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: Development

  • Real estate is a byproduct of economic growth

    I sometimes wonder if I wasn’t born and raised in Toronto if I still would have gone to architecture school and become a real estate developer. I mean, if I grew up in Paris, maybe I would have become a fashion designer. Or if I grew up in Park City, maybe I would have started a snowboard company, slash become a ski bum. I would enjoy doing all of these things. And places certainly do influence us, more than most of us probably appreciate.

    My point with all of this is that Canada likes to somewhat paradoxically over index on housing. I say paradoxically because we never seem to have enough of it for Canadians — certainly the affordable varietal — and yet:

    “Canada relies heavily on its real-estate sector to power the economy. Housing investment in Canada as a share of gross domestic product reached 8.9% in 2022, according to the Organization for Economic Cooperation and Development, much higher than the 4.8% on average for the 38 member countries in the OECD.“

    If you look at all of the industries that make up the Canadian economy, “real estate and rental and leasing” is at the top with 13.01% of GDP (as of 2020). And if you add “construction” on top of this, the total is about 20.09% (again, as of 2020). This feels suboptimal. And I say this as a developer and builder of real estate.

    Real estate is largely a byproduct of economic growth. When someone starts a business and then needs something like an office or a warehouse, that is a positive thing for the economy. Jobs are being created by the business and further jobs are being created by the people who will deliver the space they need. But if you aren’t creating new jobs in the first place, then just dealing in real estate will only take you so far.

    Immigration helps, but it can also create a mirage of growth and prosperity. If you look at real GDP growth across the G7 from 2019 to today, Canada looks pretty good. We’re second (+4.5%) only to the US (+8.9%). But if you look at GDP per capita over the same time period, we’re dead last (-2%), whereas the US remains on top (+7.2%).

    I’m not an economist; I just build things. But in my opinion, this is a problem. We should be doing everything we can to foster a stronger culture of innovation and entrepreneurship in this country. We have the talent. I mean, Ethereum has roots in this city! We just need more people turning this intellect into wonderful new companies.

  • A decade of changing development pro formas

    Ten years ago when I was working on development pro formas (here in Toronto), we used to assume that we would launch condominium pre-sales, and then start working drawings once we hit somewhere around 50% sold. And for our hard costs, we would carry a modest inflation rate of say 2-3% per year.

    The thinking at the time was that construction documents are expensive, let’s not spend the money until we know that we have a good amount of sales under our belt. In Toronto, you can also use purchaser deposits toward project costs, so this is an equity efficient way of managing your cash flow.

    But then this go-to-market strategy started becoming too risky, probably around 2017-2018. Sales were happening faster and costs started increasing a lot faster, and so now everyone wanted to minimize the lag between their pre-sales (your revenue) and when they procured construction (your costs).

    So as an ideal and totally risk-averse approach, the objective was to be ready to start construction and to know what your hard costs would be before you even started selling condominiums. It didn’t matter that you were going to spend a bunch of money on technical drawings, because it was still going to be many multiples less than your cost escalation exposure if you didn’t do it. There was also a high degree of confidence that you would get the pre-sales once you did launch.

    This is how things mostly worked during the pandemic. But strategies once again changed in the second half of 2022. Pre-sales slowed and people started wondering, “wait a minute, could hard costs actually come down?” The answer turned out to be yes and, this year, most people in the industry expect them to come down even further.

    This is a good example of how quickly and dramatically things can change in development. In 2021, it was “we need lock in construction costs immediately or we might get hit with a 40% increase on glass.” Now it is, “let’s wait as long as possible because we’re in a deflationary cost environment and I’m sure it’ll be cheaper later.”

    To some extent, you can look to leading indicators like architecture billings and home pre-sales to determine what the future might look like. But it’s far from perfect. I don’t know anyone that accurately predicted what we just went through over the last number of years.

