Category: Real Estate

• The next hot thing

  When I was in grad school at Penn I was active in two clubs: the real estate club and some tech/entrepreneurship club (I can’t remember the exact name). These were two areas that I was interested in and so I wanted to hang out with people who were also interested in these things and I wanted to hear from experienced people who were active in these fields.

  At that time, which was before the Great Recession, the real estate club was bigger and more active than the tech club. I think it was something like 3 to 1. But I remember one of my professors telling me that participation across the various clubs generally ebbs and flows. Before the dot-com bubble, the tech club was where you wanted to be. But that asset bubble had burst, and so people had moved onto real estate, which, at that time, was in the midst of creating its own asset bubble.

  What we students were effectively doing — by way of deciding where to spend our time — was chasing the next hot thing. They were chasing where they thought they’d be able to make the most money coming out of school. There is, of course, nothing wrong with this. The pursuit of profit is fundamental to capitalism. But at the same time, I think it’s crucially important to have some conviction.

  Right now we are going through another cycle. Real estate was hot last year and it is not right now. Tech was hot last year and it is not right now. NFTs were hot last year and they are not right now. The list goes on. But if you like these things and if you have some conviction, is it really the time to move onto the next club? You may find the opposite to be true. Now is actually the time to ramp up participation.

  2022.11.19

• Modern luxury

  “Luxury” is an overused term in the world of real estate. If you call everything luxury, then ultimately nothing is luxury, right? But let’s ignore this particular debate for right now. I was recently in a meeting where our interior design team — Mason Studio — made what I think is an important distinction between “classic luxury” and “modern luxury.”

  Classic luxury is old school luxury. It is the kind of luxury that says, “you can’t come in here unless you look like this.” And I’m sure that all of you can think of brands that might speak to you in this way.

  But I think this idea of luxury is quickly changing. Perhaps a good example of “modern luxury” is the recent collaboration between RTFKT — the web3 digital fashion company that Nike bought last year — and high-end luggage company RIMOWA.

  This, to me, is a brilliant collaboration. It is a sign of what’s to come — an ongoing blurring of our physical and digital worlds — and it is a less fussy kind of luxury; maybe I’ll mint an exceptionally expensive piece of luggage, maybe I’ll mint a digital collectible, or maybe I’ll just hang out on Discord.

  Now, one could argue that nothing has really changed and we’re just talking about different kinds of trappings. But that doesn’t feel exactly right. There is something about modern luxury that feels more inclusive to me. And I think that is why it is quickly becoming the dominant form of “luxury” — whatever that means.

  2022.10.27

• Real estate marketplaces are not like NFT marketplaces

  A lot less people are buying NFTs today compared to last year. But that’s okay, everything will be fine. So let’s talk about some of the characteristics of NFT marketplaces and how they differ from real estate marketplaces today:

  • When you create or “mint” an NFT, you are doing so on a particular blockchain, such as on the Ethereum blockchain. You might do that minting through a marketplace like OpenSea, but at the end of the day, your NFT now lives on a public blockchain and not on private OpenSea.
  • What that means is that if OpenSea suddenly decides to do something bad that you don’t like (I am in no way picking on OpenSea), you can simply stop using them and just access and trade your NFTs from some other marketplace. As I understand it, there are also lots of smart people working on blockchain interoperability.
  • Once you have your NFT on a blockchain, you can choose, through various applications, to list it for sale, run auctions with a reserve price, or just hold it and do nothing, among other things. You can also set it up so that any proceeds from a future sale are automatically split with someone else — maybe they are a co-creator of the NFT that you minted.
  • Whether you’ve decided to list your NFT for sale or not, there is also the option for the market to make unsolicited offers on it. It is up to you whether or not you’d like to accept any of the offers, but in all cases the offers you receive are made fully public to the market. As a bidder, it’s easy to hide behind “burner” wallets, but you generally can’t hide real intent.
  • If/when you do sell, that sale becomes public record for all to see. The blockchain never forgets and it doesn’t matter which marketplace you decide to use.

  In some real estate markets, it’s fairly easy to see the sales history of a property. But in other markets, such as here in Toronto, it’s still fairly gated. Generally speaking, you are accessing a controlled database and so you need to abide by whatever rules might be in place. If you want to build a new application on top of your local real estate board’s database, that is going to be tricky and it will likely involve more than a few lawyers.

  It is, however, fun to imagine how this might all change with public blockchains. And I think that NFT marketplaces do offer some clues in terms of what could happen to our real estate markets.

  Consider this potentially unexpected scenario:

  In the world of NFTs, there is something known as creator royalties. And they function just as you might expect. As the creator of an NFT, you can set a royalty % that gets paid to you each and every time the NFT is sold. And because the blockchain never forgets, you never have to worry about enforcing and collecting your royalty fee. It just gets automatically distributed.

  Now imagine a world where people like the architect and the developer of a new property are able to attach their own creator royalties. This would be massively cumbersome to administer today, but it’s entirely straightforward once you’ve got everything on a blockchain. And it would be a huge boon for business models that today do not benefit from reoccurring revenues.

