Category: Real Estate

• Returning to an office-centric culture

  

  Earlier this week, Amazon announced that it plans to return to an “office-centric culture” as its baseline. Its rationale was that being in an office allows the company to better “invent, collaborate, and learn together.” All of this was laid out in an announcement that was distributed to its teams globally. On the other end of the spectrum, Twitter continues to double down on working from home. The company, which is currently hiring, is even trying to target talent that may be disgruntled by the fact that their current company is planning for them to return to the office. Two very different approaches. So which one is right?

  This is, of course, a great debate right now and the right answer probably depends on a myriad of different factors, some of which are likely specific to the company. Dror Poleg has been trying to think through this problem with something he calls the talent equation (because it’s all about talent). It works like this: level of in-person interaction x overall size of talent pool = innovation and financial success. The basis behind this equation is pretty simple. In-person interaction is great for business. This much we know. But you also need the right talent interacting. Allowing remote work is one way of expanding the size of your talent pool. But again, you do this at the expense of in-person interaction.

  In-person interaction is what makes cities the great organisms that they are. And I believe firmly in this side of the equation over the long-term. Even right now I find that when I go into the office, my call and Zoom volumes go down dramatically and I have more time to think, collaborate, and do, you know, actual work. This is because many interactions don’t require a Zoom meeting when you’re in the office. You stop by someone’s desk. You ask a thing (usually pretty quickly). And then you go off and action that thing. But I also acknowledge that for some companies, access to the right talent — and lots of it — may be a real challenge, particularly in smaller cities.

  Like Amazon, I am a supporter of office-centric work cultures. But I do think that Poleg’s talent equation is a useful way to think about this debate right now.

  Photo by Shridhar Gupta on Unsplash

  2021.04.03

• The views from Capital Point

  

  

  These are two photos taken from the roof of our Capital Point project (office strata) in Burnaby, BC. They represent the views from about 19 storeys up. In the first photo you can see downtown Vancouver and the mountains that surround it. And in the second photo you can see the Metrotown town center (second largest in the region) and the SkyTrain station that services it. It’s certainly hard to beat British Columbia on a beautiful sunny day.

  2021.03.29

• Accessory dwelling unit (ADU) supply in California

  This recent article by Bloomberg CityLab, about “how California set off a backyard apartment boom,” has some interesting stats about the extent in which accessory dwelling units (ADUs) are quickly being adopted and delivered across the state.

  For one, a majority (87%) of jurisdictions have enacted at least one ordinance related to ADUs, though many have several. These policies might include everything from by-right zoning to some form of financial assistance if you build. Here is a graph showing the cities and counties that have created ADU ordinances since 2013:

  

  All of this has translated into housing supply. In 2019, California homeowners brought over 12,000 accessory dwelling units to the market (based on permits issued). Though a relatively small quantity based on the state’s overall housing deficit, this number is surely growing thanks to policies and programs, like this one here, that are working to remove the barriers to building.

  

  For the full CityLab article, click here.

  2021.03.26

• To yield or not to yield

  If you’re building a multi-family rental building, you’re almost certainly building it “on spec.” What this means is that you’re building an empty building and, once it’s done, you will then work to rent it out. (Nobody rents an apartment years in advance.) In this scenario, you will know what your costs are once the building is complete, but you won’t really know what your revenue will be until you start leasing. If demand is strong and the market has moved since you started building, maybe your rents will be a pleasant surprise. If the market has moved in the opposite direction since you started building, your rents might be an unfortunate surprise. The laneway house I recently completed is an example of a spec rental building. I built it without a tenant, but I assumed that I could rent it out upon completion. That proved to be true, but mind you it was only one unit. So it was relatively low risk.

  If you’re building an office building, it is bit more common to have some pre-leasing in place. Early on in my career, I worked on an office development where we started construction with about 25% of the leasing complete. This wasn’t enough for construction financing, but we saw that demand was strong and we needed to start right away in order to meet our lead tenant’s occupancy timing. And so we made the decision to go. We ran on equity for the first bit of construction, but once we completed enough leasing we were able to place our construction facility and lower the project’s overall equity requirement. We took a chance and everything ended up working out okay. But it could have not worked out. What would have happened if a pandemic hit after we started construction? Leasing activity would have completely stopped.

  If you’re building a condo building (at least in this city), you’ll likely be pre-selling your suites. You don’t necessarily have to do this. There are examples of well-capitalized condo developers building on spec without any pre-sales whatsoever. (Build, lock in your costs, and then sell.) But generally most developers will pre-sell, secure their construction financing, and then begin construction. In some ways this lowers your risks, as well overall systemic risk in the market. It also lowers your equity requirement as a developer. But it does create another possible risk. Once you pre-sell, you’re effectively locking in and capping your revenues. So you better have a very good handle on your costs. Otherwise you could be exposing yourself to cost escalations without any way to claw back some of your margins.

  The other thing to consider is whether you want to yield or not. Is it better to sell all of your suites as soon as possible (bird in hand) or sell only what you need, holdback the rest, and hope that prices increase going forward? I don’t think there is a right or wrong answer here. Some developers don’t want any market risk and so they take the bird in hand when they can. Other developers prefer to profit maximize and/or safeguard themselves against unforeseen costs, and so they sit on inventory. If you have unsold suites, you can always push revenues. Either way, what is hopefully clear from this post is that development is risky. This is just one example of some of the decisions that need to be made. There are countless others. Sometimes you’ll get it right. And sometimes you won’t. Hopefully the former happens more than the latter.

  2021.03.23

• Housing supply and house price dynamics in the UK

  In the fourth quarter of last year, the average house price to earnings ratio in the UK was about 8.4x. Apparently this is about as high as it has been in the past 120 years. But interestingly enough, if you go back to the 19th century, this ratio was even higher. It was over 12x back in 1845, but then went on a steady decline until about the 1920s. What changed, according to some researchers, is three things: homes got smaller (making them more affordable), incomes rose, and supply increased.

