I met up with a friend yesterday after work and the topic of my blog came up. He said he loved the content, but that he would like to learn more about the inner workings of what it means to be a real estate developer. His belief was that there are lots of city blogs out there, but rarely do you get the candid perspective of a developer.
I immediately thought this was a good idea for one simple reason: When I’m at a party and I tell someone that I’m a real estate developer, oftentimes they have no idea what that means. They usually think I’m a real estate agent. Or they ask me to explain a typical day. Either way, I’ve found it generally smoother (and more impressive) to just lie and say I’m an architect.
So I’m going to do just what my friend suggested. I’m going to make an effort to talk more about what it means to be a real estate developer. And to kick it off, I thought I’d start with some of the basics and then talk about how I got into the business.
Real estate developers are effectively the entrepreneur that make a new building happen. They go out and buy the land, they put a team in place (architect, engineers and so on), they get the necessary approvals to build (with the help of the team of course), they finance the deal, and then they get a builder to actually construct the project.
Developers are like an orchestra conductor. They don’t play any instruments, they just direct the performance.
But at the same time, developers assume 100% of the risk of the project. If the building fails (because you can’t sell the condo units or lease out the space), that all falls on the developer (and his/her investors). All of the other team members are getting paid based on the services they provide. They’re consultants.
I met up with a friend yesterday after work and the topic of my blog came up. He said he loved the content, but that he would like to learn more about the inner workings of what it means to be a real estate developer. His belief was that there are lots of city blogs out there, but rarely do you get the candid perspective of a developer.
I immediately thought this was a good idea for one simple reason: When I’m at a party and I tell someone that I’m a real estate developer, oftentimes they have no idea what that means. They usually think I’m a real estate agent. Or they ask me to explain a typical day. Either way, I’ve found it generally smoother (and more impressive) to just lie and say I’m an architect.
So I’m going to do just what my friend suggested. I’m going to make an effort to talk more about what it means to be a real estate developer. And to kick it off, I thought I’d start with some of the basics and then talk about how I got into the business.
Real estate developers are effectively the entrepreneur that make a new building happen. They go out and buy the land, they put a team in place (architect, engineers and so on), they get the necessary approvals to build (with the help of the team of course), they finance the deal, and then they get a builder to actually construct the project.
Developers are like an orchestra conductor. They don’t play any instruments, they just direct the performance.
But at the same time, developers assume 100% of the risk of the project. If the building fails (because you can’t sell the condo units or lease out the space), that all falls on the developer (and his/her investors). All of the other team members are getting paid based on the services they provide. They’re consultants.
This distinction is what (can) make real estate development so lucrative–with risk comes reward. And I’ll be completely candid in saying that this is part of the reason I decided to get into development. I was training to be an architect and I started realizing that I could make more money as a developer.
But I also came to the realization that as a developer I would likely end up having more say over the built environment. That’s the unfortunate reality of my industry. Even though architects spend far more time than your average developer thinking about what makes buildings and cities great, I would argue that they don’t have nearly the same amount of say. Because if they did, we probably wouldn’t have so many crappy buildings in our cities. But it’s this way because architects aren’t assuming the risk.
Part of me used to actually feel bad about switching over to the dark side, which is how some architects refer to the development game. But the best way to summarize how I feel today is through what an architect friend told me a few years ago: “Brandon, cities don’t need more architects that care about design. We have lots of those. Cities need more developers that care about design.”
And so that’s what I became. A developer who loves design and cares deeply about one of our greatest assets–cities.
This distinction is what (can) make real estate development so lucrative–with risk comes reward. And I’ll be completely candid in saying that this is part of the reason I decided to get into development. I was training to be an architect and I started realizing that I could make more money as a developer.
But I also came to the realization that as a developer I would likely end up having more say over the built environment. That’s the unfortunate reality of my industry. Even though architects spend far more time than your average developer thinking about what makes buildings and cities great, I would argue that they don’t have nearly the same amount of say. Because if they did, we probably wouldn’t have so many crappy buildings in our cities. But it’s this way because architects aren’t assuming the risk.