  In theory, it might also better align interests, because if you’re a “creator” who wants a good solid royalty fee stream, maybe you’re a little more motivated to do good long-term work. Who knows? This model might never actually happen, but I do think it is indicative of the kind of changes and innovations that we might see as crypto continues to filter through the economy.

  2022.10.19

• TikTok wants to open warehouses

  Last week, Axios revealed that TikTok is looking to hire a bunch of people that can help the company build out fulfillment warehouses and an entire e-commerce supply chain system for its users. All of this was discovered through various job listings that the company has posted to LinkedIn.

  Broadly speaking, this is I think interesting for two reasons. Firstly, it is an atypical approach compared to other social networks. Instagram allows people to sell stuff via its platform, but it’s done through an asset-light approach. What TikTok is doing is more Amazon meets social. (Though this is not my area of expertise and I’m going to need someone like Ben Thompson to do a deep dive into TikTok’s business model.)

  Secondly, I like to think about the physical spaces that service our online activities and what any changes might mean for our cities. Today if you order something from UberEats, it may come to you from a ghost kitchen that is servicing multiple restaurant brands and various food apps, and has no front-of-house operations. Tomorrow if you order something you see on TikTok, it may come to you from one of their warehouses.

  This is not any different than how Amazon works today, except for the fact that TikTok has this incredibly powerful and sticky social layer. If you take this to an extreme, it’s almost as if our physical spaces are slowly becoming back-of-house providers to front-of-house spaces that only exist somewhere online. Who needs Zuck’s metaverse, we may already be living in one.

  2022.10.16

• [Podcast] Making development work

  I was recently a guest on Aaron Cameron and Adam Powadiuk’s Commercial Real Estate (CRE) Podcast. This is a podcast that they have been doing since 2016 (and it’s “powered” by First National Financial). In this episode, we spoke about making development projects work in this current environment, as well as a bunch of other things. If you’d like to have a listen, click here. It’s about 53 minutes.

  Thanks for having me on your podcast, Aaron and Adam.

  2022.10.11

• 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.

  2022.09.27

• 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

  2022.09.24

• 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.

  2022.09.20

• The average wait time for a rent-controlled apartment in Sweden is now over 9 years

  I’m not all that familiar with Stockholm’s housing market, but according to this recent article, it would appear that, like most big cities, there isn’t enough affordable housing to go around. This is despite the fact that everyone in Sweden is technically entitled to it.

  As of December 2021, there were 736,560 people (in Sweden) in the queue for a rent-controlled apartment, resulting in an average wait time of about 9.2 years. So basically what you want to do is put yourself on the list as soon as you turn 18. And then hope that at some point in the future you’ll be granted an affordable apartment.

  Given this dynamic, it makes sense there would be a long waitlist. If everyone is entitled to a rent-controlled apartment, you are effectively giving people two options: pay the market price or put yourself on this list, wait for a decade, and then pay less than the market price.

  Why wouldn’t you at least try to pay less?

  The problem with this approach is that supply will almost certainly never keep pace with demand. It also appears to be fuelling a robust (and I guess illegal) secondary sublet market. Because if you have a below-market contract that is yours to keep forever and that lots of other people want, you have a valuable asset.

  Getting housing right certainly isn’t easy.

  2022.09.15

• Redfin experiment shows how home buyers react to flood-risk data

  This is a fascinating little experiment:

  From Oct. 12, 2020 to Jan. 3, 2021, Redfin ran an experiment on 17.5 million of its users across the US. As prospective homebuyers entered the site, Redfin assigned them randomly to either a group that was shown flood-risk information on each property or a group that was not.

  The flood-risk scores came from First Street Foundation, a climate and technology nonprofit that works to make climate hazards more transparent to the public. In June 2020, First Street published the first public maps that revealed flood risk for every home and property in the contiguous US. 

  First Street scores properties on a scale of 1 to 10 based on the likelihood that they will flood in the next 30 years (which is assumed to be a typical mortgage term). A score of 1 means the property has “minimal” risk and a score between 9-10 is considered “extreme” risk.

  So what happens once you start showing people flood-risk information? They, not surprisingly, start systematically looking for safer properties. After one week of users being exposed to this new information, prospective buyers who were previously looking at “extreme” homes started looking at homes that were about 7% safer.

  After 9 weeks, these same “extreme” home buyers were looking at properties that were about 25% less risky. And for some buyers, in particular those working with a Redfin agent or partner, their flood-risk tolerance dropped by over 50%. (Embedded in this data might be a sales pitch for working with a knowledgeable Redfin agent or partner).

  Also interesting is the fact that below “severe” flood risk (a score between 7-8), there was very little change in behavior. “Major” flood risk, it would seem, isn’t all that concerning to most buyers. It needs to be “severe”. Nevertheless, it is noteworthy that people will in fact make behavioral changes when presented with clear climate-risk data.

  2022.09.12