    So as a developer, you just have to do your best to stay ahead of what’s coming and manage your downside risk as best you can. In all cases, you’re going to need to be creative and nimble. Because clearly a lot can change in the span of even a single development project.

    Photo by Ben Allan on Unsplash

  • Closing risk

    Urbanation is forecasting that approximately 27,000 condominium suites will finish construction and be ready for occupancy this year in the Greater Toronto Area. This is some sort of a record, and is naturally the result of record pre-construction sales over the last cycle.

    This number is going to come down given that construction starts are declining, but before that, these suites will need to get absorbed into the market. And that’s why I think that one of the biggest risks for our industry this year is going to be closing risk.

    In other words, you’ve got the pre-sales, but will the purchasers actually show up and close on their homes?

    It is for this exact reason that most/all construction lenders want to see pre-construction purchasers pay at least 10% in deposits before they’ll advance their loan. It is also why the most risk-averse developers won’t start construction until they have even more than 10% sitting in trust. The more hard money a purchaser has paid, the more likely they are to close.

    It can be easy to forget this when the market is on fire and you’re more preoccupied with holding back inventory because you think that sale prices will be higher in the future. But it’s prudent to remember these times. They are a naturally occurring part of real estate cycles.

    The most risk adverse execution strategies will likely leave some money on the table in the best of times. You won’t be profit maximizing. However, they’ll leave you more protected in the worst of times. That’s how risk and reward work.

  • The Enchanting Village

    The story of Avoriaz 1800 starts in the 1960s.

    Downhill skier Jean Vuarnet, whose name is today found on cool sunglasses, had just become an Olympic Champion at Squaw Valley in California. He returned to his home in Morzine, France (located in Haute-Savoie) and was asked to help build a new resort on the empty plateau above the town.

    So he, and whoever else, raised some money, got the necessary approvals, and managed to successfully get the first lifts operational. But the resort quickly ran into financial difficulties and, apparently, bankruptcy became a possibility.

    The turning point came when he met Paris-based developer Robert Brémond. He had the capital and the experience, and so Vuarnet eventually ceded the project to him in 1962. In 1964, Robert then asked his son, Gérard, who was only 27 at the time, to lead the project. Supposedly he said to him, “the mountains are for the younger generation.”

    Gérard then went out and hired a young architect named Jacques Labro. He was also in his 20s at the time; 26 to be exact. The mandate he gave Labro was clear: design the ideal recreational resort. At the same time, he was asked to build upon Vuarnet’s original vision for Avoriaz. The result was an audacious masterplan designed around three guiding principles.

    First, it was to be a completely car-free resort, which was/is a big deal and an accomplishment that remains true today. To access Avoriaz by car you either need to park below in Morzine and take a gondola up, or park at the entrance to the resort.

    Two, it was to be an ideal place for skiing (snowboarding didn’t exist just yet). This meant that the entire resort had to be sloped correctly so that everything would be ski in and ski out.

    Finally, it was to have decidedly modern architecture that fit sensitively within the landscape. They didn’t want it to look like some ideal Swiss mountain village. What they wanted was bold, different, and highly sustainable. The result is some of the most unique mountain architecture to be found anywhere.

    For a preview of the village’s architecture, check out these photos by Alastair Philip Wiper. They were part of an exhibition called “Avoriaz: The Enchanting Village.” Along with this story, they will probably make you want to visit the place. That’s certainly the case for me.

    Photo by Rémi Bertogliati on Unsplash

  • The value of cheap and undesirable

    I love seeing these kind of small and creative infill projects.

    In this case, this, is a conversion of an old TV and radio repair shop into a new 4,800 square foot gallery and workspace (there also looks to be a single residential suite based on the photos). These are the kinds of projects that can really make and/or transform an area. However, they are often few and far between.

    Here’s something that I think about a lot:

    In Toronto’s red hot market, it wasn’t easy finding a building large enough to do all of these things; that Mr. Low-Beer had been out of the city for two decades only added to the shock: “I wasn’t fully cognizant of the fact that every square inch was going to be priced out as a condo; I thought you could get an old garage or some place on a highway that was undesirable.”

