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: Housing

  • 70% of Hong Kong’s housing supply is either subsidized or a small unit

    This is an unfortunate distinction:

    Of all the world’s housing crises, Hong Kong’s may be the most formidable. The city of 7.3 million leads the world in housing prices and inequality, with 125,100 millionaires and 1.6 million people living in poverty. Home prices have rocketed by 187% over the last decade. In May, the number of public housing applicants hit 245,000, with an average wait time of 6.1 years — the highest in over two decades. According to lawmaker Scott Leung, a shortage of 30,000 units in the next five years means that the public housing queue will soon stretch to 6.5 years.

    So let’s take a look at overall housing supply (source):

    What this chart tells us is the following:

    • For the five-year period from 2017 to 2021, Hong Kong built about 173,900 housing units. That’s somewhere around 34,780 per year.
    • Of these units, 60,700 were subsidized public rental housing units (~35%) and 25,500 were subsidized sale units (~15%). So overall, about half of Hong Kong’s housing supply over the last five years was some form of subsidized housing. That said, the number of public rental housing units has been declining. It was about 70,800 units between 2007 and 2011.
    • Looking at private residential units during this same five-year period, about 35,200 of them (20% of total supply) can be classified as “small units.” These are units with an area less than 40 square meters and, based on the above chart, they obviously represent a rapidly growing market segment.
    • Adding all of this up, we get to 70% of Hong Kong’s housing supply being either (1) a subsidized unit or (2) a small unit under 40 square meters.

    This is how Hong Kong builds, and it clearly isn’t enough to meet demand.

  • How 20% affordable can impact development pro formas

    This Twitter thread by Richard Wittstock of Domus Homes (developer out in Vancouver) is a timely follow-on to yesterday’s post about housing supply, land-use regulations, and specific policies such as inclusionary zoning. What Richard clearly describes in his thread is the economic impact of a Community Amenity Contribution (CAC) that requires developers to provide 20% social housing.

    The thread will walk you through all of the specific numbers, but I think there are three important takeaways:

    1. Everything has a cost. It is entirely disingenuous for anyone to refer to inclusionary zoning or other similar policies as a mechanism for “no-cost” affordable housing. Even if you believe it is the right public policy approach, there is still a cost. Social housing doesn’t just appear out of thin air.
    2. In Richard’s thread, the remaining market rate condominiums end up needing to be sold for $1,750 psf in order for the entire project to pencil. This is a significant number. But in this case, it is a result of these homes needing to shoulder the cost of the social housing. It is basically saying “housing is too expensive, so let’s make it more expensive so that we can use some of the incremental proceeds to finance less expensive housing.”
    3. If the math doesn’t work, developers will not build new housing.

    P.S. Thank you Volodya Gusak for pointing out Richard’s thread to me.

  • Housing supply in low-cost and high-cost municipalities

    Here is a housing study that looked at housing supply — in the US from 2000 to 2020 — relative to median housing values. And here is the key takeaway:

    What this chart is saying is that new housing is rarely added in cities with the lowest-value homes. The bar on the left represents municipalities whose median housing values are less than 50% of the metropolitan average. And this makes sense. If values are low there is likely little to no incentive to build. The math just doesn’t work.

    However, as home values increase, the incentive to build and the ability to finance new projects also increases, and that is what we see in the above chart. This also makes sense.

    But something interesting happens in the highest-value cities — housing supply once again starts to fall off. And it turns out that there is a bit of a sweet spot. Municipalities whose relative housing values are 110 to 130% of the metropolitan average actually produce the most overall housing. Any higher than that and things start to decline.

    Why is that? The answer likely has to do with restrictive land-use regulations. The highest-value cities (and wealthiest suburbs) often have a lot of large single-family lots, as well as policies to ensure that this kind of built form doesn’t change. This has the effect of both limiting supply and enshrining values.

    So when it comes to housing supply, what you don’t want are low-cost areas. But you also don’t want the highest-value areas. What you want are areas that are doing well, but no so well that they start really restricting new entrants. This is what our industry often refers to as exclusionary zoning.

    Now, one of the most common ways to respond to this problem is to develop an opposing policy, namely inclusionary zoning. But usually what this policy doesn’t do is direct more supply to these high-value and low-density areas. Instead what it typically does is force the segment that is producing the most housing — let’s call it the 110 to 130% band — to deliver more affordable housing.

    It’s a neat trick that sounds pretty cool, but it is not at no cost.

  • Placemaking art

    Back in 2017, when Superkul (architects) first started coming up with concept designs for Junction House, we all decided that it would be nice if we could do something to mark the important view terminus that exists with our site.

    We explored a few different ideas and then ultimately landed on a rooftop neon (or neon-like) sign that would read “Junction House.” The idea was to pay homage to the old signage that used to be present in the Junction and to some of the iconic rooftop signs that still exist around the world.

    Of course, the goal was never advertising. There is no economic imperative for us here. We just wanted to do something fun that at the same time could mark the entrance to the Junction neighborhood.

