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

  • The Great Dispersion

    It’s that time of year again. It’s time to make predictions for the upcoming year and time to look back on the ones we all got wrong from a year prior. I don’t recall many people (if any) predicting that a pandemic would cripple the global economy.

    I like how Scott Galloway put it in his 2021 predictions post. It’s obviously better to be right than wrong, but it’s okay to be wrong. The value in writing down your thoughts is that it forces you to think. It’s the reasoning that matters. (It’s one of the reasons why some people write blogs.)

    A key theme in Galloway’s predictions post is something that he calls “The Great Dispersion.” This involves two things: (1) The physical distribution of products and services over wider areas and (2) the bypassing of gatekeepers and other intermediaries (which is something the internet has always been good at).

    You could interpret this as being directly antithetical to cities. Urbanism, after all, is all about agglomerations. But I think it’s more nuanced that that. Cities have generally always had both centralizing and decentralizing forces. The two can co-exist.

    I will get into this in more detail in my own 2021 predictions post. But in the mean time, I would encourage you check out what Scott Galloway recently published, over here. And if any of you have any thoughts about what’s in store for us in 2021, please leave a comment below.

    Don’t worry, it’s okay if you’re not right.

  • Thinking exponentially and the rule of 72

    I came across the above Twitter thread last night before bed and I thought it was great. It’s about the importance of thinking exponentially, as opposed to linearly, when it comes to finance and investing.

    In it, the author provides a quick rule of thumb to help reframe our mind when it comes to compounding. It’s called the “rule of 72” and it works like this.

    To calculate the approximate number of years to double your money, simply take 72 and divide it by the annualized rate of return (%). For example, if you had an annualized rate of return of 10%, this rule of thumb would tell you that you’re going to need 7.2 years to double your money.

    If the annualized rate of return were to increase to 18%, it would now only take you 4 years to double your money. Of course, this rule of thumb is an approximation. It only really works within a certain band of returns.

    If the annualized rate of return were 100%, this formula would spit out 0.72 years, whereas an annualized rate of return of 100% actually means that you’re doubling your money in the span of one year.

    It’s a rule of thumb. The reality is that compound returns are incredibly powerful over the long-run, not only for finance and investing, but for life in general. Worthwhile things take time. If you’ve got the patience and discipline, the long-run curve ends up looking pretty sweet.

  • Thinking differently and what courses to take in school

    When I was in grad school studying architecture and real estate, the Zell/Lurie Real Estate Center used to run a regular lunch series with real estate executives. The way it worked is that executives would come in to the school and 15 or so students — all of whom were studying real estate — could sign up to have lunch with them in a boardroom. I can’t remember if the school provided us lunch or we had to bring our own, but either way, you had an hour to hear them talk about the industry and ask them whatever you wanted to know.

    One time somebody asked a question about what courses they should take outside of their business and real estate classes. And I’ll never forget what the executive said. His recommendation was to take courses that were as far away from business, finance, and real estate as possible. He said take fine art history classes, learn about ancient civilizations, or whatever. Just take classes that force you to think a little differently than everybody else.

    The reason, I think, this resonated with me so much was because I had a certain amount of academic insecurity at that moment in time. I was coming from an architecture and design background and my classmates were former investment bankers and management consultants, all of whom had a far better grasp of “the numbers” than I did. It meant that real estate recruiters didn’t want to talk to me because I was the square peg for their round hole.

    But being a square peg really motivated me.

    I remember walking into the program director’s office at that time and requesting that I be put into what was considered to be the more difficult real estate finance class offered at Wharton. He said that he didn’t recommend it. Non-MBAs (which I was at the time) can’t typically handle it. And if he put me into it, I would likely come back to him crying about how hard it was. I asked him to put me in it and said that I would come back to show him my “A.” He put me in it and, yes, I got an “A.”

