Category: Real Estate

• Weekend link roundup — Ukraine and gas supply to Warren Buffet and Canadian housing supply

  I spent much of this morning reading about and listening to discussions about what’s happening in Ukraine and so, instead of a typical post this morning, I’m just going to share a mélange of links.

  • Monocle 24 Foreign Desk episode talking about Russia’s invasion of Ukraine. Speakers are Ukrainian MP Lesia Vasylenko, former NATO chief Richard Shirreff, Russian journalist Ekaterina Kotrikadze, and Russia expert Mark Galeotti. I found this helpful in better understanding some of the dynamics at play here and what might happen going forward — though, of course, who knows. All of this is both deeply sad and frustrating. [Link]
  • Discussion in Bloomberg Green about the feasibility of the EU shutting off Russian gas right now, as opposed to through a protracted transition. Currently, the EU satisfies about 20% of its total energy needs through gas and about 40% of it comes from Russia. [Link] Also, a chart showing Russian natural gas exports, by destination. [Link]
  • Warren Buffet published his widely read annual letter to Berkshire Hathaway shareholders this weekend. He likes to deliver news like this on a Saturday so that people have time to digest it before the markets reopen on Monday. The overall message was one that we have heard before: BH has a lot of cash (~$144 billion to be exact) and they’re not finding very many compelling opportunities in which to deploy it. [Link]
  • To add to the above, here is a longish Q&A session with Buffet’s partner, Charlie Munger. He continues to be worried about excess money in the system and high inflation. [Link]
  • Construction has been recently completed on a Mies van der Rohe design from 1952 that had been forgotten and buried in some archives. Originally commissioned to be a fraternity house at Indiana University, the building is now the Eskenazi School of Art, Architecture + Design. This is a supremely cool story, particularly for an architecture school. [Link]
  • Yet another simple example by Bobby Fijan on how highly restrictive zoning codes and design guidelines don’t always produce the end results that we might want. Different times and different contexts in this example. But it’s interesting to think about how best to promote design excellence in our cites. Is more creative market freedom the answer? [Link]
  • My friend Randy Gladman, who is senior vice-president of development advisory at Colliers here in Toronto, published an opinion piece in the Financial Post last week about the hidden costs of inclusionary zoning. It is consistent with the ad nauseam discussions that we have been having on this blog for the past few years, but it of course remains an important read. [Link]
  • Steve Pomeroy of Focus Consulting makes an argument in the Globe and Mail that elevated home prices in Canada isn’t primarily the result of a supply deficit. Using recent census data that allegedly shows that housing supply in Vancouver actually kept pace with demand (over how long of a period?), Pomeroy instead points to the other typical culprits: strong demand, low interest rates, unused homes owned by non-residents, and so on. This one likely deserves a dedicated post at some point. [Link]

  Ironically, the post turned out to be wordier than my usual ones.

  2022.02.26

• Opendoor is creating too many rentals

  Steven Levy over at Wired recently wrote a short piece comparing Opendoor’s iBuying approach to what Zillow was doing when it was in the space. (Thank you Robert Wright for forwarding me the article.)

  As we have talked about before, the fundamental problem with Zillow’s model is that it couldn’t accurately predict where home prices were going. It was losing too much money and so they shut down that side of their business.

  The article talks about Opendoor’s approach and how they’ve spent the last 8 years refining a valuation model/approach that is now apparently pretty accurate. That’s positive. But here’s another excerpt that I found particularly interesting:

  There’s one controversial aspect of the business model that Wong didn’t bring up. It appears that when companies like Zillow and Opendoor can’t easily sell a home, the fallback is what’s called an “institutional sale.” All iBuyers sell a small but not insignificant percentage to institutional investors with aspirations of being “mega-landlords.” While the marketing materials of the iBuyers emphasize clean sunny rooms and frictionless transactions, that segment of the market involves hedge funds like KKR and Blackstone snapping up properties for rental, limiting the inventory available for families seeking homes. Even the Biden administration has weighed in on the evils of this trend: “Large investor purchases of single-family homes and conversion into rental properties speeds the transition of neighborhoods from homeownership to rental and drives up home prices for lower cost homes, making it harder for aspiring first-time and first-generation home buyers, among others, to buy a home,” said a recent White House dispatch.

