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: Real Estate

  • Weekend walking tour

    I had a friend — who I know from architecture school — visiting from Detroit for the weekend, so we did a little building tour on Sunday morning.

    This is the elevated (and half-finished) CIBC Square Park that spans over the rail lines leading into Union Station. The benches are beautiful. On the right side of the second photo are also fire pits that are in the process of being setup.

    This is us nerding out (photo credit to Neat B).

    And this is the view looking down Bay Street from the stairs that lead up to the park. We tried to snoop around inside a little but a security guard asked us to leave.

    This is T3 Bayside — a new timber office building going up on the waterfront. Apparently it is the tallest of its kind in North America at the moment. I am also embarrassed to say that I just learned that T3 stands for timber, transit, and technology, and that it is part of a broader office development strategy that Hines is rolling out.

    This is Tridel’s Aquavista. I’m looking forward to the ground floor spaces getting leased up in this area. All of the ingredients seem to be here for a vibrant waterfront community.

    This is the next Aqua-something project. We all assumed that there must be strict umbrella rules in place.

    This is Monde by Moshe Safdie & BDP Quadrangle (architects) and Great Gulf (developer). It kind of reminds me of 56 Leonard Street (New York) from this elevation. I guess I’m not used to seeing it from the south side.

    Finally, this is Sherbourne Common, which is both a park and an important piece of stormwater infrastructure. It treats stormwater before it gets discharged into Lake Ontario and it also helps to reduce poop from flowing into Lake Ontario as a result of combined sewer overflows.

    It’s fun being a tourist in your own city. We should all do it more often. It makes you appreciate what you have.

  • The fall of manufactured housing

    In 1973, 580,000 mobile homes (or manufactured home as they are now called) shipped in the United States. This represented about 50% of the number of single-family housing starts that year, and about 22% of total housing starts. So they represented a significant chunk of the overall housing supply.

    But following the collapse of the US housing market in 1974, an interesting thing happened. Manufactured homes never managed to reclaim their position in the stack. See above chart. Brian Potter, author of Construction Physics, puts forward a number of possible explanations for this, over here.

    Some have speculated that it was the result of new code changes that ended up increasing costs. Some have speculated that it was because of a new requirement to include a steel chassis on the bottom of every home, which also increased costs, but more importantly stigmatized manufactured homes. It made them seem transient, whereas previously they were installed on permanent foundations.

    There are also some theories that manufactured home production was harder hit during the economic downturn given that they had more fixed plant costs (compared to site-built homes with their variable labor costs).

    But Brian’s current working theory is that it comes down to capital flows. Manufactured homes tend to cater to lower-income buyers and so supply, as the argument goes, has largely depended on “lax lending” practices being made available to them.

    I’m not so sure that this is the only reason though. For one thing, multi-family housing starts have followed a somewhat similar trajectory to manufactured homes. We’ve certainly seen an increase in supply over the last decade, but we’ve never gotten back to that early 1970’s peak.

    And so I wonder: How much of this is actually just the result of the single-family home hegemony? This is arguably what the market has historically wanted (look at the split pre-1973 in the above chart), and so perhaps we simply refocused our attention there and worked to make this housing type as accessible as possible to the masses.

    Chart via Brian Potter

  • A headquarters in the cloud

    Venture firm a16z just announced that it will be “moving its headquarters to the cloud.” At the same time, it announced 3 new offices in Miami Beach, New York, and Santa Monica. These will be in addition to their existing offices in Menlo Park and San Francisco.

    Part of their argument is that hybrid work is weakening the network effects and agglomeration economies associated with being right in Silicon Valley. So they’ve deiced to be virtual, but still have offices where they can “materialize physically” when needed.

    They acknowledge that physical presence is important for developing a company’s culture, building relationships, and helping entrepreneurs (their core business).

    What’s interesting about all of this is that it’s further validation for Miami (Beach). Here is one of the most important venture firms out there saying that when they quickly materialize in real life, they want to be able to do that in Miami Beach.

    It also raises some interesting questions. Because even if the network effects of Silicon Valley are weakening when it comes to tech, this announcement still speaks to the importance of agglomeration economies. These three new office locations were chosen for a reason.

  • The Germania Bank Building at 190 Bowery

    I recently mentioned that it would be nice to be able to buy a five-storey building in Soho (New York) for $70,000. Yes, that was in 1968 dollars. But even in today’s dollars, we’re talking less than $600,000. I would gladly buy a cast-iron five-storey building in Soho for that price today if it were somehow possible.

    In response to this post, a reader sent me this (thank you), which is another great example of an artist buying an old buying in New York for what is clearly an absurdly low price. The artist is photographer Jay Maisel, and the building is The Germania Bank Building at 190 Bowery.

