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.
This skinny 8-story building caught my eye in the Place des Terreaux in Lyon. I think a lot about these sort of small infill buildings because it is generally not how we build, today, in Toronto. But it’s a workhorse of a “fabric building”, and I can think of many streets that would be made better if only we encouraged this kind of built form. Truthfully, it’s probably most streets.
I am not a lawyer. Nothing I write on this blog should be construed as legal advice. In fact, it is highly questionable whether anything I write here should be construed as any sort of advice. Still, Trump’s fraud trial is an interesting one for us to discuss. The case, as I crudely understand it, accuses him of “inflating his net worth to dupe banks” and “issuing false financial statements every year between 2011 and 2021.” And possibly some other things, too.
Now there are some people who are saying that there’s nothing actually wrong with the way Trump conducts his real estate practice. Kevin O’Leary, for instance, was just on CNN saying, “every real estate developer everywhere does this.” His position was that if you’re going to fault Trump, then you need to go after every developer out there. Here’s the video interview where he says this:
Let’s break this down. Kevin is right in that people who own real estate ordinarily want it to be worth as much as possible. This is true for individual homeowners and it’s true for large real estate companies. And there are various reasons for this. One reason is that it maximizes your debt proceeds. For example, if you buy a building for $100 and the banks are willing to give you a loan based on a LTV (loan-to-value) of 70%, then you will get $70 in debt proceeds and you will need to put in $30 of your own cash equity.
However, if you buy a building for $100 and it ends up being worth ~$143, then this same 70% LTV will result in $100 of debt proceeds. This means that you won’t need to put in any of your own cash and that, for all intents and purposes, you just got a building for “free.” By most metrics, this would be considered a good real estate deal. (Of course, you could also buy a building for $100 and have it be worth only $50. And this would be much less fun than getting free real estate.)
One important question, though, is how does the building end up “being worth $143?” Well, one scenario could be that you just bought really well. It was an off-market transaction (i.e. it wasn’t formally listed), the seller was highly motivated, and so you negotiated a below-market purchase price. You then went out and hired a reputable third-party appraiser who did a bunch of rigorous research and issued you a report that said, “your building is worth $143.” And this would be perfectly fine.
But one can also imagine ways in which someone could lie and do nefarious things to try and convince people that their building is worth $143, even if it clearly isn’t. Now, at the end of the day, I don’t know the facts of this case. So I can’t comment directly. But I did want to use this as an opportunity to add some nuance to Kevin’s claim that “every real estate developer everywhere does this.” Ultimately, that depends on what “this” is. Are we talking about doing customary things to maximize value creation? Or are we talking about fraud?
Yesterday’s post was written in the co-working (/lobby) area of Junction House. I wrote about this space nearly a year ago when it was under construction, but now it’s complete and people like me are using it:
I spent a few hours working in the space yesterday, and it was amazing to see residents and guests coming and going. Some people were waiting to meet someone. Some people were just playing on their phones. And others, like me, were jumping on and off calls and writing blog posts. Later in the evening, it transitioned to guests carrying bottles of wine and flowers.
This was always the intent of this “amenity.” We wanted to create a social space for residents and guests, replicating a bit of the feeling that you might get in a hotel lobby bar. But ultimately, this is the kind of space that will almost certainly evolve over time, depending on how residents choose to use it. It’s not rigidly defined; it’s more of a flex space.
It’s also worth mentioning that this space was designed well before COVID. A lot of people have asked us if this was in response to that, hoping to identify tangible ways in which design has responded to the pandemic. But honestly, we didn’t change anything. Gathering spaces were important before, and they remain important today.
I guess in many ways this is a space that sits somewhere in between a “first place” and a “third place.” It’s almost a first place in that it’s in a building that people call home. But it’s also a more public social environment that isn’t technically home or work. So I’m really looking forward to seeing how it settles in and evolves over time.
I’ll report back.
This week it was announced that Canada’s population grew by approximately 430,000 people over the last quarter (+1.1%). And that it represents the highest population growth rate of any quarter since the second quarter of 1957. Even more impressive, though, is the fact that in the first 9 months of this year we have already added over 1 million people in total. This beats all full-year periods since Confederation in 1867!
