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

  • Q2-2022 land prices in the Greater Toronto Area

    Bullpen Consulting just released its latest land insights reports for the Greater Toronto Area. For the period of Q2-2022, Ben Myers and the team identified 46 high-density residential land transactions with an average price of $95 per buildable square foot. This is down from $112 pbsf in Q1.

    In the core of the city (former City of Toronto), the average price for Q2-2022 was $135 pbsf. In North York it was $103 pbsf. And in Scarborough it was $50 pbsf. Overall land prices are down about 15% from last quarter (though it’s important to note that quarterly transactions can represent a relatively small sample size).

    We have spoken before about how land prices tend to be fairly sticky in the face of changing cost structures. But what we are seeing right now is a bit of a perfect storm:

    • Development charges (here in Toronto) are set to increase by 49%
    • Hard costs have seen double digit increases (with some inputs increasing by 30-40%)
    • Inclusionary zoning is on the horizon and will add another additional cost to new housing
    • And rising interest rates are both increasing project costs (higher interest charges) and slowing the macro economy

    All of this is naturally causing developers to be more cautious when it comes buying new land. And we are seeing that in the above pricing. But at the same time, this dip in pricing is not going to be enough to absorb all of the additional costs that new housing projects now face in today’s market.

    If you’d like to download a full copy of Bullpen’s report, click here.

  • The cost floor

    Generally speaking, the cost of building a new building is always going up. There are moments in time, like during a recession, where costs might temporarily correct downward. But generally speaking, there is a cost floor that is constantly rising. This includes everything from hard costs to rising development charges.

    We have spoken before about how developers typically look at their costs, and then price accordingly through “cost-plus pricing.” Put differently, it is answering the question, “what do I need to rent or sell this space for in order to cover all of these projected costs?” This can be tricky when costs are all over the place, as they are right now with double percentage point swings, but that’s a different conversation.

    As long as there remains some price elasticity in the market, cost-plus pricing can work just fine. Costs are up, but I’m just going to increase pricing to absorb most of it, or in some cases all of it. However, problems occur when and where you can’t increase pricing. Maybe it’s in a marginal area where rents aren’t increasing. Or maybe interest rates are rising and overall price elasticity is tightening.

    Whatever the case may be, in this scenario, it likely means that development will stop and supply will slow or possibly even shut off. We are starting to see some evidence of this happening in Toronto right now.

    But if the fundamentals of the overall market remain strong, this should only be a short-term problem. Eventually the market will catch up (through higher pricing and/or some reduced costs), and then projects will return to being feasible. But if there’s a structural problem in the market, maybe development never returns without some kind of subsidies.

    Thankfully, it is obvious to most that markets like Toronto have incredibly strong fundamentals. We can screw up a lot of things as long as we remain open to smart immigrants from around the world. This makes it fairly easy to have conviction around what will happen over the longer term. And this is generally how I like to make decisions, whether we’re talking about real estate or crypto (see above tweet).

    But all of this doesn’t mean that one shouldn’t also be managing the short run.

  • Ground, broken

    Buildings take a long time. Slate started investing in the Yonge & St. Clair area in 2013 and we acquired the first parcel for One Delisle in 2015. And here we are now in 2022. When it’s all said and done, it’ll be over a decade.

    So it’s important to celebrate the milestones when you can, and we did that today with the official ground breaking event for One Delisle. It takes an army of smart and dedicated minds to realize a project like this, so a huge thanks to everyone involved. You know who you are.

    Today was a real milestone. But I’m looking forward to concocting some others so that we have more reasons to celebrate as we complete this very rewarding marathon.

  • Does off-site construction equal more compromises?

    We have been talking about prefabricated and modular buildings for so long that it’s easy to think it might never happen. (Here’s a related post that I wrote back in 2015.) There are also lots of groups that have tried and failed. Perhaps the most high profile is the bankruptcy of off-site construction company Katerra, which had raised some $2 billion in funding, but for whatever reason(s) couldn’t figure things out.

    That said, I’m starting to get the feeling that change might actually be underway in our industry. Over the last few months we’ve been talking about startups like Nabr. But there are many others, including Factory OS, which has been quietly building affordable housing in California (presumably far away from here). To date, they have completed 10 buildings and over 1,200 units, and they have another 24 or so buildings in the pipeline.

    This feels promising to me. And I think it’s being aided by our current environment — costs are way up and people are desperately searching for efficiencies. But if this is really going to transform our industry, I think we’re going to need to be willing to make some sacrifices. Standardization and efficiency likely means making some concessions around design and overall specificity. Not every project can be custom, as is generally the case today.

