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.
Over the years, we have spoken a lot about the role that investors play in Toronto’s pre-construction condominium market. In the media, they are often spoken about pejoratively. They are seen as being a well-capitalized group that outbids end-users for a limited supply of new housing.
But on the other hand, we know that (1) they have been a major contributor to new rental housing in this city (they filled the gap after we decided in the 1970s that we didn’t like purpose-built rentals) and that (2) they play an important function in getting new housing financed.
For better or for worse, we know that, without an investor market, there would have been far fewer new homes constructed over the last cycle. Pre-sales are generally always a prerequisite for a construction loan. And the fastest, and therefore safest, way to get pre-sales is/was to target investors.
But the world has changed since then. Investor demand has diminished. So much so that you could argue that the opposite is now true.
I was speaking to my friend Christopher Bibby this morning and he reminded me that end-users, who are passionate about specific projects and neighborhoods, are the more resilient demand base during a downturn. Because if you need a place to live, you need a place to live.
Perhaps it’s no coincidence that every single sale that we have had at Junction House this year has been to an end-user who moved in.
This week, Urbanation released its condominium market update for Q1-2024. And I’d like to point out two data points. Firstly, across the Greater Toronto & Hamilton Area (GTHA), there were 1,461 new condominium sales for the quarter.
This is the lowest quarterly total since Q1-2009 (the global financial crisis) and the second lowest total since the mid-1990s. (Remember when we spoke about right now being the toughest market since the early 90s?)
Secondly, during this same time period, 2,361 new condominiums began construction across the region. This represents a 52% annual decrease. So all in all, fewer people are buying new homes and fewer new homes are starting construction.
What is obvious is that the market is slow right now. What is not obvious is what happens next. It’s unknowable. There’s risk. My gut is that the market will come back more slowly than many people are expecting, or perhaps hoping. There’s inventory that needs to work its way through the system first.
But ultimately it will come back. Toronto is one of the greatest cities in the world and there remains a need for more homes. Which is why I continue to believe that, if you are in the market for a new one, now is arguably a wonderful time. You get to buy when most others aren’t.
Back in 2018, Amazon opened its first cashier-less grocery store. The technology — which it later branded as “Just Walk Out” — was intended to allow customers to do exactly that. All you had to do was put items into your cart and walk out of the store. And then, through the magic of sophisticated computer vision, machine learning, and lots of sensors, you would be billed and sent a receipt.
However, this month the company announced that it will be moving away from this technology, and instead focusing on its Dash Carts (more on this shortly). It turns out that the technology wasn’t nearly automated enough.
Last year, The Information reported that “Just Walk Out” was relying on at least 1,000 off-site workers in India to constantly review video footage and figure out who had bought what. This is why it apparently took so long to receive a bill sometimes; humans far away were working to figure out if that was a persimmon in your hand, or a tomato.
I’m not an expert on this space, but I’m guessing it is not (yet) feasible to do what Uniqlo and other retailers now do with their supply chains and checkouts. So this was the workaround. Whatever the case, Amazon has now said that it will be focusing on its Dash Carts, which are kind of like roaming checkout counters. They come with screens and scales for weighing things.
Obviously the ideal solution is to not have to do or scan anything. But being able to avoid check-out lines still feels like meaningful progress. I just wonder if these smart carts will encourage or discourage spending. Because now everyone will have a live receipt in front of them. That might discourage spending unless you can offset it with rewards and/or other incentives.
This evening in French class we discussed a Parisian apartment type called the chambre de bonne. The direct translation is “maid’s room”, and it’s exactly what it sounds like. A small one-room apartment that is found on the top floor of bourgeoisie apartment buildings. Indeed, nearly one-third of Paris’ entire supply of chambres de bonne are in the wealthy 16th arrondissement.
Their original function was to house servants. The reason they were on the penthouse floor is because, when they emerged in Paris in the 1830s, the elevator hadn’t yet been invented. And so this was the least desirable floor. The people staying in these rooms typically worked for the people living on the lowest floors in the same building. That’s where you wanted to be. Fewer stairs.
Fast forward to today, and it is estimated that Paris has somewhere around 114,000 chambres be bonne (also known as chambres de service). They are also occupied by a broad cross section of different people:
But it means living small. The smallest allowable size for an apartment in Paris is 9 m2 (area) or 20 m3 (volume). Meaning, even if the surface area is under the 9 m2 threshold, it might still be able to pass as livable if the ceilings are tall enough. But under these figures, and the place can’t be rented. And supposedly, about half of Paris’ chambres de bonne do not meet these minimum thresholds.
These requirements are immediately interesting to me — not only because they’re much smaller than what we allow in Toronto — but because most people don’t think of real estate in terms of volumes. Ceiling heights, yes. But when have you ever seen or measured the volume of an apartment? It’s clearly appropriate in this instance given that many of these apartments sit under sloping rooflines.
But the most interesting question, I think, is whether this housing type is functionally obsolete. On the one hand, Paris is an expensive city, and these apartments represent what is likely the most affordable housing option. Go on YouTube and you’ll find lots of students giving tours of their compact room-apartments. On the other hand, census data shows that occupancy within his housing type has been steadily declining since at least the 1960s:
Based on these figures from 2011, only about 17,300 chambres de bonne are occupied as a principal residence. This doesn’t seem like a lot for a big city like Paris. (It’s around 1.25% of its entire housing supply based on my rough math.) The rest of these apartments appear to be vacant, ineligible for renting, or serving as a secondary space for owners in the same building.