  So what’s going on today? The obvious answer is perhaps that interest rates are low. But in this recent FT article by Martin Wolf, he argues that that’s not really the primary driver. Part of his logic is that low interest rates are a global phenomenon. And so how is it that real home prices in the UK rose 93% between 2000 and 2020, but only 29% in Germany? There must be some other structural force(s) at work. (Germany has a lower homeownership rate for whatever that’s worth.)

  

  Wolf argues that it’s a problem of housing supply. Very little housing was built during WW2, for obvious reasons, but housing delivery did really spike in the post-war period in the UK. Local authorities also played a major role. If completions from 2000 to 2019 had averaged the same rate seen between 1950 and 1970, the country would have 2.9 million more homes today, representing a 13% increase to total dwelling count.

  This, Wolf argues, would be having an impact on house price dynamics.

  Chart: Financial Times

  2021.03.22

• The rise of the second home

  

  Real estate brokerage firm Redfin recently did an analysis of “mortgage-rate lock data” taken from the analytics firm Optimal Blue. A mortgage-rate lock is an agreement between a lender and a borrower guaranteeing a particular interest rate for a particular period of time.

  What’s potentially interesting about this data is that (1) approximately 80% of mortgage-rate locks apparently result in an actual home purchase and (2) buyers must specify whether they’re applying to secure a rate for a primary home, a second home, or an investment property. So there’s a high degree of intent that goes along with these applications.

  What Redfin found when they looked at the data is that the growth in demand for second homes is exceeding that of primary homes by quite a wide margin. They argue that this is largely a result of people now working remotely.

  But this rise in demand — at least according to the above data — appears to have started in the second half of 2019. So I think a few more data points would be helpful in understanding what’s really going on. Is what we’re seeing more about acceleration than about causation? And what does this look like a year from now?

  Chart: Redfin

  2021.03.20

• Upsizing to a larger apartment in New York City

  This is an interesting story about New Yorkers starting to seek out larger homes. Last month, Manhattan saw 140 purchase agreements signed for homes priced at $4 million or more. In the last week of February alone, 40 contracts were signed, which is apparently a weekly record for this price point that hasn’t been seen since August 2016.

  What’s also interesting is that, in some of these cases, we’re talking about buyers who bought preconstruction and then went back to the developer to swap for a larger apartment. Developer Scott Avram is quoted in the above article saying that 10 buyers have “upgraded their contracts” at 130 William (David Adjaye project) over the last six months.

  As we’ve talked about before, this is likely happening for a bunch of reasons. People have been working from home and want more space. Interest rates are low. And New York saw some softening in prices and now people are jumping back in to seize on those opportunities. At the same time, it is yet another example of people going long on dense urban living.

  2021.03.18

• Do you support having more housing built in your community?

  Back in 2019, Lake Research Partners conducted a housing study for California YIMBY. One of the questions that California voters were asked was about whether or not they support or oppose having more housing built in their community. Here is how people responded (about 700 interviews were conducted by phone and about 500 people were asked online):

  

  What this seems to suggest is that most people (61% of all voters) support more housing in their community, with 38% (the darker bar) feeling very strongly about it. These results also seem to suggest that if you’re already a homeowner and/or if you’re a Republican, that you are then less likely to support housing in your community (51% and 54%, respectively). Even still, one possible conclusion that you can draw from these findings is that, perhaps in all cases, a majority of people (>50%) support the idea of more housing in their community.

  However, the problem with this approach is that you’re ultimately asking a pretty generic and theoretical question about housing supply. I am presuming that this is a scenario where the rubber has not yet hit the road. Indeed, most people will say that they support new housing in their backyard, but is that actually how things will play it? It’s pretty common, for example, to hear things like: “I support new development, but I think this project is simply too ___________.”

  So while I think that there are some interesting directional indicators that one could draw from these findings, I suspect that the numbers in the real world might be slightly less rosy.

  2021.03.14

• We’re all going back to offices — most of us anyway

  

  I was speaking with a writer from the Globe & Mail today about the future of office. We were half talking about a new AAA strata office building — called Capital Point — that we (Slate) are in the midst of launching in the Metrotown neighborhood of Burnaby, BC. And we were half talking about whether or not we’re all going to return to offices.

  This is one of the great debates of the pandemic but, as I mentioned in my 2021 predictions post, I think it’s overblown. The longer I work from home and spend my entire day on video calls (only to start actual work in the evening), the more I become convinced that this is a suboptimal arrangement for productivity, collaboration, personal motivation, employee morale, and talent retention (among many other things).

  We have complete conviction around great offices in the right locations. That’s why Amazon and whoever else continue to build. They’re rightly looking past this period of dislocation (12-24 months of suck). Again, this is not to say that there won’t be some changes and that certain pre-existing trends haven’t been accelerated, because they have been. But I believe that humans will continue to cluster for work.

  In fact, it’s hard to disentangle cities and offices. Cities are labor markets. It’s where agglomeration economies take hold and where people come to improve their socioeconomic standing in the world (as well as meet people and have fun). To say that we no longer need to come together in person for work is to say, in a way, that we no longer need cities. We can all decentralize.

  That is not a bet that I am prepared to make.

  For more information about Capital Point and to register for the project, click here.

  2021.02.16

• Mackay Laneway House is now complete and available for rent

  

  Eleven years and a few setbacks later and we now have a completed laneway house.

  As Bill Gates once said, “most people overestimate what they can do in one year and underestimate what they can do in ten years.”

  Construction is all finished up and Mackay Laneway House is available for rent starting immediately.

  For photos and more information, click here.

  2021.02.13