  It’s interesting for two reasons.

  First, these highly tuned valuation models are now being used to scale the acquisition of single family homes. No specific figures are given, but Levy speculates that some iBuyers could be feeding up to 20% of their homes to institutional buyers. Economies of scale are a challenge with this asset class. Here technology is helping.

  Second, I don’t like the tone toward renters in the above White House dispatch: “[It] speeds the transition of neighborhoods from homeownership to rental.” This line in particular implies that renting is perceived as being suboptimal to homeownership and that “speeding”’ towards the former is something that should be avoided for reasons of social good.

  Even the words that are used here suggest biases. A single-family home is called, well, a home. But a rented one is a rental property. I reckon that a home is a home regardless of whether it’s low-rise, high-rise, rented, or owned.

  2022.02.18

• Housing doom loop

  This discussion between Patrick O’Shaughnessy and Marc Andreessen is a great follow-up to my recent post about the productization of housing. Broadly speaking it’s about tech, software eating everything, and the future of the world. But if you skip to around the 15 minute mark, Marc talks about the growing divide in our economy between sectors that are changing rapidly and sectors that are changing slowly.

  Examples of the former include things like computers, media, retail, cars, and a lot of the other stuff that we regular consume. Examples of the latter include things like healthcare, education, and housing (you know, the pillars of the American Dream).

  The noteworthy problem with this divide is that the fast changing sectors are producing things that have been getting more affordable over time. The specific example that he gives is televisions. Think about how much more TV you can get today compared to when they were first introduced.

  In contrast to this, things in the slow changing sectors keep getting more expensive. The same university education is exponentially more expensive today than it was a few decades ago, even though it’s far more important for people to have an education than to own TVs.

  A similar thing can be said about housing. How much has really changed in terms of the way we build new homes?

  One of the common threads across these slow change sectors, Marc argues, is strong government intervention. We restrict supply such that we can’t meet demand. We then respond to higher prices by trying to subsidize demand, but this only drives prices up even further. Because, at the end of the day, we haven’t addressed the underlying issue.

  The result is a doom loop.

  If you can’t see the embedded podcast above, click here.

  2022.02.07

• The productization of housing is set to start in San Jose

  

  Nabr, which I wrote about last year over here, recently announced its first residential project in San Jose’s SoFA district. Named SoFA One, the project is expected to have 125 apartments that will be offered up on a hybrid lease, own, and lease-to-own model. In this latter scenario, the company is saying that people will be able to buy with as little as 1% down. Construction isn’t scheduled to start until later this year, but if you’d like to get early access, you can add yourself to their waitlist, here.

  As a reminder, Nabr is touting itself as a direct-to-consumer real estate company that aims to bring the same manufacturing and supply chain efficiencies that we have seen in virtually all other industries to the production of housing. This, of course, is not a new ambition. The flatlining of construction productivity is well documented, and lots of architects, builders, and entrepreneurs have tried to innovate in this space over the years. But it’s clearly a notoriously difficult problem to solve. So the obvious question here is: What is going to make Nabr any different?

  Nabr is trying to productize housing. To do this, they’re building a vertically integrated process, going deep into supply chains, and trying to standardize their product offering as much possible. In the case of SoFA One, the base building is expected to consist of a CLT loft-style frame that can then be fitted out with various interior offerings. The idea here is that 90% of the build will be a repeatable system but that the remaining 10% is something that their customers will be able to customize — similar to when you’re buying a new car. The car is the same, but would you like black leather or brown leather?

  Continuing with the car analogy, the company is also taking a move out of Tesla’s playbook for how they plan to roll out their products. The plan is to start at the top of the market (like what Tesla did with its expensive roadster) and then move downmarket as they drive efficiencies and cost savings in their delivery process. What they are trying to do is find the compounding innovation that has been present in most industries but that has been noticeably lacking from construction.

