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: Construction

  • Digitally twinning our cities

    Many of you have probably heard of the concept of a “digital twin.” Put simply, it is a digital representation of a physical thing. This could be a thing that already exists or, in the case of a new building, it could be a thing that you’re about to make exist.

    But there’s no reason to stop at the scale of a building. Right now, there are groups working on modeling entire cities. Sadly, in Ukraine, it is being done to document important buildings that could get destroyed. But in other places, it is being done in order to create a new kind of urban testing environment (via FT):

    “In the city, you don’t have a development environment; you only have one city. The laboratory is the place where the planners go to test. So test in a digital twin and then develop or implant in the city. That’s going to be the value.”

    The thinking is that if you combine a digital twin with good real-time urban data and AI, then you might actually be able to start testing new city building initiatives. For instance, maybe you could ask it: What would happen if we added a traffic lane, here? Would it actually help congestion or would it induce new demand?

    It’s hard to model this kind of stuff today, which is one of the reasons why there’s usually fierce debate about seemingly everything. But if we had accurate models that could tell us something close to reality, that feels like it would be a game changer for city builders.

  • Why are construction starts down?

    Last year in the Greater Toronto Area, condominium construction starts fell to a 9-year low of 15,891 homes. And this year, condominium construction starts are forecasted to fall to a 15-year low of 11,500 homes (though new sales are expected to rebound). Both of these figures are from Urbanation’s Q4-2023 market data.

    One possible explanation for this drop in construction starts could be that developers are somehow colluding to keep supply low and prices high. Another one could be that more developers are right now independently speculating that prices will be higher in the future, and so they think it’s better to just wait. But both of these explanations would be wrong.

    The correct answer is that more developers are unable to start construction because the market isn’t there. In the case of Toronto’s condominium market, this means that the pre-sales aren’t there. This might seem obvious, but there seems to always be a contingent of people who believe that developers can choose to build whenever they want.

    It is for this same reason that some people think that zoning approvals should have an expiry date. Call it a use-it-or-lose-it approach. But as I think we can see in the above numbers, developers don’t control the market. And so I would never want to be in a position where I need to start construction by a certain date, or else.

    That’s not entirely within my control. In fact, sometimes it’s completely out of my control.

  • High-rise graffiti in downtown Los Angeles

    About five years ago, a project in downtown Los Angeles, called Oceanwide Plaza, halted construction. I don’t know exactly what happened, but the reports suggest corruption, financing problems, and the Chinese developer running out of money.

    Under typical circumstances, once you secure your financing and start construction, it should mean that you have enough money to finish the project. That is unless there are significant cost overruns, you experience a cash crunch somewhere else, and/or somebody does something bad.

    In fact, on some projects, the peak equity requirement occurs before construction commencement, meaning that once you do secure your construction facility, you should be able to reduce the amount of equity that you have remaining in the project (i.e. you can pull out some cash).

    Here it sounds like a combination of things went sideways. And now today, Oceanwide Plaza looks like this:

    The towers have been tagged pretty much all the way up. And it kind of looks like each artist commandeered their own suite in the building. Not surprisingly, this has been attracting a lot of attention and debate. The project is also across the street from the Crypto.com Arena and so there are a lot of eyeballs on it.

    On the one hand, you have artists being creative and doing something with an abandoned set of buildings — ones that are beset with corruption charges and that people are generally upset about. But on the other hand, you have a busted project, and you have artists trespassing and creating what others see as another symbol for a spiralling downtown.

    LA police are reporting that the site is going to be better secured and that all of the graffiti will be removed. But until then, this has got to be one of the tallest expressions of graffiti ever created.

  • How to design a mountain house in the French Alps

    This is the chalet that our group has been staying in for the last week:

    • We’ve been calling it a tree house. It is 5 levels in total. And you circulate through the house using a spiral staircase in the center of it. It’s space efficient, but there are a lot of stairs.
    • The site is downhill from the road, which, as we have talked about before, creates a more challenging build than uphill from the road.
    • You enter the chalet on the third level, which itself houses 2 bedrooms. One floor below and one floor above also have 2 bedrooms, meaning there are 6 bedrooms in total. On the lowest floor is an indoor hot tub, a shared parking garage, and a shared ski/snowboard room.
    • Every mountain house needs, at a minimum, two things: a fireplace and a hot tub. Ideally the latter is outside.