    Having cheap and undesirable spaces in a city can be a huge benefit, because they lower the barriers to entry and allow for new ideas. And at the end of the day, it is new ideas that usually make cities so exciting. Jane Jacobs was on to someting here.

    But over the last real estate cycle, this has been a challenge because of how frenetic the market has been. It has been a challenge for people wanting to convert TV repair shops into new creative spaces, and it has even been a challenge for new/smaller developers wanting to, yes, build things like condos.

    However, all of this started changing about a year and a half ago. And I would argue that right now is the best time in the last 15 years to be a new entrant. Two years ago, it was hard to buy development sites, and it was mostly impossible to negotiate favorable deal terms (such as structure).

    This current reset has changed that. And it is creating opportunities for those who can be creative.

  • Converting to residential

    This week, a 1913 Beaux-Arts office building at 69 Yonge Street (here in Toronto) was conditionally approved for conversion to residential. The proposal entails preserving the existing 15-storey building, adding 6 storeys on top, and creating a total of 127 new condominium suites (14 studios, 65 one-beds, 27 two-beds, 21 three-beds, and exactly zero parking spaces).

    This is noteworthy for at least 3 reasons.

    One, it’s a beautiful old building and PARTISANS does great work.

    Two, there’s no parking. This isn’t novel for Toronto, but it’s a good reminder that you don’t need parking in urban centers (so stop mandating it). It’s also something that you often have to accept with office conversions. If the parking doesn’t already exist, you’re probably not going to build it.

    Finally, this approval demonstrates a reversal in the city’s view on office replacement. Years ago, this sort of project wouldn’t have been feasible, because the developer would have been forced to replace any demolished office space. But obviously that’s no longer the case today. And in my opinion, that’s a good thing.

  • So what floor do you live on?

    Tonight was a “housewarming” party for the residents of Junction House. It was hosted in the co-working space that I wrote about, here, which was a lot of fun to see in action.

    As part of the event, we opened up the doors to our model suite and to the penthouse suite that sits under the Junction placemaking sign.

    And in the penthouse, we set up a little gallery displaying historic photos of the Junction — from the 80s — taken by photographer Avard Woolaver.

    They’re awesome photos, and eventually they’ll make their way down to the lobby. But for now, it’s a penthouse gallery.

    However, the most important component of the evening was that it was an opportunity for residents to meet each other. And that’s why the question of the night quickly became, “so what floor do you live on?”

    I sometimes hear people say that there can be a lack of community in multi-family buildings. But I can honestly tell you that I felt the exact opposite of that this evening.

    It was nice to meet so many lovely people from the building.

  • 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.

  • It always starts with a bold idea

    This is a photo taken from the base village of Val Thorens. I took it while we were sitting on a massive terrace in the middle of it. But what stood out to me even more than the terrace itself was the buildings that frame it. They are all about 8-9 storeys, have no step-backs, and were clearly orchestrated to create a defined “street wall.”

    These framing buildings can be just as important as the public spaces themselves; they form the “walls” of the public realm and create a sense of enclosure. In this case, the buildings also follow a similar aesthetic. They were designed to pay homage to traditional Savoyard architecture, which is known for its use of local woods and stones.

    The other thing I find noteworthy is that all of this is only about 50-some years old. Val Thorens the resort opened in 1971. And it only became an idea sometime around 1969 when Pierre Schneblelen — an engineer and developer — decided that he wanted to build Europe’s highest ski resort. (The base of the resort sits at 2,300 m and the peak elevation is 3,230 m.)

    As time passes, it’s easy to take these kinds of places and experiences for granted. But they only exist because someone, at some point, had a vision. And when that vision was initially presented, it was probably perceived by many, or by most, to be crazy. That’s just how these things go, and so I like reminding myself of that.