Part of me used to actually feel bad about switching over to the dark side, which is how some architects refer to the development game. But the best way to summarize how I feel today is through what an architect friend told me a few years ago: “Brandon, cities don’t need more architects that care about design. We have lots of those. Cities need more developers that care about design.”
And so that’s what I became. A developer who loves design and cares deeply about one of our greatest assets–cities.
One of the main reasons why I hear people oppose certain development projects is because of a lack of infrastructure. Whether it’s roads, transit or something else, the concern is that what we have is inadequate to service what we’re about to build.
Now, I understand that we can’t completely overburden the city, but I still have fundamental concerns with this line of thought.
The population of the Greater Toronto Area is expected to grow by 2.5 million people over the next 20 some years, to almost 9 million people by 2036. What this means is that growth is happening and it doesn’t really care whether or not we have the “right” infrastructure in place. It’s coming and we need to figure out how best to house these people while at the same time building the most livable and prosperous city on the planet.
And I’m not sure most people appreciate that if we don’t build up (intensification) it means we’re going to be building out (sprawl). Again, the growth isn’t going to stop. And this represents an even greater strain on our region’s infrastructure (both built and natural) because it puts people into less intense land use and into cars.
So what I’m going to suggest is that instead of asking if our current infrastructure will handle the future, we ask why the future hasn’t been built into our current infrastructure? It’s a question of being proactive, rather than reactive.
One of the main reasons why I hear people oppose certain development projects is because of a lack of infrastructure. Whether it’s roads, transit or something else, the concern is that what we have is inadequate to service what we’re about to build.
Now, I understand that we can’t completely overburden the city, but I still have fundamental concerns with this line of thought.
The population of the Greater Toronto Area is expected to grow by 2.5 million people over the next 20 some years, to almost 9 million people by 2036. What this means is that growth is happening and it doesn’t really care whether or not we have the “right” infrastructure in place. It’s coming and we need to figure out how best to house these people while at the same time building the most livable and prosperous city on the planet.
And I’m not sure most people appreciate that if we don’t build up (intensification) it means we’re going to be building out (sprawl). Again, the growth isn’t going to stop. And this represents an even greater strain on our region’s infrastructure (both built and natural) because it puts people into less intense land use and into cars.
So what I’m going to suggest is that instead of asking if our current infrastructure will handle the future, we ask why the future hasn’t been built into our current infrastructure? It’s a question of being proactive, rather than reactive.
Earlier this week I connected with a Ryerson student doing a piece on Toronto’s condo rental market. She emailed me and asked if I would mind answering a few questions. Here are my responses.
Generally speaking, why is Toronto continuing to see such a rapid increase in the number of condos in development?
A lot of what we’re seeing is policy driven. It stems from the Places to Grow Act and the continued push towards intensification. It actually mirrors a similar boom we saw in the 70s. In both cases, it was policy driven and the market responded.
The other factor is a growing consumer preference for more walkable and urban neighborhoods. People are sick of long commutes and so we’re seeing a return to city centers and downtowns. This is happening across all demographic segments, though Millennials and Baby Boomers seem like particularly strong ones.
Is that boom, and the consequent rush by developers to create new units for rapid sale, affecting the quality of design and accessibility in new condo developments in Toronto?
When you have a hot market, you’re going to get lots of people rushing in and trying to make money. Whether it’s real estate, tech or some other industry, it’s to be expected. And I’m sure it impacted some projects negatively. But that market is gone in Toronto.
And regardless of the pace of development, there will always be varying degrees of quality across builders. The unfortunate thing for consumers is that it’s not always easy to tell which is which.
Earlier this week I connected with a Ryerson student doing a piece on Toronto’s condo rental market. She emailed me and asked if I would mind answering a few questions. Here are my responses.
Generally speaking, why is Toronto continuing to see such a rapid increase in the number of condos in development?