  This all sounds great, but we know that buildings have a myriad of unique challenges compared to other products like cars and smartphones. My iPhone is the same as your iPhone, except for maybe the color and the case I put on it. But each development site is unique. Some have a high water table below it and some don’t. Some have adjacencies that will impact how you need to build and some don’t.

  Each jurisdiction also has unique codes and regulations — everything from urban design guidelines to more or less stringent seismic requirements. Some cities have snow and some cities don’t. The list goes on. So what Nabr is going to have to do is create regionalized products with as much repetition as possible. And if they can generally lock the ~90% base building systems and just adjust the balance as needed, maybe that’s enough to do it.

  At the end of the day, our industry is not completely void of innovation. It’s just a bit slow to change. We never used to build skyscrapers, but now we do. So I’ve decided to cast my developer cynicism aside. Today, we don’t have truly productized housing, but maybe we will.

  As an aside, Nabr also recently shared their leaderboard of cities where people want to see a future Nabr building. Those cities are New York, London, Los Angeles, Toronto, and San Francisco.

  Image: Nabr

  2022.02.05

• Some 60,000 condominium units were purchased last year in Toronto

  So 2021 was a pretty good year for condominiums here in the Greater Toronto Area. According to the latest data (Q4-2021) from Urbanation, this is what happened last year:

  • 30,844 new condominium sales. This is a 69% increase compared to 2020, which saw 18,282 new unit sales.
  • Fourth quarter alone saw 8,361 unit sales, which is the best quarter on record according to Urbanation.
  • Unsold inventory dropped 26% year-over-year because sales exceeded the number of new project launches by over 4,000 units.
  • Average price for an unsold condominium unit in Q4-2021 reached $1,322 psf, which is an 18% increase compared to the year before.
  • Resale condominiums also did exceptionally well with 29,880 unit sales — a 49% annual increase.
  • All in all, some 60,000 condominium units were purchased last year in the GTA. Of course, some were ready to be lived in and some were future homes.

  2022.01.31

• Drive until you qualify

  The “drive until you qualify” approach to finding housing that you can afford is a well established practice. Anecdotally, I can tell you that I have friends who are right now looking for a grade-related home under the C$1 million mark. This constraint, as most of you know, is pushing them to the outer reaches of Toronto’s suburbs. But if it were up to them, it would be their preference to stay in the city. According to the “two millennials” behind The Habistat, the average distance of an entry level detached house from the Toronto core (defined as a 3 bed, 1 bath under $800,000) is now 81.8km.

  

  There’s a lot to be said about this. For one, home prices across many/most markets are way up. Earlier this week on the blog it was mentioned that the average price of a US home is up about 19% year-over-year. This is likely unsustainable. We are coming off of a period of easy money policies and at some point things will normalize along with the broader economy. Looking at the equity and crypto markets, it may be happening right now, but I don’t really know. (Fred Wilson wrote a post last year calling this “one of the great asset bubbles of modern times.”)

  We know that the centralizing forces inherent to most cities have been weakened during this pandemic. For periods of time, they were completely off. So it is no surprise that we have seen greater decentralization (sprawl) than what might have ordinarily happened. I was in a (zoom) meeting this past week with somebody who has spent the last two years traveling around South America while working remotely. It sounded like a lot of fun and I was admittedly a little bit envious of her adventures. But as I argued at the beginning of this year, I think most people are going back to offices and this centralizing force will have an impact on real estate.

  Because “driving until you qualify” is a function of an affordability constraint, it tells you certain things about consumer preference, but not all things. What I mean by this is that it tells you that somebody is willing to trade the cost of a commute for more space and/or the housing type of their choice. This has been an easier trade during COVID because the cost of commuting has been relatively — albeit temporarily — low for many people. So less of a discount for distance. But what I think this doesn’t tell you is what true consumer preference would be if all things were more equal and we increased housing supply and options in other areas of our cities.

  At the same time, there’s a very real question of whether the measuring stick in the above chart should be a grade-related detached house? Is this a reasonable expectation in the same way it was for prior generations? I am not a fan of dictating what people should and shouldn’t do. But maybe 100km away from the core becomes untenable. And again, maybe if we increased both supply and options, we would find new housing preferences revealing themselves. I am specifically thinking of those who would prefer to stay in the city, but can’t find something they think is suitable.