Here’s what all of this starts to look like visually:
The unfortunate side of these records is that it is coming at a time where we’re, perhaps counterintuitively, building a lot less new housing; which is to say that construction starts are declining. In fact, I was on a call this week where people who examine development and construction costs all day were predicting a 5-6% decline in hard costs in the Toronto region next year. And this is a direct result of fewer new projects getting started.
Broadly speaking, this is how things tend to work in real estate development: there are heavy lags between changes in demand and changes in supply because of how long it takes to build new buildings. But what’s happening right now is more than this. Interest costs are impacting everyone. And investor interest in pre-construction homes has softened significantly, demonstrating how much our industry relies on individual investors. Many projects cannot go.
What I ultimately think this is going to do is exacerbate our current supply-demand imbalances. Meaning that when the market does come back — and it of course will — it’s going to come back with a vengeance. And that’s because it is going to need to catch up to all of the new demand that is accumulating as we speak.
Last week, the Canadian federal government announced that it will be developing a catalog of pre-approved housing designs in order to accelerate the delivery of new homes.
This is not a new idea. A similar approach was taken after the Second World War in order to quickly house veterans returning home. But in this current iteration, the catalog is expected to be focused on missing middle housing such as small multiplexes and student housing, and then later on higher-density construction.
We have also spoken about this idea before in the context of ADUs in Los Angeles. And at that time, I wrote that the way to encourage more of something is to reduce friction. I continue to believe that this is the case, and so I do think that pre-approved designs are a positive thing, especially for smaller projects.
However, it’s important to keep in mind that this is not the biggest barrier to new housing supply. The problem is not that developers and builders are all sitting around thinking “if only I had a design for a 5-unit multiplex.” The problem is that they’re sitting around thinking “if only I could make some money building a 5-unit multiplex.”
So while reducing the barriers to entry is a good thing, the really important question for the designs in this upcoming catalog is: Can developers actually make any money building them? Because if the answer is no, it doesn’t matter that they’re pre-approved and ready to go. They won’t be built.
Hopefully somebody is thinking about this because it will take some work. Every market is different. What works in one place, may not work in another. On top of this, what works today, may not work tomorrow.
If you are the Los Angeles County Metropolitan Transportation Authority and you own excess land next to a transit line that you’ve just recently built, one possible option could be to give this land to a non-profit housing developer so that they can build some affordable housing. And this is exactly what was agreed to in 2007 with the Lorena Plaza site in the Boyle Heights neighborhood of LA. The proposal: 49 affordable units geared toward people making 50% of the AMI.
However, like all things in development, things do take time. And when building new 4-storey housing complexes, there is always the real possibility that you might face several years (or longer) of fierce opposition. In the case of Lorena Plaza, it apparently took the developers from 2013 to 2020 to reach a settlement with the local councilman and their immediate neighbor (a commercial plaza). In the end, this project is now expected to occupy next summer (2024), which brings the total project timeline to 17 years.
This is probably an extreme example and, thankfully, some of the rules have since been changed to help speed up projects like this one. Still, it is no wonder we can’t build enough new housing. (Los Angeles wants to build some 450,000 new homes by 2029.) Time isn’t free. And according to the WSJ, this relatively small project ended up costing US$34.2 million to build. That’s nearly US$700k per suite. A number that will buy you a lot of home in many cities across the US.
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.
Last week was “forum week” in Toronto. (That is, it was the Toronto Real Estate Forum.) And as is the case every year, Benjamin Tal, deputy chief economist of CIBC, opened up the event with his usual macro view of the world. For those of you who missed it (as I did), here are some of his key points (via RENX):
This last point is an important one. New housing supply is mostly shut off right now. I say mostly because there are obviously still projects under construction, and there have been and there will continue to be some successful launches. But by and large, most developers are waiting right now, principally because the absorption isn’t there. They have no other choice.
But Canada continues to grow. People from around the world continue to want to move here. And there continues to be a need for a lot more new housing. So when the market does return — and it, of course, will — there is going to be a supply-demand imbalance. And as is always the case in real estate, there will be a lag in responding to this imbalance.
This is what Tal means by “crazy”.
Photo by Wiktor Karkocha on Unsplash