    Jay bought the six-storey building in 1966 for $102,000. He then used it as his residence, a studio, and as a place to collect a hell of a lot of things. Though at one point he also rented out some of the other floors to artists like Roy Lichtenstein.

    It is alleged that most people thought the building was abandoned. But this was obviously not the case. Jay sold the building to RFR Holdings in 2014 for $55 million. And in 2019, streetwear brand Supreme opened up in the bottom.

    Today, I understand that Web3 things are also happening in the building. And who knows, it might be the case that we’ll be reading about some of them, in a similar kind of way, fifty years from now.

  • State-to-state net income migration from 2019 to 2020

    Here is an interesting chart from the WSJ showing how much net income migrated to the state of Florida between 2019 and 2020:

    I’m not sure what the exact dates are for this dataset, but it seems to again suggest that this migration was already a trend before the pandemic happened.

    Either way, Miami is red hot and the continues to lead the US in residential rental rate growth. But all of this growth is now apparently starting to catch up to the city. Here is just one example from the same article (though developers here in Toronto would gladly take this sort of timeline):

    Right before the pandemic, when he moved to Miami, he said it took no more than four months from when he submitted development plans to when he got city approval. Now, with the number of projects swamping Miami Beach’s staff and resources, that same process takes nearly a year, Mr. Curnin said.

    This frenetic run-up is also causing some in the city, including Barry Sternlicht of Starwood Capital Group, to pause:

    “Everyone and their cousins are looking to build a building here,” he said. “I’m getting nervous.”

    Miami has historically always been a boom and bust kind of market. I don’t know if this is one of those times, but there’s clearly no denying the allure of palm trees, warm winter weather, and no state income tax.

  • Happiness vs. satisfaction

    I have heard from some of you that you don’t like it when I write about crypto and NFTs. This personal blog is supposed to be largely about city building after all. So today I thought I would write about crypto and NFTs. More specifically, this podcast episode, which I watched last night.

    It’s with Marc Andreessen and Chris Dixon of the venture firm a16z, and it’s actually less about specific things like NFTs and more about the reinvention of the internet in general. Why I found it particularly interesting is that Marc co-invented the first widely-used web browser. Anyone remember Netscape?

    So he was around for what we are now calling web 1 and he is around for what we are today calling web 3. And there are lots of parallels between then and now. Similar to today with crypto, the early internet had lots of critics and lots of people who thought it was dumb and that it would never amount to much.

    Oops.

    Here are a few other thoughts and ideas from the podcast that I found interesting (some of them even relate to city building):

    • No matter how many times we have seen the same movie, humanity seems doomed to repeat the same mistakes when it comes to, among other things, embracing new ideas and innovations. I agree with Marc in that part of this is generational. Younger people are often more open to new ideas because they view it as a way for them to establish themselves and make their mark on the world. Whereas older people (established people) often view new ideas and change as a threat to their current position in the world.
    • Marc drops a number of books throughout the talk and one of them is The Mystery of Capital — Why Capitalism Succeeds in the West and Fails Everywhere Else. This is a well known book by Hernando De Soto and the big idea is that property ownership and property rights are really the fundamental ingredients in our modern world. People need to know that if they hold title and invest money into something, it’s not just going to get taken away by someone. And it is this underlying legal structure that has allowed people to leverage property into wealth.
    • This is a fascinating observation in its own right, but it also relates to crypto. Hear me out. Chris Dixon makes the argument in the episode that web1 democratized information (anyone can search for stuff), and that web2 democratized publishing (anyone can share stuff through platforms like Twitter or the blogging platform I’m writing on right now). He then goes on to argue that the promise of web3 and crypto is really to democratize ownership of the internet. Anyone can buy crypto tokens.
    • Why might this be a big deal? Well if property rights in our offline world are a fundamental ingredient to modern society, it seems logical to me that property rights in our digital world(s) might also be equally transformative. And this is precisely one of the things that blockchain technologies enable for the very first time.
    • Finally, on a mostly unrelated note, I liked Marc’s comparison of happiness vs. satisfaction in life. Happiness, he explains, is like getting an ice cream cone on a hot summer day. The first and second feel great, but after that you move on. Satisfaction on the other hand is enduring. It’s the feeling you get from working on something really challenging and then finally succeeding. And that’s exactly how I feel about real estate development. There are lots of shitty days and lots of grinding. But in the end, I do feel very satisfied.

  • The pre-meeting is often better than most panel discussions

    When you’re preparing for a panel discussion, one of the things you usually do is have a pre-meeting with all of the participants. The purpose of this meeting is, of course, to get to know everyone and decide on what you’re going to talk about. Everything then gets buttoned up and you have the actual panel.

    But one of the things I’ve been feeling lately is that oftentimes the pre-meeting is more interesting than the actual panel. And that’s because everyone is more relaxed and everyone is engaged in a genuine discussion that hasn’t been pre-meditated. Nobody wants to hear boring and overly-scripted answers. Natural and free-flowing discussions are so much more engaging.