    That likely means that cities and communities will also need to become more forgiving when it comes to urban design guidelines. Could you please step your building back right here and follow this oblique angle that lines up with this important historic datum line? Nope, sorry, can’t. Our production line can’t accommodate that sort of change. Would you like the most affordable housing possible with today’s means or would you like a custom design?

  • What am I paying more for?

    So here’s the thing. The whole reason we are all talking about how to build more sustainably is that there isn’t often a quantifiable ROI for doing so. If building a net-zero building cost less than building a regular building, everybody would be building one. But that is not the case, which is why our industry, and others, are grappling with how to justify the added costs, even though we all know it’s absolutely the right thing to do.

    The questions we are asking ourselves look something like this: If I spend X% more on this build, what kind of rent premium could I command? And in some cases this premium is quantifiable and in some cases it matters a great deal. For instance, in the case of a new office building, you might need to spend the extra money so that you can attract the right tenants. While in other cases/asset classes, you might feel as if there’s no rent premium and nobody will ever pay more.

    But I like how Seth Godin thinks about it in this recent post: people never pay extra. If you’re paying more for an electric car, for example, you aren’t actually paying extra. What you are paying is a price that you feel is fair for what you are receiving. And what is it that you’re receiving? Well, in this case, you’re getting an electric car, but you’re also buying in Seth’s words, “sustainability, community awareness, cachet, status, safety, quiet, and the feeling of being an early adopter.”

    These things have value to some people. And as long as you can deliver on your promises, extra isn’t extra at all. But perhaps more importantly, this early adoption can help encourage change. Electric cars are becoming cheaper and cheaper, and I think it’s pretty clear that they will soon replace combustion engine vehicles. This model of starting at the top of the market and then moving down seems to have worked.

    Now, the auto industry isn’t perfectly comparable to the building industry. They have been good at improving productivity and bringing down costs, and we have been awful at it. Depending on how you measure it, construction productivity growth over the last half century is sitting somewhere between flat to some negative number. But I don’t think this dubious achievement changes Seth’s message. Think about what you’re offering. Maybe extra isn’t extra.

  • Augmented reality is coming — will it finally reach construction sites?

    Apple has been working on new virtual reality and/or augmented reality headsets for at least 6 years. This has been widely reported. But in typical Apple fashion, nobody knows anything about them, even though something is set to be revealed as early as this fall. I also don’t know anything about them, but I already want one. I am sure Tim Cook will get up on stage at some point and convince me that I need it immediately, so I’m trying to get ahead of that moment.

    VR/AR headsets are, of course, not new. Google tried and failed. Nobody wanted to wear them besides nerds. I had a pair of Focals by North but they were far too cumbersome to use and about as comfortable as having a smartphone duct-taped to your face. Meta’s headsets currently control the market. They have about 78% market share. But the overall market remains small. It’s mostly gamers. But the same could have been said about tablets before Apple did its thing.

    The promise is that these AR headsets might replace our phones as the dominant personal device. AR > VR. And that feels to me like a reasonable assumption once the requisite tech arrives. But even before that, there are a ton of great use cases for highly-functioning AR — everything from online shopping and digital fashion to finally fulfilling the dream of walking around a construction site and visualizing the design and coordination clashes.

    Technically these things are already possible, but the technology remains fairly niche. I hope Apple changes that.

    Full disclosure: I am long Apple.

  • Time to market and managing costs

    If you’re building a purpose-built rental building, you spend nearly all of your money up front and then you start earning revenue (i.e. collecting rent). On the other hand, if you’re building a condominium building in a market that generally relies on pre-sales for construction financing, which is the case here in Toronto, you spend a bit of your money up front, lock in (but not collect) most, if not all, of your project revenue, and then you spend the majority of your money.

    (This is obviously a simplification and when I say “spend all of your money” I’m speaking on an unlevered gross basis and not based on equity in. But this nuance doesn’t change the point of this post.)

    I have written about the above difference before on the blog, but I think it’s particularly relevant in today’s cost environment. Looking at the construction cost chart that I posted a few days ago, it is clear that a lot of us, myself included, have never had to work and build in an environment like this.

    In the past 30 some years, we have never had to deal with construction costs rising as quickly as they are right now. Though I recognize that things did also suck in the early 80s when we had high inflation and double-digit interest rates, and in the early 90s when the real estate sector was particularly hard hit.

