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

  • Toronto housing market has slowed — do you care?

    If you’ve been following the Toronto housing market and/or following any panicky resale agents/brokers on Twitter, you’ll know that things have shifted over the last few months. Here’s what broker (and my friend) Christopher Bibby had to say about the market in his most recent newsletter:

    As anticipated, April has ended up being one of the defining months of the 2022 real estate market. With the recent fragility we are seeing, it is clear that the market peaked in February. In fact, the Toronto Real Estate Board, in its most recent Market Watch, claims that month-over-month prices could be down by 2.6%—which is very likely. TREB also indicated that the overall number of year-over-year transactions in March was down by approximately 30%. I deferred the release of this newsletter because weekend activity positively altered some of my previous commentary. The key takeaway, however, is that sentiment has shifted in our marketplace.

    But let me paraphrase the conclusion of Bibby’s newsletter with two words: who cares? If you think that Toronto (or some other city) will remain an important global city by 2025, 2030, or even 2040, you really shouldn’t be fussed by what the market is doing over the span of a few months.

    Moreover, I can tell you that my least favorite time to go out and buy real estate is when everyone else is submitting silly offers and clamoring to buy whatever they can find.

  • Toronto proposes at 49% increase to development charges

    The big news this week for Toronto city builders is that the city has put forward a proposal to substantially increase development charges. Here’s a tweet storm that I published earlier today on the topic, and here’s a summary of what the new fees might look like:

    To translate this into a specific example, let’s assume that you’re building a 300 unit apartment building with 180 one bedroom suites and 120 two bedroom suites.

    Under these proposed DC rates, this would translate into charges of about $9.6mm for the one bedroom suites and $9.8mm for the two bedroom suites, totaling over $19.4mm in DCs alone. But keep in mind that there would be other charges on top of this for parkland dedication, community benefits, and a bunch of other things.

    When our cost consultant ran the numbers back in 2019, the estimate was that about a quarter of the price of a new condominium in Toronto was going to government fees and taxes. But with the above increase and with the introduction of policies like inclusionary zoning, I am sure that the number is higher today.

    These are easy fees to hide. Most people don’t know they exist. And a lot of people don’t seem to like new development and new housing. Property taxes on the other hand are highly visible and highly sensitive. So that tax tends to be left alone, especially by comparison.

    But these increases are hugely impactful. It means that developers across the city will now need to start looking at increasing rents and prices in order to try and offset it. If they can’t, they won’t build. And if they can, it will mean that the housing that does ultimately get built will be that much more expensive.

  • A mapping of US rental housing rents, scraped from Craigslist

    This is an interesting way of seeing rental housing rents (national scale). And there’s a lot that you can glean from a mapping like this. But it’s also interesting in that what you are seeing here is a visualization of some 11 million Craigslist rental housing listings (taken from this study). The authors refer to it as a “nontraditional source of volunteered geographic information”, and they argue that it’s probably more granular and real-time than what is typically available when it comes to rental housing. That sounds right to me.

  • Miami rents increased 55.3% on a year-over-year basis

    All of the talk of people moving to Miami over the last two years is certainly coming through in the numbers. According to this recent rental report by Realtor.com, residential rents in the Miami-Fort Lauderdale-West Palm Beach metro area increased 55.3% on a year-over-year basis (as of February 2022). And the next 2 metro areas on the list are also in Florida. This is compared to a 17.1% increase for national rents, which is quite a bit lower, but still a massive increase. These are clearly unsustainable numbers and eventually things will settle down. How exactly things settle down is yet to be determined. But for right now, the above figure feels to me like a pretty good answer to the following question: If you had the flexibility to work from anywhere, where would you go? Somewhere sunny, I guess.

  • Location always matters

    Well this is interesting, yet not surprising: According to RBC’s annual “Home Ownership Poll”, three out of every five respondents (so nearly 60%) said that location is more important than buying a larger home. Now, there’s only so much you can glean from a single survey question, but the overarching sense is that people’s home-buying attitudes are now starting to revert back to pre-pandemic levels.