    But at the end of the day, the point that this executive was making at the lunch was that the math and mechanics behind things like cap rates, IRRs, and DCFs is not rocket science. Real estate is not rocket science. You of course need to know how this stuff all works, but it is not the be-all and end-all. The other critical parts of this are more art than science. What are the assumptions that I am making as part of my analysis? What do I believe about the future of the world? To answer these questions, you need think critically and laterally. And having a different perspective can help you do exactly that.

    This was true back in 2008 and it’s still true today.

  • Inaugural consumer trends report — what changed and what might stick

    The New Consumer and Coefficient Capital recently teamed up to publish their inaugural consumer trends report. It is a look at what changed this year and what might actually endure as we get past all of this.

    Some of it is perhaps intuitive once you see it. Makeup consumption is, for example, way down and home scent sales are way up. See above chart.

    And some of it I disagree with. Their survey results suggest that 81% of Millennials (and 66% of all consumers) are now perfectly content working out at home, as opposed to going to a gym. I am firmly in the 19% here. Get me back to the gym.

    But what is clear is that this year has accelerated a number of consumer trends that were already underway and so there are likely to be some structural changes as we move forward.

    To read the entire report, click here.

    Chart: Consumer Trends 2021

  • The maker’s schedule

    Four years ago I wrote about a great essay that Paul Graham had published way back in 2009 about two different kinds of schedules: the manager’s schedule and the maker’s schedule. Put differently, the manager’s schedule is one of command. It is for bosses to drop in for 15, 30, or 60 minutes at a time, say a bunch of things, and then jump to the next meeting.

    The maker’s schedule, on the other hand, is one of doing, whether that be programming or working on an excel model. And the reality is that you can’t make or do much with only 15, 30, or 60 minutes. To make anything of real substance you need longer uninterrupted blocks of time. You need time to get into the zone.

    I’m reminded of this dichotomy now, more than ever, because of video conferencing. It has never been easier to overload a calendar with meetings. Consequently, it has never been easier to screw up a maker’s schedule.

  • The art of the possible

    Architect Sheena Sharp, of Coolearth Architecture, tweeted something interesting out today:

    Improving this would be good. And it is the same gripe that I had with architecture school when I was there. Why is it taboo to talk about money and the market? Why must design exist, in many instances, within a vacuum?

    I can appreciate the value in not always constraining yourself with the status quo. To innovate, you have to stretch. And sometimes, or perhaps oftentimes, the best ideas initially seem dumb. It’s important to have room to experiment and tinker.

    But eventually, reality does matter. Plans that look good on paper, may not be suitable for the market. Constraints are a big part of what makes the city building industry so rewarding. Planning is hard. Building is hard. Getting consensus is hard. It’s all incredibly difficult and you have to be creative.

    The really elegant solutions usually need to weave across and through many different objectives and stakeholders. And so in my view, the more you can empathize with those other constraints, the more elegant your solution will be. Knowing more is good.

  • Airbnb’s S-1 is now public

    Airbnb’s IPO documents recently went public.

    Not surprisingly, their business as a travel company has been heavily impacted by COVID-19. Last year, the platform saw 326.9 million nights and experiences booked, with 251.1 million being booked in the first nine months of 2019. This year, nights and experiences are down to 146.9 million for this same nine month period. Revenue is correspondingly down from $3.7 billion for the first nine months of 2019, to $2.5 billion for the first nine months of this year.

    But what is also clear from their data is that people still really want to travel and have new experiences. As soon as April passed and the Northern Hemisphere entered the normally busy Q3 travel season, domestic travel began to quickly ramp back up. For many, this likely took the place of international travel. See above chart.

    Of greater concern might be all of the regulation that now surrounds short-term rentals. As of October 2019, about 70% of the platform’s top 200 cities (by revenue) had some form of regulation impacting short-term rentals. But at the same time, no one city accounts for more than 2.5% of the platform’s revenue. So there’s strong geographic diversification.