  At the end of the day, we can’t ignore the fact that we are profoundly hypocritical when it comes to the delivery of new housing. We acknowledge that we’re in a housing crisis and we acknowledge that we need more affordable housing (both for sale and for rent), and yet we continue to make it systematically more difficult and more expensive to deliver it. The development charges, parkland fees, and many other costs that continue to increase and get applied to new housing are a real worry to those in the industry.

  It is a worry because we’re all wondering how much price elasticity is left in the market. That is, how much more can consumers afford before they stop buying and renting? It is a worry because it means that new rental housing, which has always been a challenge to pencil in our market, is now completely infeasible in many more submarkets. Our solution to all of this is to mandate a certain number of affordable units in new developments. But this is yet another tax on new housing.

  To be fair, the delivery of new housing is subject to countless competing interests. This is arguably why it is such a tricky problem to solve and why there are no easy answers. But that’s what we do around here. We explore new ideas. And maybe, just maybe, there are other options besides just driving until you qualify. Next up (or soon up): A look at the competing interests behind new housing.

  2022.01.22

• Ownership and participation — what cities share with Web3

  

  Here’s a cogent argument by Dror Poleg about how urban economics can be used to explain the evolution of Web3, and also why it’s all a bit of a ponzi scheme, but that when it works, it works.

  His argument revolves around ownership and participation. If you own real estate in a city, you could say that you are both a part owner of said city and a participant. You participate by virtue of living and/or doing other things there, but beyond that you also have a vested interest in the city doing well. Because if the city continues to do well and grow, there should be more demand for real estate, including yours, and that likely means your wealth will increase over time.

  This same force could be said to apply when existing property owners oppose new development. It restricts supply and increases the value of people’s existing “ownership” in a city. It’s kind of like being a company and not issuing new shares so as to not dilute your existing shareholders.

  This connection between ownership and participation is similarly a hallmark of Web3. In the world of crypto, users buy tokens (some fungible and some non-fungible) and those tokens provide access and rights to various things.

  For example, owning tokens might allow you to vote on key decisions affecting the overall organization. And if the organization does well and continues to grow, all token holders should, in theory at least, see their wealth increase. More people will want those same tokens. Ownership and participation.

  Web2 companies, on the other hand, do not typically offer this automatic connection between ownership and participation. That is, of course, unless you’re a shareholder. If you’re just a regular user of a platform like Instagram (which I am), but you don’t own any shares in Meta (I do not), then you’re only a participant.

  If you happen to be a widely followed influencer then you can certainly benefit indirectly from the platform, but you do not benefit from any sort of direct ownership in the organization. Pretty much everything accrues to the house.

  In fact, you also don’t own your followers, from which you derive your indirect benefit. Not to pick on Meta, but if Meta decided that your content was suddenly inappropriate for the platform, perhaps too salacious, then it could choose to close you down and your indirect benefits.

  This, of course, is one of the great promises of crypto and Web3. If you’re a part owner and you have some say in the way things are being run, you can maybe avoid this kind of outcome. And if things really aren’t working out, one should have the flexibility to take their followers and be extra salacious somewhere else.

  We shall see if this is ultimately how Web3 plays out, but the connection between ownership and participation is an interesting one and, if things do end up working out as planned, maybe it can be harnessed to improve our cities. Because we know the problems: inequality, housing supply and affordability, and many others. The system is clearly far from perfect.

  Photo by Adrian Schwarz on Unsplash

  2022.01.21

• Brampton is building a ton of secondary suites

  Here is an interesting housing chart from Ryerson University’s Centre for Urban Research (CUR) using data from CMHC:

  

  What it shows is (1) the number of new housing using created through the addition of secondary suites, such as basement apartments and laneway suites; (2) the number of housing units lost to demolition or “deconversions”, such as when a duplex or triplex gets converted (back) to a single-family home; and then (3) the net new units added over the last three years.

