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

  • Cheaper or better?

    One perfectly sound approach is to just be the cheapest. This often entails lower margins, but hopefully higher volumes. However, the problem with this approach is that it can become a race to the bottom. At some point, somebody will find a new corner to cut. As Seth Godin says, “the problem with the race to the bottom is that you might win.”

    On the other end of the spectrum is this approach:

    This is a pamphlet describing full ripeness mangoes from the Miyazaki prefecture in Japan. These are not the cheapest mangoes around. In fact, it’s the opposite; they’re generally known to be the world’s most expensive. But they will almost certainly be the best mangoes that you’ve ever tasted. And you’ll only be able to get them between the months of April and August.

    Sometimes it’s possible to be both cheaper and better. And that’s obviously an ideal position to be in. But in many, or perhaps most cases, you’ll need to choose. Cheaper, or that much better.

  • The risk of not taking risk

    One simple definition of risk is that it’s the “possibility of loss or injury.” And that’s generally how most of us think about it — it’s a bad thing that needs to be managed, minimized, and sometimes avoided all together.

    While true, this recent memo by Howard Marks is a good reminder that risk is also indispensable. Or, put differently, there’s risk in not taking enough risk. This is true in business and finance, but it’s also true — as Howard argues — in chess, in sports, and in many other aspects of life:

    The paradox of risk-taking is inescapable. You have to take it to be successful in competitive, high-aspiration arenas. But taking it doesn’t mean you’ll be successful; that’s why they call it risk.

    By definition, it means that you will be wrong sometimes. Because if you couldn’t possibly be wrong, then it wouldn’t be a risk. It would be a known. And known things exist in our world in a very different way than uncertain things. Superior performance, as a gross generalization, demands uncertainty.

    So what’s the solution? Calculated risks:

    You shouldn’t expect to make money without bearing risk, but you shouldn’t expect to make money just for taking risk. You have to sacrifice certainty, but it has to be done skillfully and intelligently, and with emotion under control.

  • You have to try

    Now that some of the dust has settled around Apple Vision Pro, it is clear that nobody really knows if it is going to work. (Though, it’s too expensive and it’s too heavy are missing the bigger picture.) It sounds like it delivered what it said it was going to deliver as a product, and the potential is there for a “spatial computing” future. But who knows for sure. Here’s an excerpt from an essay that Benedict Evans recently published called, “A month of the Vision Pro“:

    Second, taking one step further back again, even if my doubts are all wrong, we won’t know any of this for years, and right now this is all still in the experimental category. Apple sells more watches in a typical quarter than Meta has active Quest users. Even the iPhone took years to start selling. It’s possible than in five years this will have started to work, and it’s possible than in five years we’ll have concluded that this [AR/Apple Vision Pro] is a niche, and we’ll have to wait for glasses, contact lenses or neural implants.

    But ultimately, this is okay. You have to try, because:

    Thank you to Lucas Manuel for sending me the above quote.

  • Fundamental and enduring

    I admire Warren Buffet’s humility:

    In the physical world, great buildings are linked to their architect while those who had poured the concrete or installed the windows are soon forgotten. Berkshire has become a great company. Though I have long been in charge of the construction crew; Charlie [Munger] should forever be credited with being the architect.

    This is an excerpt from his recent letter to Berkshire Hathaway shareholders, which, this year, he opens up with an obituary to his late partner, Charlie Munger.

    I don’t agree with everything Warren says and writes. He, for instance, doesn’t seem to like crypto and streetcars. Though, surely, he’d really dig my CryptoParisian.

    That said, I never miss his letters and his thinking has been broadly instrumental in how I tend to think about real estate.

    If you take his description (same letter) of what Berkshire does, and replace businesses with properties, this is what you get:

    Our goal at Berkshire is simple: We want to own either all or a portion of [properties] that enjoy good economics that are fundamental and enduring. Within capitalism, some [properties] will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers.

    This is a good way to think about real estate.

  • Ideal end state

    A friend of mine sent me this X post today.

    It covers two important life questions: (1) How do you define success? (2) Are your actions aligned with that definition? And included in the post is the author’s “ideal end state”, which is a list that includes things like “control 80% of my schedule”, “be top 0.1% fit for my age group”, and “thriving marriage with regular 1-on-1 time.”

    Some of his list has checkmarks, and some of it — things like “small, beautifully designed home with an epic view” — is still a work in progress.

    After I got the message, I immediately responded with: “This is great. I’m going to do this for myself.” I then sent it to my family.

    Now, in some ways, I’m already doing this. I like lists and I have a lot of them. Some of them are “disciplines” that tell me to do things like write every day (that’s what this blog is), lift weights, and continuously practice my French. And some of them deal with aspirational goals like, build a creative retreat in the mountains because you love snowboarding.

    But I think there’s a lot of room for me to be even more intentional, and aspirational, about what success means to me. And so that’s what I plan to do. Maybe some of you will want to do the same after reading this post.

  • 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.

  • 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.

  • Risk perception

    Here is an interesting way of looking at risk (via Seth Godin):

    If you’re trying to reduce risk, do the hard part first. That way, if it fails, you’ll have minimized your time and effort. On the other hand, if you’re looking for buy-in and commitment so you can get through the hard part, do it last. People are terrible at ignoring sunk costs, and the early wins and identity shifts that come from the easy successes at the beginning will give you momentum as you go.

    He’s not wrong. We are generally bad at ignoring sunk costs, which is why they have to tell you in business school that you need to ignore sunk costs. It doesn’t come naturally.

    We are also victims of temporal myopia. Meaning, we tend to emphasize short-term items and discount things that are in the future. So if two things are equally risky, we’ll likely perceive the immediate one as more risky than the one that will occur in a few years.

    Some things to keep in mind as we go about managing risk.

  • Difficult work

    There is an old saying that if you can find something you love to do, you’ll never work a day in your life. But this is probably bad advice.

    Here is a simple graph, from Seth Godin, to help explain:

    The problem with fun things (y-axis) is that they’re fun. So lots of people want to do them. And if there’s a small or no market for said fun thing, then it’s probably a hobby. (Hobbies are still important.)

    Sometimes you can be fortunate where something that previously had no market eventually has a big market. Take, for example, tinkering with computers in the early days.

    This is what Chris Dixon was getting at when he said that what the smartest people do on the weekend is what everyone else will do during the week in ten years.

    But if this doesn’t happen or if a big market already exists — and you do want to be successful at something fun — it’ll likely follow a power law.

    Meaning, you’ll need to be the very best in the world and it’s almost certainly going to be a “slog”. (Bottom right quadrant.) One example of this would be the phenomenon of “starchitects.”

    And that’s pretty much it for the fun stuff. The rest of this graph is for things that are difficult, which means that 3 out of these 4 quadrants are difficult and/or a slog.

    This is not nearly as much fun as not ever working.