    Other evidence includes how quickly urban residential rents/prices have bounced back and, in many cases, now exceed their pre-pandemic levels. Below is a chart from the WSJ showing residential net-effective median rent prices in Manhattan. The low came in November 2020 when the median rent price hit $2,743 per month. But today it is well over $3,500, which is the highest it has been in a decade.

    Certain aspects of how we will continue to live and work in our cities is admittedly still evolving (see my recent post on office utilization). But part of our pandemic narrative was that location was no longer going to matter, or at least not matter nearly as much. New York City, to give just one example, had died forever. But that was obviously bullshit. And what we are seeing in the residential space is an important leading indicator. Location always matters.

  • Per buildable square foot

    Let’s say that you were comparing and thinking about buying two different pieces of development land. Both are about 25,000 square feet in size, but one is priced at $5 million and the other is priced at $50 million. If you were to calculate how much you were paying per square foot of actual dirt, you might conclude that the $5 million parcel is the cheaper one.

    But as we have discussed many times before on the blog, the value of development land depends on what you can build on top of it. So what matters more is the price per buildable square foot. And to calculate this, you simply divide the purchase price by the allowable gross floor area (GFA) on the site (or, in many cases, the GFA that you believe is likely achievable on the site).

    For example, if you could build 50,000 sf on the $5 million parcel and 500,000 sf on the $50 million parcel, both sites would have a price per buildable square foot of $100. This makes them, in theory, equal, assuming all other things are equal. That said, one could argue that 50,000 sf is maybe too small of a build, and so the $50 million lot is actually a better buy because you can hope to achieve some economies of scale.

    Of course, if you could build even more than 500,000 sf on the one lot, then your price per buildable square foot would come down even further and that would make it the more attractive site (again, assuming all other things are equal).

    There are a lot of other details to consider when evaluating a development site. Maybe the $5 million one actually has a bunch of environmental contamination that will cost you an additional $5 million to clean up ($10 million in total costs). In that case, your price per pound would actually be double the other lot, assuming the other parcel doesn’t have any contamination or other factors that might impair value.

    Permitted uses also greatly affect value, with residential often being the most valuable kind of urban density. And so this is ultimately why you need to create a full and detailed pro forma in order to properly evaluate a new development opportunity. But even before you get to that stage, you can tell a lot with just the price per buildable square foot. If you know the market, you’ll usually know right away if it’s too high or if it’s an opportunity that may be worth exploring.

  • Playful parkades

    This is perhaps the wrong post to be writing right now with gas prices where they are, but lately I’ve been thinking about parking garage designs. We have talked a lot about parking minimums and other related topics on this blog, but let’s put all of these aside for today and assume that parking garages are a thing that will continue to exist in our cities.

    Generally speaking, parking garages are fairly utilitarian spaces. They store cars and they usually aren’t that nice. And in the case of public garages, they often smell like urine. But there are some extraordinary examples out there. Miami immediately comes to mind as a city with some pretty cool garages. I mean, when you have one designed by Herzog & de Meuron (1111 Lincoln Road) that is usually a pretty good indicator.

    When I was there in January, we went walking one night through the Design District and we ended up on the roof of “Museum Garage” to take some photos and take in the views. Once we got there, we found people doing everything from eating dinner to filming TikTok videos. Great spaces attract people. It also helps when all of your parking is above-grade, which is the case in Miami.

    Here is another example from Sydney (also pictured above). In this case, it’s a residential parking garage and Craig & Karl were hired to create a colorful geometric mural. Garages are a perfect place to be a bit more playful and have some fun. I think we should do more of this.