    • As is typical in the mountains, the main living space is on the top floor (level 5 in this case). You want this for the views. If you’re building into a sloping site, the lowest floors are usually somewhat constrained.
    • We did the same thing with Parkview Mountain House. But it does mean that you circulate through the more “private” spaces within the house before reaching the more “public” ones. This is the opposite of what happens in most homes.

    • The underground parking garage is accessed by way of a small parking elevator that lowers you down two floors. Initially this seemed excessive, but it is a shared elevator/garage. The chalet is semi-detached chalet, if you will, and so this was probably the only way they could get enough parking on the site. Assuming our attached neighbor is of a similar size, that’s 12 bedrooms.
    • It also creates an important pathway so that people don’t need to bring their skis and snowboards through the house.

    Every site has its challenges and that is especially the case in the mountains.

  • The Allen key

    I’ve been assembling a lot of things over the past few weeks, and that got me wondering.

    IKEA did not invent the Allen key. Though today, it might feel that way. Canadian Peter L. Robertson first commercialized the square socket in 1908. And in 1909, American Willian G. Allen patented the hex varietal.

    Due to an increased interest in interchangeability, hex nuts and keys would go on to become the dominant mode of fastening after World World II. And in English-speaking countries, the name Allen has largely stuck.

    They’re cheap to make and you get built-in leverage with its longer arm.

    IKEA first began using hex keys in the 1960s. Their philosophy was: “You do your part. We do our part. Together we save money.” Meaning, you assemble the things yourself. Here’s a set of assembly instructions from 1968:

    Today, most of us probably take it for granted just how radical of an idea this was. IKEA had smartly figured out that flat packing furniture saved a ton of money for everyone. The challenge was that it then had to get everyone accustomed to putting together their own furniture.

    But they more than did that. They arguably ushered in a revolution in furniture. And they did it on the backbone of a simple, yet revolutionary, device that, over a century later, most of us still call an Allen key.

  • Building a home on a constrained site

    I’m so predictable. This is the kind of house that tends to grab my attention: modern design, relatively small footprint (~7.8m x 12.3m), narrow street (~4m), and panoramic views (of Seoul). But what does it take to actually build a house like this in an urban fabric as dense as Seoul’s?

    If you read TIUM Architect’s description (using Google Translate for those of us who don’t speak Korean), you’ll see that the house was built out of concrete and steel, but that concrete trucks couldn’t stage on the narrow and dead-end street.

    So what they ended up having to do was build a 100-meter concrete conveying pipe (~328 feet) and staging somewhere else. It was such a pain in the ass that they only wanted to do this for the foundations. The rest of the house was built out of steel. (I think because of the clear spans that they wanted.)

    Sometimes small infill projects aren’t as simple as they may seem. In this case, the lot size is 92 m2. The building footprint is 51.53 m2 (56% lot coverage). And the total floor area is 136.52 m2.

    Photo: Lee Hanul via ArchDaily

  • 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.

  • Architecture billings are down

    When I was in grad school they used to always tell us that architects are a leading indicator for the development business. Because if architects are getting fewer jobs/billings, it means that at some point in the future there will be fewer construction starts and then fewer completions. And not surprisingly, that is what we are seeing happening right now. Below is the latest data from the AIA/Deltek Architecture Billings Index (via Bloomberg).

    Billings, inquiries (an even earlier leading indicator for billings), and design contracts are down:

    And it seems to be most pronounced in the West and the Northeast:

    This is always something to watch if you want to try and forecast where hard costs might be going and what completions might look like in the next few years.

  • Port Lands flood protection project is one of the most important in Toronto

    This morning I did a hard hat tour of the Port Lands area of Toronto. And once again, I was reminded that this is one of the most important projects taking place in the city right now.

    When completed at the end of 2024, the $1.25 billion flood protection project is going to create over 60 acres of new greenspace and parkland, and unlock a significant amount of land for development. Already, it’s hard to imagine this part of the city not becoming a desirable new neighborhood and a magnet for recreation.

    I was asked not to share any images from within the site (i.e. the non-public areas), so I’m only sharing the above photo taken from Cherry Street. But we did get a chance to stand on the bed of the new river valley that will eventually take flow from the Don River. And I have photos on my phone to prove it. That was almost certainly a once in a lifetime thing.

    For the latest on construction progress, check out this video from Waterfront Toronto.