    After proposing this idea, we quickly learned that these are next to impossible to get approved. But to their credit, the City of Toronto fully got it. We heard things such as, “look, we can’t call this art, but we like the idea and we like what you’re trying to do.” Thank you for that.

    The compromise we ultimately struck was to remove the “House” part, leaving just “Junction.” This way it no longer referenced our project and instead referenced a place. By doing this, it became “placemaking.” And that is what is now baked in our site plan approval.

    Fast forward to 2022, and we are now getting ready to test our first 1:1 mockup of the sign. I can’t wait to see how this looks on site.

  • There’s an apartment amenity for that

    This afternoon a few people from our team toured two of Fitzrovia’s recently completed rental apartment buildings here in Toronto. For those of you who may not be familiar, Fitzrovia is a relatively young company, but they have quickly become one if not the most active rental developers in the city. They are also ushering in an approach to purpose-built rentals that is more common in the US, but that is still fairly nascent in Canada. Part of this has to do with the fact that Canada took a few decades off from building rental apartments and instead focused on condominiums.

    One of the first things you’ll notice is that they have programmed all of our lobbies with a coffee shop and bar called No. 10 Dean. This is their own brand. They operate it. And it serves as both an amenity for residents, as well as a cafe for the general public. This really helps to animate their lobbies, particularly at The Waverley, which is situated next to the University of Toronto and feels more like a co-working space in a cool boutique hotel than the lobby of an apartment building. I like this idea a lot. But it’s also an idea that is a lot easier to execute in an apartment building than in a condominium building.

    Some of their other usual amenities include a rooftop pool (called LIDO), a gym (called The Temple), a signature amenity terrace (called STOA — which I’m assuming is a Greek architectural reference), and a pet spa (called Beauty for the Beast). When we went through this afternoon it was raining pretty heavily, but the pool was so great that I still felt a deep urge to pose and take multiple selfies. That’s how you know it’s doing what it’s supposed to. But perhaps more importantly, these amenities are all consistent brand offerings. Go into any Fitzrovia building and you’ll find a LIDO (pictured below).

    Generally speaking, real estate companies usually aren’t as good at driving their brands in the same way as other consumer-facing companies. So it’s great to see this kind of design-forward and consistent brand offering being developed here in Toronto. Thanks for the tour and for hosting our team, guys.

  • Koto open day at Fritton Lake, UK

    I have written about Koto a few times before (check here and here). They design and fabricate beautiful modular homes and cabins that are designed to connect you back to nature.

    One location where you can already find these cabins is on Fritton Lake, which is about 2 hours and 45 minutes outside of London. The way it works is that you buy a plot of land in the Fritton Lake community and then you choose which Koto home you would like.

    There are two models available — Ki and Miru — and they can be customized as either 2 or 3-bedroom cabins. Apparently it then takes somewhere between 4 and 6 months for your new cabin to be fabricated and delivered to site.

    Prefabrication is, of course, not a new idea. But it does feel like we are finally starting to see some meaningful traction. As recent as 2016, only about 2% of new single-family homes constructed in the US were prefab or modular.

    But today it’s perhaps easy to imagine a world where only the top end of the market builds on-site and custom. Koto is also evidence that these homes can be just as, if not more, beautiful and sustainable.

    FYI: The Koto team is having an “open day” on Saturday, October 1, 2022 at Fritton Lake. If you happen to be in the area and would like to check out the cabins (and do things like swim in the lake), drop them a note to book a spot.

    Image: Koto

  • Super-prime home sales in New York and London

    Here’s what I can tell you this morning: Real estate development is a bit more fun when you don’t have to constantly worry about supply-chain issues, access to labor, high inflation, and regularly increasing interest rates. That said, if you just want to buy a super-prime property in one of the world’s preeminent global cities, things seem to be just fine:

    According to FT, both New York and London have continued to see a rise in super-prime sales this year and both have seen more of these sales in the first 8 months of 2022 compared to all of 2019 (before the pandemic). Note: These charts are showing home sales greater than US$10 million and greater than £5 million, respectively.

    On top of this, many or most of these buyers are, apparently, still able to access financing at LTVs of 100% (i.e. no money down). For what it’s worth, there is a London mortgage broker quoted in the article saying that he has arranged more 100% mortgages this year than in his entire 20-year career. Turns out that the best way to ensure access to debt is to not need it in the first place.

    Charts: FT

  • Market making for houses

    Matt Levine’s latest Money Stuff column does a good job explaining why a lot of smart people are trying to figure out a market-making model for homes (see companies such as Opendoor):

    People want to apply the market-making model to homes. This makes sense. Buying or selling a home is a long slow uncertain annoying process. The value of immediacy is high, especially for a seller. If you decide to sell your house and go to a website and spend 10 minutes filling out a form and then someone wires you cash for the value of your house, that is much much much better than hiring a broker and listing the house and holding open houses and so forth. You’d be willing to pay a market maker a lot for that immediacy. (By selling your house to the market maker at a discount.) And if the market maker is good at acquiring houses, then it will have a lot of inventory, which will make it a good seller of houses. If you want to buy a house, you will naturally go to the market maker’s website, because it’s where the houses are.