    So I’m going to try and keep this in mind and not put on a sucky panel next week at the land & development conference (which, by the way, will be in person). I’m moderating a panel on innovations in project design, delivery, and building operations. If you’d like to join, you can register over here.

  • Housing starts up 63% in Calgary

    The Canada Mortgage and Housing Corporation (CMHC) just published its latest housing supply report for Canada’s 6 largest city regions (downloadable over here).

    One figure that stands out is the increase in housing starts in the Calgary CMA — it was up almost 63% last year compared to 2020. This is a positive indicator for that market.

    It’s also worth mentioning that Calgary’s supply is more evenly split between low-rise and apartment housing. This is in contrast to markets like Toronto, where 3/4 of all new housing is now “apartment”, and in Montreal, where the percentage is even higher.

    My view is that it’s time to get more granular with our reporting of higher density housing. In the above example, we are showing 3 categories for grade-related housing and only 1 for anything outside of that.

    This is our national bias toward low-rise housing coming through.

  • Vancouver proposes empty stores tax

    When you buy commercial real estate, you are buying a stream of future cash flows. Sometimes these cash flows are already in place and sometimes these cash flows are based on future expectations. Either way, as a general rule, it is better to have more rather than less rent.

    But there are some short-term exceptions to this rule. If there is a higher and better use for your property and you’re planning to redevelop it, you probably don’t want to encumber the asset with any leases. Certainly not with any long-term leases. So vacant is likely better.

    Another possible short-term scenario might be that the market has moved and you’re no longer able to command the same rents. But instead of adjusting your expectations, which would negatively and immediately impact the value of your asset, you decide to hold out in the hopes that the market will return.

    Yet another more dire scenario could be that the market has moved entirely and you’re no longer able to find tenants at any price. But this isn’t a choice and so I wouldn’t consider it an exception to our more-rent-is-better rule. This is a systemic kind of problem.

    I am going to assume that for Vancouver to propose an empty stores tax the belief is that scenario two, or some permutation of it, is what is playing out on retail streets. It’s not that the tenants aren’t out there (because of changes in the retail landscape), it’s that landlords are greedy and want too much money.

    But my view is that this proposal ignores (at least) two things.

    One, you can’t punish and tax your way to vibrant urban streets, particularly if something structural is going on in the market. If this were the case, the way to revive a declining post-industrial city would just be to tax any vacant buildings.

    And two, the fundamental value of commercial real estate is, again, determined by rents. So sooner or later the rule of more rent being better than less rent will take hold. Vacancies are not in anyone’s best interest.

  • Tokenized real estate and public databases

    One of the ways that you can turn a traditional real estate company into more of a web3 company is talk about how you’re going to tokenize the ownership of real assets. But what does that even mean and how would it work?

    Here is one example that I recently discovered (but of course there are countless others and I’m not suggesting that you should use their product). Bricknest is a startup that is focused on buying vacation apartments in popular tourist destinations. They then split the ownership into 365 non-fungible tokens that live on the Solana blockchain.

    Each token is intended to correspond to a day. And so if you own 1 token, you own 1/365 of the asset and you get 1 day. You can choose to either use it yourself on this day, or rent it out and get the rental income sent directly to your crypto wallet. If you own all 365 tokens, then it would be similar to you just owning 100% of the asset.

    The obvious question is how is this different from, say, fractional ownership, which can be similarly found in high-demand vacation spots? And the dumb answer is that, well, tokens exist on a blockchain and fractional ownership shares do not. So I guess the real question is whether or not tokens will make this ownership model any different.

    There is a long history of trying to democratize the ownership of real estate. In fact, this was the general idea behind REITs when they were created in the 1960s. So again, we are back to the question of whether tokenization will be any different from what we already have.

    But I think that most people are asking this same question of crypto/web3 in general — why does all of this matter? And a big part of the problem is that crypto is generally hard to explain. One of the best explanations that I have come across is this one here by Albert Wenger.

    Simply put, most internet companies today can be thought of as large privately controlled databases. Instagram, for example, is a database of all of our photos (among other things). But because it’s Instagram’s database, they get to decide what can be done with it. And naturally they are going to do what it takes to maintain their economic moat.

    Blockchains are similarly databases. And right now they’re not particularly good databases. However, the key differences are that (1) they are public, (2) they are not controlled by a single entity, and (3) anyone can read and/or write to them. And so they directly attack the thing that gives many companies today their economic advantage.

    Does this mean that tokenized real estate is the future? Does it make a difference that rental contracts can be programmed into the blockchain so that distributions are automatic? It still feels too early to tell. But I do think that most people are underestimating how disruptive a seemingly small change like this might be.