    If you’d like to take a look at the company’s S-1, you can do that over here. And for those of you who might be curious, these are Airbnb’s top 10 cities based on revenue:

    1. London
    2. New York City
    3. Paris
    4. Los Angeles
    5. Rome
    6. Barcelona
    7. Tokyo
    8. Toronto
    9. San Diego
    10. Lisbon

  • Pay and performance for graduates of elite universities

    We know that educational attainment is probably the single biggest determinant of urban economic success. If you’re hoping to predict average household incomes, looking at the percentage of the population with a 4-year college degree is a pretty good place to start. But let’s take this a step further: to what extent does graduating from an elite university affect both pay and performance?

    It turns out, according to this recent study, that the pedigree of one’s university isn’t all that good at predicting motivation and talent. It does, however, impact pay. Average early career salaries for graduates of the top 10 colleges in the US are almost 50% higher than those with degrees from the ten colleges within the City University New York school system. This is according to data from Payscale and the US Department of Education.

    But this pay delta doesn’t necessarily match the performance delta that you might expect. The study found that for every 1,000 positions that you move in Webometrics’ global university ranking (which is what they used for their research), overall performance only changes by about 1.9%. In other words, a graduate from the alleged number one university is only going to perform, on average, about 1.9% better than someone from the 1,000th best school.

    I’m not exactly sure how to practically interpret a 1.9% improvement in performance. But 2% compounding on 2% each year should get you somewhere. Regardless, graduates from top universities do generally score higher on competency examinations. The reasoning behind this is thought to be at least twofold: 1) more selective admissions create a better pool of students and 2) top universities should provide better training.

    Whether that’s enough to justify the higher pay is a separate discussion. But if you’re looking to measure urban economic success, the data does suggest that elite universities should lead to overall higher average incomes.

  • The game of life

    “Anxiety is experiencing failure in advance.” — Seth Godin

    I mention and quote Seth Godin fairly often on this blog and so it only seems right to share this recent podcast that he did on the Tim Ferriss Show. Broadly speaking, the conversation is about “the game of life, the value of hacks, and overcoming anxiety.” I think most of you will find it useful regardless of what you do and what you’re involved in. It’s over an hour long, but there’s a full transcript available if you’d prefer to read, rather than listen. If you’re looking for something even shorter, here’s a quick video by Tim Ferris that has Seth talking about why worrying isn’t productive and that it’s really in service of our need for status quo and reassurance.

  • CloudKitchens has spent more than $130 million on property over the last two years

    According to a recent Wall Street Journal review of property and corporate records, Travis Kalanick’s ghost kitchen startup, called CloudKitchens, has spent over $130 million over the past two years buying more than 40 properties in about two dozen cities.

    Travis is co-founder and the former CEO of Uber and this latest startup provides commercial kitchens to restauranteurs who are looking for a low-cost way to launch delivery-only food concepts.

    In some ways, it can be compared to coworking spaces for delivery-only restaurants. Instead of renting a full restaurant space, you lease 200-300 square feet of real estate at a lower cost address. CloudKitchens then handles all of the distribution and fulfillment, effectively lowering the barriers to entry for food startups.

    Some of the properties that they have been buying include a vacant restaurant space in Miami Beach for $9.2 million (May 2020) and an industrial property in Queens, New York for $6.6 million (March 2020). They’ve also bought in cities like Portland and Las Vegas.

    As you might imagine, now is a pretty good time to be buying some of these properties. And if you think about it, there are some real cost advantages to what they are doing, not to mention some co-working-style arbitrage on the real estate.

    The company is apparently going to great lengths to conceal what and where they are buying. But what is perhaps more interesting is their asset-heavy approach. They’re buying lots of real estate, which is inline with what companies like Opendoor are doing, but is distinct from Uber’s asset-light approach.

    It is also different from what many other ghost kitchen startups are doing. It seems that most are leasing their spaces. There has to be a reason for this difference.