    Levine also explains why a market-making model is that much more difficult for homes compared to things like stocks. In a slowing/slumping housing market, it’s pretty easy to lose money as a market maker. (That is, unless you can somehow accurately predict that a slump is coming.)

    Last month, Opendoor lost money on 42% of its home transactions. This is a result of them buying homes from people when prices were X and then selling these homes many months later when prices were less than X.

    However, I’m not so sure that this has to be an existential problem. Opendoor’s primary value proposition is instant liquidity for homeowners. And this value proposition is at its strongest when the market is in fact slumping. Because the alternative — selling with a broker — is less attractive.

    So the current environment may eventually turn out to be a boon for Opendoor. Of course, we won’t know for a number of months.

    Full disclosure: I am long $OPEN. And yes, it is painful right now.

  • A spectacular laneway retreat 11 years in the making

    The latest issue of Designlines magazine is about how Toronto is — finally — embracing laneway life. And one of the featured homes is none other than Mackay Laneway House. Pictured above is architect Gabriel Fain sitting on the front steps.

    As some of you will know, MLH took over a decade to get built. I first did a design for the house back in 2009. Laneway housing seemed like such an obvious opportunity, and so I designed a compact house that could fit neatly within the confines of my 25-foot-wide backyard.

    Technically, it was perfectly workable. But I could tell I was too early. After speaking with city staff, I immediately got the impression that this thing was not going to get approved. At least not now. So I shelved the project until 2017.

    By this time, it was clear that laneway housing was on its way to becoming a reality in Toronto. It was simply a matter of time. And so Gabriel Fain and I decided to come up with a new design and try our luck at the Committee of Adjustment (we needed, I think, over a dozen zoning variances).

    But it turns out that we were still too early. The project was immediately refused. After the decision, I had a few planning lawyers reach and offer to help me with a pro bono appeal. But I decided to wait until the new laneway policies came into force and the home could be built without any variances.

    And that’s exactly what we did. In the fall of 2020 we submitted for a building permit, and about 6 weeks later it arrived. The home was then built that winter and it went up on the market for rent in March 2021. It rented right away, even in the midst of intermittent COVID lockdowns.

    At this point, it’s hard to imagine that this form of housing was once illegal. Hundreds of permits have already been issued and this number is only going to increase. In fact, I believe that the humble laneway house is destined to become a defining characteristic of Toronto’s urban landscape.

    Toronto is finally embracing laneway life.

  • Streets in the sky

    I went out this morning to grab coffee from around the corner and, on my way back home, I ran into two people in the elevator that, from what I could glean, had hit the same button in the elevator and then struck up a conversation. He asked if she had just recently moved into the building. She responded with no, and that she usually doesn’t see anyone else on their floor. He was surprised by this response and said that he knows everybody on the floor.

    Nearly a hundred years ago, architect Le Corbusier, as well as others, had the idea of creating “streets in the sky.” Perhaps the most famous example of this concept is his Unité d’Habitation in Marseille (pictured above). Now a UNESCO World Heritage building because of its role in the development of modernist architecture, the building houses five “streets”, two of which were intended to be fully-fledged shopping streets. These streets house(d) things like shops, restaurants, galleries, and even a hotel.

    Le Corbusier was famous for his desire to create machines for living in. And these streets in the sky were part of this philosophy. The idea was that by having all of the things you needed under one roof, you would then be able to live an efficient, productive, and enjoyable life. Architecture and design could do that for you.

    Of course, the other reason for this thinking was that we needed to get people away from cars. As the car became more commonplace in cities, conflicts arose. And architects began to grapple with how best to separate people and cars. One obvious solution was to simply lift people up and off the ground so that the street could be freed up for cars to do their thing. This was going to be the future.

    The pitfalls of this line of thinking have since then been widely documented. And today, I think it’s pretty clear that most cities are in fact taking the opposite approach. Instead of removing people, they are removing cars through pedestrianization projects. Some of these projects are temporary, but many are also permanent. This happening almost everywhere from Toronto to Sao Paulo.

    The other problem is that it’s extremely challenging to make retail uses work way up in the sky. And that’s why even second floor retail spaces often struggle compared to those on the ground floor. As I understand it, the non-residential tenancies in Marseille’s Unité d’Habitation have naturally evolved from being retail-centric to being more office-like. Supposedly you’ll now find architects and medical offices, which is not at all surprising.

    But that doesn’t mean that Le Corbusier’s instincts weren’t directionally right. We now have lots of examples of tall buildings housing an intense mix of uses and public functions. And in the case of multi-family buildings, the corridors do often serve as a kind of street. I happen to live off of one that houses our building’s amenities. And so in addition to just running into neighbors, I’ll often run into the odd birthday party or Sunday afternoon sumo-suit party. True story!

    It may not be the Champs-Élysées, but it is a kind of street for living.

    Photo by Bernd Dittrich on Unsplash