This represents an ~85% vacancy rate, which begs the question: Is there something more productive that Paris could be doing with all of this under-utilized penthouse space? Though perhaps it’s helpful to start with: would you live in 9 square meters or 97 square feet? This is smaller than the minimum size of a parking space in Toronto.
One of my arguments around return to office is that we have not yet reached a post-pandemic equilibrium. Meaning, we’re still in the process of coming back and it’s probably too early to say where exactly we will end up.
The latest data (above) from the Strategic Regional Research Alliance (which is for Toronto) seems to suggest exactly this. Office occupancy continues to steadily increase from its low point in the middle of COVID.
We are now seeing an average weekly occupancy of 63%, a low day occupancy (Friday) of 40%, and a peak day occupancy (Wednesday) of 73%. All of these figures are relative to the number of people working in offices prior to the pandemic.
It is, once again, hard to say where this will ultimately settle. But my gut tells me that this climb still has a ways to go.
What it shows is the average size of new single-family houses in the US. And what it tells us is that median and average floor areas are falling. They are now roughly back to where they were in 2010, following the 2007-2008 financial crisis. This is noteworthy because it shows that homebuilders are responding to lower affordability. Interest rates went up, buyers can now afford less home, and so the market is responding by shrinking square footages to reduce sticker prices. It is the same reason that condominiums also tend to follow a similar size trendline (at least here in Toronto); it’s about affordability. That said, if you go back even further in the above chart — to 1999 — the trendline is up and to the right. Meaning that when the market allows, the average new single-family house is generally getting bigger. That also tells us something.
“Danchi”, or apartment blocks built by Japan’s housing agency during the country’s high-growth period, may look grim and outdated in today’s Tokyo, where flashy glass and steel towers reign.
However, I only just learned that, since 2013, the Japanese houseware brand Muji has been renovating apartments within these housing blocks in an attempt to reduce vacancies:
But danchi are becoming hip again, thanks to modern renovations by lifestyle brand Muji, which is turning the poky, multi-room flats into open-plan studios.
It’s a logical collaboration. Both want to bring good and affordable design to the masses. And obviously there are brand benefits for Muji. It’s a way to expose more people to their products.
But what I find particularly interesting is that it, once again, shows the potential of a strong brand within the real estate industry.
According to the same 2015 article, as soon as Muji completed its first round of apartment renovations, UR saw 2x the number rental applications from people in their 20s and 30s. Perhaps the number is even higher today.
Clearly what happened is that you had young followers of the brand who said to themselves, “oh if Muji is involved, it must then be cool and nice, and so I’d like to live there.”
I mention this because, as a gross generalization, real estate companies don’t seem to focus on their own brands in the same way other companies do. (Again, I’m making a gross generalization.)
Knight Frank just published the 2024 edition of its annual wealth report and, it turns out, that 2023 was a reasonably good year for rich people. Below are some of the charts that I found interesting as I flipped through the report.
The first is their Prime International Residential Index, which tracks the pricing of the most desirable and expensive properties in the following 100 locations. Generally, they define this as the top 5% of each market.
Moving on, this is how much square meterage that US$1 million will buy you in select city and second-home locations.
These are the cities that saw the greatest cross-border investment flows into commercial real estate.
This is their prime property price forecast for 2024.
This is what it looks like for prime rents.
And finally, this is how much net wealth you need in order to join “the 1% club” in select countries/territories.
To download a full copy of Knight Frank’s 2024 Wealth Report, click here.
In the physical world, great buildings are linked to their architect while those who had poured the concrete or installed the windows are soon forgotten. Berkshire has become a great company. Though I have long been in charge of the construction crew; Charlie [Munger] should forever be credited with being the architect.
This is an excerpt from his recent letter to Berkshire Hathaway shareholders, which, this year, he opens up with an obituary to his late partner, Charlie Munger.
If you take his description (same letter) of what Berkshire does, and replace businesses with properties, this is what you get:
Our goal at Berkshire is simple: We want to own either all or a portion of [properties] that enjoy good economics that are fundamental and enduring. Within capitalism, some [properties] will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers.
Like many cities these days, Boston has a program in place to incentivize the conversion of office buildings to residential. Here is generally how it works:
City to provide an average tax abatement of up to 75% of the fair market assessed residential value for up to 29 years.
City to fast track the development review process (only 1 community meeting). Zoning would be considered as-of-right.
Construction must start before October 2025.
Per the city’s inclusionary zoning policies, 17% of all newly created residential suites must be restricted to households making up to 60% of AMI (Area Median Income), and another 3% of the suites must be reserved for voucher holders.
Projects cannot be ground-up construction. Adaptive re-use only. Though additional height/FAR is a possibility.
Program is not intended to create micro-units (I’m not sure how firm this restriction is).
Any ground-floor retail and public uses must be maintained.
Transaction charge of 2% on any future gross sale of the property.
And here is one example project that is using the program. It is interesting to look at how different cities are approaching this vacancy problem.