A lot of what we’re seeing is policy driven. It stems from the Places to Grow Act and the continued push towards intensification. It actually mirrors a similar boom we saw in the 70s. In both cases, it was policy driven and the market responded.
The other factor is a growing consumer preference for more walkable and urban neighborhoods. People are sick of long commutes and so we’re seeing a return to city centers and downtowns. This is happening across all demographic segments, though Millennials and Baby Boomers seem like particularly strong ones.
Is that boom, and the consequent rush by developers to create new units for rapid sale, affecting the quality of design and accessibility in new condo developments in Toronto?
When you have a hot market, you’re going to get lots of people rushing in and trying to make money. Whether it’s real estate, tech or some other industry, it’s to be expected. And I’m sure it impacted some projects negatively. But that market is gone in Toronto.
And regardless of the pace of development, there will always be varying degrees of quality across builders. The unfortunate thing for consumers is that it’s not always easy to tell which is which.
We should be demanding better infrastructure instead of holding back progress because of our inability to properly city build. We should be demanding the best as opposed to knocking everything else down to the lowest common denominator.
A perfect example of this is transit.
I strongly believe that transit is one of, if not the, biggest issue facing our region today. Decades of disinvestment are really showing my friends. And if we don’t get our act together, the impact on our quality of life, our environment, and our economic productivity is only going to worsen.
We need to be asking the right questions: Is the development the problem or is the real problem our infrastructure deficit?
One of the things we’re trying to do (at TAS) is integrate consumer education more into our sales and marketing programs. Mechanical equipment, as one example, isn’t the most exciting thing to to talk about, but we want consumers to know what they’re buying into.
Prices are rising (you could buy a house outside the city for the price of some of Toronto’s tiny bachelor units, if I’m not mistaken…) - So what is making condo ownership so desirable in spite of the high cost relative to space?
Again, it’s being driven a lot by lifestyle. People want walkable communities, they want to be close to amenities and they want to drive less. And they’re willing to give up space for that.
When considering and comparing the cost of a home, I think it’s important to consider some of the indirect costs, such as transportation costs, travel times, quality life and so on.
Sure a home in the suburbs may be a lot cheaper, but what’s my total, all-in, cost? If you need to own 2 cars and you spend 2 hours commuting everyday, there’s a real cost to that. If you place a big value on your time (as I do), the cost equation isn’t so skewed all of a sudden.
Are more people choosing to live in rental condos instead of buying, because of the inaccessible cost? If so - why are we still seeing so many new ‘rental condo units’ being built, rather than purpose-built apartment units?
Condos are being built because, in most cases, it’s the highest-and-best use for the land. It’s the most profitable. And investors have been more than willing to step up and fill the rental needs of the market. But with the condo market now coming down from record levels, I wouldn’t be surprised if we start seeing more purpose-built apartments.
We should be demanding better infrastructure instead of holding back progress because of our inability to properly city build. We should be demanding the best as opposed to knocking everything else down to the lowest common denominator.
A perfect example of this is transit.
I strongly believe that transit is one of, if not the, biggest issue facing our region today. Decades of disinvestment are really showing my friends. And if we don’t get our act together, the impact on our quality of life, our environment, and our economic productivity is only going to worsen.
We need to be asking the right questions: Is the development the problem or is the real problem our infrastructure deficit?
One of the things we’re trying to do (at TAS) is integrate consumer education more into our sales and marketing programs. Mechanical equipment, as one example, isn’t the most exciting thing to to talk about, but we want consumers to know what they’re buying into.
Prices are rising (you could buy a house outside the city for the price of some of Toronto’s tiny bachelor units, if I’m not mistaken…) - So what is making condo ownership so desirable in spite of the high cost relative to space?
Again, it’s being driven a lot by lifestyle. People want walkable communities, they want to be close to amenities and they want to drive less. And they’re willing to give up space for that.
When considering and comparing the cost of a home, I think it’s important to consider some of the indirect costs, such as transportation costs, travel times, quality life and so on.
