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.
Some four years ago, people were talking about the possibility of New York City being dead. But of course that was nonsense. Last week, New York City published the initial findings of its housing and vacancy survey and the key takeaway is that the city’s vacancy rate dropped to 1.41% last year (2023). This is a drop from 4.54% just two years ago and the lowest measurement since 1968. It’s also even worse at more affordable rent levels:
The problem, as described by the city, is a supply-demand imbalance. Over the last two years, the city’s net housing stock grew by about 60,000 homes (~2%). This is, apparently, pretty good compared to recent years/decades; but it wasn’t nearly enough given that the city added 275,000 new households. This is the opposite of dead, and it’s not going to be addressed by just doing things like restricting short-term rentals.
We have a structural delivery problem and New York City is not alone in facing it.
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.
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.
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.
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.
It is disappointing to me that we often vilify all condominiums as being “luxury condos.” I think the rhetoric is disingenuous and I think it distracts us from finding more productive solutions. As Mike Moffatt points out in this thread, if you look at virtually all major cities in Canada, the most affordable housing options are going to be condominiums and not low-rise freehold houses.
In his case, he looked at current for sale listings in London, Ontario, and found that for homes under $400k, about 81% of them were condominiums, and for homes over $1,200,000, only 4% of them were condominiums. Again: the real “luxury homes” are the low-rise houses that not the condos.
Now to be fair, John Pasalis is not wrong in responding to the thread and saying that on a per pound basis, or a per square foot basis, condominiums are actually more expensive. I’ve been saying this for years on the blog. When measured this way, mid-rise buildings are one of if not the most expensive housing typologies.
So John’s argument is that, while condominiums may be the more affordable option for 1-2 person households, if you’re a family in need of more space, low-rise housing is likely going to be more affordable for you on a per square foot basis. And I would agree with this statement.
The problem with this approach in the real world, though, is that people don’t buy and afford homes based on this metric. You can’t go to a bank and say, “I want to buy this house for $1.7 million dollars because it’s only $680 per square foot when I include the basement, and that’s better value than this 700 square foot condominium selling for $1,400 psf.”
Sorry, the bank is going to tell you what total price you can afford based on your income. And that’s why condominiums in our market have tended to serve as a critical entry point for first-time buyers. They’re the most affordable option in terms of their total sale price.
So in my view, labelling all condominiums as “luxury” is not exactly productive. It ignores their role in providing more affordable homes; it overlooks the supply constraint that low-rise houses represent in most of our cities; and it’s a distraction from the more systemic issue at hand: how do we make housing more affordable for everyone, including families?
Generally the way the former works is that you have to have been living continuously in the home since July 1, 1971, and the building itself needs to have been constructed before 1947. If this is the case, then in theory, you should have seen relatively minor rent increases over the years.
This was the case for the late real estate agent, Alice Mason, who died at the beginning of this year at the age of 100:
She never left the rent-stabilized [controlled?] apartment where she held her storied dinners, in a century-old building on East 72nd Street. (In Manhattan real estate parlance, it was a classic eight, a gracious prewar layout that included three bedrooms and two maid’s rooms.) In 2011, the developer Harry Macklowe bought the building for a reported $70 million and began to turn the units into condos, buying out the tenants to do so.But Ms. Mason refused to give up her apartment. When she moved there in 1962, the rent was $400 a month. At her death, it was $2,476. The apartment below her, in the same line, was recently on the market for just under $10 million.
Green, Penelope. “Alice Mason, Real Estate Fixer and Hostess to the Elite, Dies at 100.” The New York Times, 13 Jan. 2024, www.nytimes.com/2024/01/11/style/alice-mason-dead.html.
For better or for worse, this is an obviously awesome deal, and reason enough to never move and have family members move in with you before you die so that you can try and pass down this asset for generations to come.
Real estate commissions on homes in the US are typically between 5-6%. And it is usually split between the seller’s agent and the buyer’s agent (or it goes all to one agent in the case of dual-ended deals). It is also customary for this commission to be paid entirely by the seller (through the proceeds of their sale), though you could argue that buyers end up paying for it indirectly. All of this is generally true in Canada as well.
This is a good set up:
Sellers don’t pay until they sell and have fresh cash
Money being deducted from proceeds (the “take rate”) is a lot less noticeable and has a lot less friction than cash you just have to pay out
Buyers kind of don’t pay
This last point is one of the most important features of how real estate commissions work. Because you have one side of the transaction that feels as if they’re mostly not paying, it generally helps to perpetuate the status quo. If both sides had to directly fork out cash, you’d likely have a lot more people saying, “hey, why don’t we consummate this transaction over here, on the side, and not pay these fees.”