  In looking at the chart, you’ll see that the City of Toronto actually lost about 2,000 units from its existing housing stock between 2019 and 2021. Again, these numbers only consider what’s happening in the city’s existing low-rise residential housing stock. They don’t factor any of the housing supply being delivered through new condominiums and multi-family apartments.

  Still, it’s evidence for something that is perhaps already well known: many of Toronto’s low-rise neighborhoods are losing people. They are losing people because the existing structures are housing fewer residents and they are losing people because we make it difficult to build new housing. We want them to be “stable.” But stable built form doesn’t necessarily mean that things aren’t changing on the inside.

  Now compare this to what’s happening in Brampton (a suburb of Toronto). CUR is calling Brampton the land of secondary suites. Over the last three years, it added nearly 11,000 housing units and was on pace (at the time the data was published) to create nearly 6,000 last year alone (most of which are basement apartments). This is all within its existing housing stock.

  With all of this, I think there’s an interesting question about about how much of this is being driven by market demand and how much of this is being driven by land use policies. There’s obviously demand for expensive single-family homes in Toronto, which is why “deconversions” are happening. But to what extent does this change if/when we become more permissive around multi-unit dwellings?

  I think it depends on how we craft the policies.

  2022.01.14

• What should Airbnb launch this year?

  At the beginning of this year, Brian Chesky, who is cofounder and CEO of Airbnb, took to Twitter to ask about what products, features, and/or services the company should launch this year. The thread is filled with all sorts of interesting ideas and suggestions, as well as many responses from Brian confirming the things that Airbnb is already working on, and so here it is:

  If Airbnb could launch anything in 2022, what would it be?

  — Brian Chesky (@bchesky) January 2, 2022

  If you’re not a Twitter person or don’t feel like going through the entire thread, you can also check out this highlight summary from Skift. They went through and curated the ones that they liked. Some of the common suggestions included tools for co-living and remote working, tools for families and larger groups (like being able to cluster bookings in a particular area), and tools that help you meet locals and other guests.

  There were also a number of suggestions around a full blown travel advisory business, as well as property management services that could help small landlords service and maintain their places. This one seems pretty compelling to me because if your goal is to get as many places/hosts as possible, you probably want to make it as easy and frictionless as possible.

  It also helps to solve the operating scale problem that is inherent with most short-term rentals. If you’ve got one property, it can be costly to manage. But if you’re Airbnb and you have lots of listings in a particular submarket, then you have some economies of scale. Then again, they’re in about 100,000 cities. So maybe that’s a lot to manage. And maybe it’s too hotel-like for a company that is facing regulatory headwinds.

  Do you have any thoughts on what Airbnb should launch this year?

  2022.01.11

• Informal settlements are the desire lines of housing

  Toronto’s new garden suite (accessory dwelling unit) policies are headed to Planning and Housing Committee this week for approval. If you’d like to leave a supportive comment, you can do that over here by clicking “submit comments” at the top of the page. I just finished doing exactly that.

  Given that this is happening, I figured I would share this related article from the New York Times talking about ADUs and informal housing in Los Angeles. I discovered it through this Strong Towns article by Jay Strange. And I love how he refers to informal structures as the “desire paths” of housing.

  Desire paths, for those of you who may be unfamiliar, are the naturally formed paths and lines that get created when people just walk where they want to walk. Usually these are the shortest and/or most logical routes and, by definition, they don’t align with any designed paths or walkways.

  Jay’s point with informal housing is that it is similarly what people actually want to do, but maybe can’t, usually because of restrictive zoning and/or building codes.

  The New York Times gives the example of a family that illegally built an accessory dwelling unit at the back of their house in the 1990s. It was rented to friends and family, and it helped them get through some difficult financial times. But again, it wasn’t lawful.

  According to some researchers at UCLA, Los Angeles County is estimated to have some 200,000 informal units. Many are forced into demolition, but many, like the above example, manage to sneak under the radar because lots of other people are building them and nobody in the community wants to disrupt things.

  Of course, Los Angeles now allows backyard cottages. And so what was once illegal is now not only permitted, but encouraged. Funny, isn’t it? I don’t know if it was the “desire housing” that ultimately made it happen. But it is clear that many people wanted it and they were voting with their actions.

  2022.01.10