Sure a home in the suburbs may be a lot cheaper, but what’s my total, all-in, cost? If you need to own 2 cars and you spend 2 hours commuting everyday, there’s a real cost to that. If you place a big value on your time (as I do), the cost equation isn’t so skewed all of a sudden.
Are more people choosing to live in rental condos instead of buying, because of the inaccessible cost? If so - why are we still seeing so many new ‘rental condo units’ being built, rather than purpose-built apartment units?
Condos are being built because, in most cases, it’s the highest-and-best use for the land. It’s the most profitable. And investors have been more than willing to step up and fill the rental needs of the market. But with the condo market now coming down from record levels, I wouldn’t be surprised if we start seeing more purpose-built apartments.
Would you say that the majority of condo rentals on the market are owned by foreign investors who depend on building management to liaise with renters? If so, why are they choosing to buy units in Toronto?
I have no idea. It’s even hard to tell how many units are just investor owned, let alone local versus foreign. Because there are tax implications if you don’t owner occupy a unit, buyers have an incentive not to disclose. Overall, I find it problematic that the marketplace is so opaque. I wish there was a way to bring perfect information.
With respect to why they choose to buy in Toronto, there are a bunch of reasons. Real estate has been a phenomenal investment in Toronto over the past decade and that’s attracted a lot of investor attention. There are also segments that just want capital preservation in a safe and stable country. Even without great returns, that’s a valuable proposition for some foreigners. And of course, Toronto is a great city. Talent wants to live here and that’s important.
Generally speaking, is there a certain LOCAL demographic (ie, boomers, post-boomers) that are investing in condos for the purposes of renting them out? What makes that investment so desirable?
Again, there isn’t great data on this.
What I will add to the investor topic is that, despite the fact that investors often get a lot of flack, they do serve two important needs in the marketplace for both developers and consumers. The first one we’ve already talked about. Investors provide rental housing in Toronto at a time when few, new, purpose-built rental apartments are being constructed.
The second one is that investors help to get projects under construction and built. I’ve heard one developer refer to them as providing a kind of short-term financing. Because consumers don’t always want to commit to a unit that might be built 4-5 years out, developers rely on investors to buy pre-sale units so that the project can get underway. Once construction is complete, these units then often get sold to end users who are now ready to commit and move in.
Would you say that the majority of condo rentals on the market are owned by foreign investors who depend on building management to liaise with renters? If so, why are they choosing to buy units in Toronto?
I have no idea. It’s even hard to tell how many units are just investor owned, let alone local versus foreign. Because there are tax implications if you don’t owner occupy a unit, buyers have an incentive not to disclose. Overall, I find it problematic that the marketplace is so opaque. I wish there was a way to bring perfect information.
With respect to why they choose to buy in Toronto, there are a bunch of reasons. Real estate has been a phenomenal investment in Toronto over the past decade and that’s attracted a lot of investor attention. There are also segments that just want capital preservation in a safe and stable country. Even without great returns, that’s a valuable proposition for some foreigners. And of course, Toronto is a great city. Talent wants to live here and that’s important.
Generally speaking, is there a certain LOCAL demographic (ie, boomers, post-boomers) that are investing in condos for the purposes of renting them out? What makes that investment so desirable?
Again, there isn’t great data on this.
What I will add to the investor topic is that, despite the fact that investors often get a lot of flack, they do serve two important needs in the marketplace for both developers and consumers. The first one we’ve already talked about. Investors provide rental housing in Toronto at a time when few, new, purpose-built rental apartments are being constructed.
The second one is that investors help to get projects under construction and built. I’ve heard one developer refer to them as providing a kind of short-term financing. Because consumers don’t always want to commit to a unit that might be built 4-5 years out, developers rely on investors to buy pre-sale units so that the project can get underway. Once construction is complete, these units then often get sold to end users who are now ready to commit and move in.
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Brandon Donnelly
Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly.