But it turns out that the US Department of Justice isn’t happy about some of these policies and practices. More specifically, when the National Association of Realtors does things like this:
Prohibiting multiple listing services (“MLSs”) from disclosing to prospective buyers the amount of commission that the buyer broker will earn if the buyer purchases a home listed on the MLS (“NAR’s Commission Concealment Rules”);
Allowing buyer brokers to mislead buyers into thinking that buyer broker services are free (“NAR’s Free-Service Rule”);
Enabling buyer brokers to filter MLS listings based on the level of buyer broker commissions offered and to exclude homes with lower commissions from consideration by potential home buyers (“NAR’s Commission-Filter Rules and Practices”); and
Limiting access to lockboxes that provide licensed brokers physical access to a home that is for sale to only those real estate brokers who are members of a NAR-affiliated MLS (“NAR’s Lockbox Policy”).
Prohibits, discourages, or recommends against an MLS or MLS Participant publishing or displaying to consumers any MLS database field specifying the compensation offered to other MLS Participants;
Permits or requires MLS Participants, including buyer brokers, to represent or suggest that their services are free or available to a client at not cost to the client;
Permits or enables MLS Participants to filter, suppress, hide, or not display or distribute MLS listings based on the level of compensation offered to the buyer broker or the name of the brokerage or agent; or
Prohibits, discourages or recommends against the eligibility of any licensed real estate agent or broker, from accessing, with seller approval, the lockboxes of those properties listed on an MLS.
Some believe that this ruling — which will create more competition — could reduce the $100 billion or so of commissions paid each year (in the US) by as much as 30%. This is possible. I have no idea how this estimate was calculated. But it does make intuitive sense that commissions should come down. This ruling gets at the heart of what sustains the industry: one side of the marketplace needs to feel that they’re, mostly, not really, paying.
We evolved to be wary of change. Our attention is limited, new things can be a threat and the status quo feels comfortable.
As a result, we spend a lot of time and energy being afraid (and arguing about) the upcoming changes in our lives, but almost no time at all thinking about the things we’re used to.
As an example of this tension, check out this “exit interview” with Toronto’s former chief city planner, Gregg Lintern. The underlying theme is change and why it’s desperately needed.
But of course, that’s not easy.
The interviewer, Victoria Gibson, mentions this survey stat: nearly half (47%) of all Torontonians think the city is building too little housing, and yet only about a quarter (27%) think their area could handle more.
We need this, but not here. Probably because we’re used to the way things are.
But if you read the interview, you’ll see that the answer, or at least one answer, is to make the conversation personal, and ultimately think critically about, you know, the things we’re used to.
Change starts with not giving the benefit of the doubt to the status quo.
The market consensus right now is that this cycle of interest rate increases has come to an end, and that we should see rates start to come down next year. Having confidence that rates won’t go any higher in the near future is what markets need in order to start making more decisions. So this is, of course, positive. At the same time, I don’t think anyone should expect a return to ultra-low rates. Rates today are still low when viewed historically.
Lower rates are good for levered assets such as real estate, but I don’t think that our industry has fully felt and processed the impacts of higher rates. Unfortunately, I think that things will get worse (in 2024) before they get better (maybe toward the end of 2024 or perhaps in 2025). This is when a “risk-on” approach will return in commercial real estate. A year ago today, I thought 2023 would be the year for this, but as I said yesterday, I was overly optimistic in terms of my timing.
On the residential resale side, I think we will see greater optimism sooner, certainly for the most in-demand cities and areas. There is pent up demand waiting on the sidelines and, once we can get past the current bid-ask spreads and deadlock, I believe we’ll return to a more balanced market in 2024. To be clear, I’m not expecting bidding wars and the like. And because of our housing affordability crisis, I also think the Bank of Canada will be more resistant to lowering rates compared to other central banks. This will help the Canadian dollar.
If you’re a buyer of real estate, I generally believe that 2024 will turn out to be a pivotal year for you. Roughly speaking, you win acquisitions in one of two ways: either (1) you pay the most or (2) you believe in something that most other people in the market don’t. This second approach is harder to achieve in bull markets. But in slower markets, the door is open and history has taught us that it can be the foundation in which great fortunes are made.
As I mentioned yesterday, I agree with the prognostications that hard costs will soften further next year (perhaps even more than 5% on average). Obviously every market is different. But here in Toronto, I just don’t see us returning to the level of construction starts that we have seen over the last number of years.
Since 2021, I have used my hyper scientific Jimmy the Greek Reopening Index to keep tabs on office utilization and the overall return to office. And based on this, 2023 was a positive year. Initially, souvlaki consumption appeared dramatically lower on days like Monday. But I noticed discernible increases as the year went on. However, if you look at actual data, such as what we have from swipe cards, the great return to office seems to have stalled out at around 50%. I don’t think this will hold, though. I continue to believe that of the people who work in offices, most will spend > 50% of each week there. And we will see that in 2024.
2023 was the year of AI. But Fred Wilson makes an excellent point, here. AI is 40+ years in the making. Last year only became the year of AI because a consumer-facing app — ChatGPT — was revealed that captured everyone’s attention. Crypto will eventually have this moment, but it will likely need to marinate a bit longer. Instead, I think 2024 will be the year of augmented reality (AR) and a further blurring of our offline and online worlds. Think digital art, fashion, and other collectibles (such as NFTs).