    Photo via Craig & Karl

  • Florida proposes stricter condo rules

    In response to the tragic collapse of the 12-storey Champlain Towers South building in Surfside last year, the state of Florida is set to pass new stricter condominium rules around inspections and reserve funds. And according to the WSJ, the requirements would be some of the strictest in the US.

    Under the House bill that has already passed, condominium buildings that are three or more stories would need to be fully inspected and recertified once they are 30 years old. For buildings within 3 miles of a coast (salt water is impactful), the requirement would be 25 years old. Following this recertification, the buildings would then need to be inspected every 10 years. Under the proposed Senate bill, the inspection process would start after 20 years and be required every 7 years. In both cases, the reports that come out of these inspections would need to be submitted to all unit owners and to local building officials.

    If approved, these rules would have an immediate impact on the market given that about 900,000 of the approximately 1.5 million condominium units in Florida are older than 30 years old.

    But is all of this enough? I think the devil is in the details.

    Under the House bill, unit owners would no longer be able to waive the collection of certain building reserves. But under the Senate bill, the requirements for waiver would simply be tightened. How tight? In all honesty, I don’t know the specifics. I haven’t read the bills. But the collection of reserve funds is paramount. And after reading the above WSJ article, I can’t help but feel like these new policies might still be less stringent than what we already have here in Ontario.

    Here are two excerpts from Ontario’s Condominium Act:

    Put more simply, all buildings and structures need to have regular inspections. Materials and systems naturally depreciate over time and so the point of a reserve fund study is to determine (1) what will need to be repaired/replaced, (2) when it will need to be repaired/replaced, and (3) how much it might cost. You then need to ensure that the money is in place to carry out the execution of said study. In all cases, there should be zero compromises around life safety.

  • Office utilization update

    Some of you might remember my Jimmy the Greek Reopening Index. It has become my crude way of measuring office utilization in Toronto’s CBD. Based on this I can tell you that utilization is firmly up this week. Most lunch spots in Toronto’s PATH are back to having lines and the people working at these fine establishments are saying things like “finally” and “the people are back.” All of this is, of course, anecdotal. And I am not saying that we are back to pre-COVID levels. But there was a clear and meaningful uptick this week, which happens to coincide with the lifting of a number of COVID restrictions.

    Now let’s consider some actual numbers. I don’t know what they are for Toronto’s CBD (if you do, please share them in the comments below), but Kastle Systems has what seems like accurate “office swipe card” data for the 10 largest US cities. What this data tells us as of the end of February 2022 is that there has been a “return to normal, but not to the office.” Compared to 2019, NBA games are at 93.3%, movie theater ticket sales are at 89.4%, TSA checkpoints are at 87.8%, OpenTable reservations are at 87%, and yet office utilization sits on average at 36.8%.

    The “best” performing city is Austin with an average utilization of 53.4% as of February 23. And the “worst” performing city is San Francisco with an average utilization of 26.1% as of the same date. This makes intuitive sense given that tech has been pretty much leading the charge when it comes to remote and flexible work. Still, things are heading up and to the right. And as I argued at the beginning of this year with my annual predictions, I continue to believe that the majority of office workers will return at some point. Offices aren’t going away. And I think they’re going to remain the dominant place of work.

    Chart: Bloomberg

  • The world’s top performing luxury residential markets

    Knight Frank just released the 16th edition of its Wealth Report along with the disclaimer that, with everything going on in Ukraine right now, this outlook is of “little relative importance” and kind of doesn’t matter in the grand scheme of things. In any event, it includes the latest edition of their Prime International Residential Index (PIRI 100), which looks at the annual % change in luxury residential prices around the world. The chart is interactive, but I screenshotted (above) the top risers and fallers. Toronto is 4th in the Americas and 7th globally with a 20.3% year-over-year increase. Miami is also no surprise and came in 4th globally. The top three cities were Dubai, Moscow, and San Diego. Thankfully though, the number two city is in serious jeopardy right now and I suspect that its position will look quite different next year. Money will go where it feels safe and secure.