What is real anymore? It doesn't matter.
In development, visuals are persuasion. AI makes them infinite.
In case you missed it, Google released Gemini 3 this past week. And boy is it awesome. The images it creates — see the tweet above — are completely undetectable as the work of AI, and this is just one particular use case. From an overall sentiment standpoint, it is also amazing to see how quickly things have changed for Google. This past summer, the narrative was that AI was going to kill Google's golden goose — its search business. But now all of a sudden, it feels like Google is the king of AI.
I know we all know this, but it's hard not to keep thinking about how profoundly this is all going to change the global economy. Let's take real estate development. Development is a future-oriented business. It's about imagining what the future could be, and then going out and trying to create it. Because of this, I think you could also describe it as an industry of visual persuasion. Renderings, photos, diagrams, and many other tools are used to sell a specific kind of future.
In the olden days, these tools used to cost a lot of money, especially if you were preparing for something like a condominium sales launch. When it came to renderings, we used to have to book the best companies months in advance, and then once work actually started, it would take several weeks of iteration before the final renderings were ready. In parallel to this, you'd also be working on your photography. And because no developer wants to photograph dormant winter trees and sidewalks shellacked in road salt, you also needed to carefully plan ahead for when you'd be taking these.
Then, once you had all your visuals ready, you sent them off to the printers, so that sales brochures and other marketing collateral could be physically printed. It's a long and expensive process. Of course, AI collapses this entire workflow. It dramatically reduces both time and cost (down to an almost zero marginal cost), and opens up a world of unlimited visual possibilities. Want a photograph of a couple walking in New York City in the snow during Christmas? Done.
So what does this mean for development and all of the service providers who help to visualize projects into existence? In my view, it means the low-value-add ones go away. AI easily replaces them. But for the high-value ones who bring incredible creative direction to projects, I think they get better and become even more important. AI is creative rocket fuel. But you still need someone who can direct, who has taste, and who can decide what story the project should tell.
Cover photo by Serhii Hanushchak on Unsplash
I recently started reading Marginal Revolution. This recent post, called "Illegal Immigrants Didn't Break the Housing Market; Bad Policy Did," covers many of the things that we talk about on this blog:
If “fixing” housing scarcity means blaming whichever group is politically convenient, you end up cycling through targets: illegal immigrants first, then legal immigrants (as Canada has done), then the children of immigrants, then wealthy buyers, then racial or religious minorities. Indeed, one wonders if the blame is the goal.
If you actually want to solve the problem of housing scarcity, stop the scapegoating and start supporting the disliked people who are actually working to reduce scarcity: the developers. Loosen zoning and cut the rules that choke what can be built. Redirect political energy away from trying to demolish imagined enemies and instead build, baby, build.
As a developer, I naturally chose the most self-serving excerpt to quote, but that doesn't mean that what Alex Tabarrok wrote is incorrect. Blame is, of course, the goal. Such is the reality of politics. Here's another excerpt, this one from one of Howard Mark's investing memos:
I've always gotten a kick out of oxymorons — phrases that are internally contradictory — such as "jumbo shrimp" and "common sense." I'll add "political reality" to the list. The world of politics has its own, altered reality, in which economic reality often seems not to impinge. No choices need to be made: candidates can promise it all. And there are no consequences. If something might have negative consequences in the real world, politicians seem to feel free to ignore them.
This is why immigrants are blamed, foreign buyers are banned, rent freezes are proposed (counterproductive), and we continue to do very little to actually fix traffic congestion in our cities, among an endless list of other things. The real solutions are simply too politically inconvenient; it's more advantageous to blame scapegoats.
Meanwhile, our problems persist.
I woke up this morning to an email from one of our partners with a link to this article talking about a three-storey, 10-unit housing project (plus garden suite) that was just refused by the Committee of Adjustment here in Toronto. It's five minutes from a major subway station. Why?
Because it's always easier to blame someone else.
Cover photo by Frames For Your Heart on Unsplash
Real estate may be local, but a lot of markets appear to be correlated. I felt that way this past summer when I was meeting with developers in Paris and I continue to feel this way when I read articles about other markets. Here's a recent one from Building Salt Lake talking about the state of Utah's multi-family market.
Based on the article, cap rates appear to be in the mid-4s for newish product, which is too low right now:
Investors aren’t jumping at the 4.6 cap deals they can typically find in Utah today, she added, when they could get over 5.5 in other major markets.
“Salt Lake, a 4.6 cap, I personally think it’s a little mispriced relative to where else we can put our money,” Schultz said.
This means that there aren't the asset trades to support new development. To justify ground-up development, developers need to see a positive spread between their development yield and the exit cap — one that compensates them for the additional risk of construction. If that spread isn't there, or if it's unclear what it might actually be, development shuts off.
Rents and values coming down also doesn't help:
Back in 2022, which was the peak of the market, you could underwrite double-digit rent growth on a typical 250-apartment deal Downtown. Now, he said, “we’re seeing that effective rents down about 8.25%.”
Overall multifamily values are down 26%, King said, though he added that’s not indicative of every single project or every deal. He also said that decline came after four years of record supply and double-digit rent growth.
What should be clear from these excerpts is that Salt Lake City is not at the point in the cycle where developers are jumping to deliver new ground-up multi-family product. They're at the point in the cycle where firms are looking and hoping to buy distressed assets below replacement cost.
Cover photo by Saul Flores on Unsplash