Right now, autonomous vehicles feel like they’re in the trough of disillusionment (within the hype cycle). There were moments last year where it felt like we were finally moving beyond this phase. But then some very suboptimal things happened. I think AVs are our reality in the next 5+ years, which means that for next year we likely want to be focused on the inputs: vision/LIDAR, battery tech, etc.
Zooming out, we should be thinking about the above two trends in the context of a broader shift toward greater automation. I think it will feel more insidious than immediate (certainly in 2024), but the longer-term impacts are going to be profound for our society. The so-called gig economy is likely to be impacted first. Eventually the overall economy will create new jobs, but we are still going to need to manage this transition toward more automation.
TikTok Shop is where to look for the future of shopping. I think the platform will continue to see strong adoption and ultimately prove to be a dominant e-commerce platform throughout 2024. Amazon, Meta, and others will see this, and try their best to catch up and copy it.
At the time of writing this post, the total crypto market capitalization is about $1.74 trillion. This is down from nearly $3 trillion at the peak of the market in 2021. The recent gains suggest that the so-called “crypto winter” might be over, and so combined with lower interest rates and more real-world use cases, I think that 2024 will be another strong year for crypto. Total crypto market cap at the end of the year will exceed its 2021 peak.
And there you have it. My current thoughts for this upcoming year. I should note that I’m not an economist, analyst, or an expert on souvlaki demand for that matter. But I enjoy writing this post as an annual discipline. It forces me to think critically about the topics that interest me. And in the paraphrased words of Howard Lindzon, it gives me an archive that I can go back to and either cringe at or think to myself, “hey, I could have been a somebody!”
And with that, a big thanks to everyone who has read this daily blog over the last year. This year marked its 10th anniversary. I wish you much success and happiness in 2024. Happy new year!
As per tradition around here, I like to bookend the new year with two posts: a post that revisits my random predictions for the year and a post that talks about what might happen in the year to follow. Today’s post is the former. So let’s see how I did:
I thought the interest rate hikes would come to an end in Q1-2023. But that didn’t happen until the summer. I also thought this would lead to a mild recession in Canada. Technically, we are not actually in one, but according to some, we kind of are.
I thought the real estate sector would start seeing some distress in the first half of the year, and that a new equilibrium would be found in the second half. This proved to be overly optimistic in terms of timing. A lot ended up being on pause for the entire year, and I now think that my forecast was at least a year too early. The sea change is still underway.
Given the overall slowdown in real estate, I felt that construction costs had to see some softening. This did, in fact, happen with some of the “earlier trades”, such as shoring and excavation, and we did see some specific trade pricing, such as concrete formwork, come down by as much as 30%. The smart cost consultants we work with now expect to see overall hard costs come down by a further 5-6% next year in Toronto. This makes sense given construction starts are way down.
With me expecting the interest rate increases to stop in Q1, I thought that pre-construction condominium sales would return in a meaningful way by the spring. While we did see some buoyancy around that time, it was short lived. Sales remained nearly shutoff for the entire year, but for maybe a handful of projects. The more successful projects tended to be outside of the Toronto core and at lower price points.
With respect to home prices in more tertiary/fringe markets, my sense then, as it is now, was that these prices would remain below the peaks for many years. In addition to the upward momentum created by low rates, my view was/is that some of this pricing was the result of a bet on urban decentralization. I don’t think that has played out as many expected it to, so that’s why I think it will be many years before the pricing we saw in early 2022 returns.
The momentum around “expanding housing options” in our low-rise neighborhoods is many years in the making. And a lot of progress was made in 2023. Here in Toronto, we adopted new multiplex policies that now allow fourplexes plus an accessory dwelling (so 5 homes in total) on an as-of-right basis. I continue to believe that this momentum is only going to grow. I also think we will see the arrival of more mixed-use opportunities.
I believed that, broadly speaking, urban transit ridership would remain below pre-pandemic levels for all of 2023. This proved to be the case for most US and Canadian cities. But things are improving. For Canada as a whole, it looks like we’ll see full recovery sometime in 2024 based on this trend line.
I thought 2023 was going to be the year I took my inaugural ride in an autonomous vehicle. Sadly, this didn’t happen. The sector as a whole also saw some setbacks. Hopefully I’ll get a chance next year.
I assumed that Apple would finally release its augmented reality device. And though they didn’t technically releaseVision Pro, they did announce it. So I guess that counts for something. I also thought that 2023 would be a big year for “phygital” goods. Maybe it was. Or maybe it was more of a building year. A lot of people are curious to see how Vision Pro does in 2024. It’s not set up for the mass market, just yet, but I think it will do exactly what it is supposed to once it’s out in the wild.
Finally, crypto. I know that a lot of you like to skip over these posts, but it is something that I feel strongly about. A year ago, though, I was pretty bearish on Solana. Boy was I wrong. Solana ended the year as the best performing major crypto asset — up 933% at the time of writing this. Oops! However, Ether is also +91%, and I continued to dollar-cost average in all throughout the year.
Next up: What will, or more accurately, what might happen in 2024.