    In any event, what does this current environment mean for development projects? Well for one, and this is a big one, it means that spending a bit of your money up front and then locking in most of your revenue (i.e. pre-selling condominiums), can present a lot of risks if you don’t have a good handle on how much it’s going to cost you to finish the project. And the reality is that nobody has a crystal ball, especially in this kind of environment.

    So in my humble opinion, I think you need to spend a bit more of your money up front. I think it makes sense to spend the time and money on solid working drawings and on running a tight construction procurement process — all before you begin selling.

    It used to be the case that many developers would start selling before they even had their zoning in place. That is far less common today (from what I can tell) for reasons like what I’m describing here. Of course, this means it’s going to take you longer to get to market. And time equals more money. But it feels like a necessary move in this environment.

    Photo by Matías Santana on Unsplash

  • Hard costs are insane right now

    Marlon Bray over at Altus recently shared the above chart on LinkedIn. Normally I only go on LinkedIn about once every quarter, if that. But thankfully our team likes to follow nerdy charts and so it got circulated around.

    The chart is from Statistics Canada (table 18-10-0135-01 to be exact) and what it shows is the % change per annum of their construction price index, going all the way back to 1989. It is good context for the massive cost increases that we are all currently working through.

    Increasingly, I think that most people in the industry feel as if we’re now reaching a tipping point. Costs — both hards and softs — cannot continue to go up like this. At some point supply will start to taper off or even shut off. The former has likely already started.

  • A flexible parkade in Calgary

    As a general rule, I believe that our cities should be striving for less rather than more parking. Which is why it still baffles me when allegedly progressive cities continue to mandate ludicrous parking ratios (even when the sites are next to transit). You know who you are.

    But if you absolutely have to build it, the new 9th Avenue Parkade + Innovation Centre in Calgary is a good example to look to.

    Designed by 5468796 Architecture in collaboration with Kasian Architecture, Interior Design and Planning, the project does all of the things to ensure that it doesn’t look ugly today and it doesn’t need to remain a parkade in the future once we all switch over to electric scooters and flying autonomous vehicles.

    Some of the moves include 4m floor-to-floor heights and generally flat floor slabs that only rise 1-2%. This was done so that the floors can be more easily retrofitted to residential and/or office in the future.

    And in fact, this flexibility already gotten proven out during the design process. Originally the ~335,000 square foot building was going to be entirely parking. But then an innovation centre called Platform came to the table for 50,000 sf, and a portion of the building had to be converted to flexible office space.

    Let’s hope this trend continues. But in the meantime, here are some pretty pictures:

    All photos by James Brittain.

  • The Eiffel Tower and the awful tower

    It was explained to me this week that Paris has two principal towers: The Eiffel Tower and the awful tower. The awful tower is, of course, the Tour Montparnasse. Completed in 1973, the Tour Montparnasse is tall, brown, monolithic, and seemingly out of place with the rest of Paris’ urban context. At the time of its completion it was the tallest building in Paris and it remains the tallest building outside of La Defense (business district).

    But the Eiffel Tower is also tall. In fact, it’s taller. So how is it that the Eiffel Tower became such a symbol for Paris and the Tour Montparnasse became the “awful tower?” Both were intended to represent modernity (at their respective times) and both were controversial at the time of their construction.

    Today people respond to these two towers very differently. Is it because the Eiffel Tower is set in a beautiful park and more separated from its urban context? Or is it because the Eiffel Tower has had almost another 100 years to settle in. It’s not exactly clear. But we do know that as humans we have a bias toward the status quo. And so I like to think of change in the following way:

    – There’s change that people immediately like

    – There’s change that people hate and will always hate

    – And there’s change that people initially hate but will eventually like

    The Eiffel Tower, you could argue, falls into category number three. It was big, modern, and alarmingly different when it was built at the end of the 19th century. But now people seem to like it. I know this based on the number of street vendors selling little replicas. For the record, I have yet to see little replicas of the Tour Montparnasse sitting on blankets on the street. I’m a buyer if I do come across one though.

    But is it really right to place Montparnasse into category number two? Could it be that it just needs more time to settle in and then it will ultimately move into number three? Maybe. In 2017, an international design competition was held to find an architect for the redesign of the tower. Studio Gang submitted an entry. But Nouvelle AOM was ultimately selected.

    I wasn’t part of the selections committee, but I think a good way to evaluate the success of this project will be whether or not it moves the tower into category three. That is, people start to like it. Then maybe Paris will become known as a city of two towers, as opposed to a city with one nice one and one awful one.