot-com bubble, that was directionally correct. Sure, infamous “companies” like Pets.com never ended up going anywhere, but the idea of tech and the internet becoming dominant was absolutely right.

    Fast forward twenty years and you can be sure that many people are now buying their pet supplies online, along with pretty much everything else. Sometimes we simply overshoot and get the timing wrong.

    This is perhaps a good thought for all of us to consider as we welcome 2021 and say goodbye to what was one weird and terrible year.

    Being directionally correct means that it’s okay for there to be bumps, mistakes, and speculative frenzies along the way. They are expected. What matters is the path forward.

    Happy new year, everyone.