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

  • Airbnb still has a lot of accommodations

    There are a lot of headwinds facing Airbnb. Cities around the world seem to be systematically making it more difficult to be a host. New York City, as many of you know, recently made it so that you need to be physically present while the dwelling is being rented. That is pretty limiting. Similar things are happening in non-urban markets too. North of Toronto in Muskoka, there’s a draft by-law that will, among other things, limit short-term rentals to 50% of the total number of days within certain time periods. That eliminates the possibility of doing this as a business. So in many ways, it’s easy to be pessimistic about the future of Airbnb.

    But at the same time, if you step back and look at the bigger picture, there are over 7 million active listings on Airbnb. This effectively makes it the largest hospitality brand in the world. There are more accommodations on Airbnb than with Marriott, Hilton, Intercontinental, Wyndham, and Hyatt combined. (The below chart is from Scott Galloway.) It’s also important to point out that while Airbnb doesn’t own any of its own supply, the same is true of most hotel brands. They are, brands. The difference is that Airbnb created a more scalable platform and a more decentralized approach to aggregating supply.

    The numbers also don’t suggest that things are slowing down for Airbnb. (Here’s their Q3 2023 shareholder letter.) Active listings on the platform grew 19% YoY in Q3 2023 (or by almost 1 million listings). Revenue is up. Free cash flow is up. And in Q3 of last year, the company repurchased $500 million of stock, bringing their one year total to somewhere around $3 billion. So despite all of the efforts to curb short-term rentals within our cities, the company, at least for now, seems to be holding up just fine. And if they can successfully diversify beyond their core business, there could even be reason to be bullish on the world’s largest hospitality brand.

    Full disclosure: I am long $ABNB.

  • Prada just bought a lot of real estate in New York

    We have spoken before about how hotel brands don’t typically own their real estate. But the same is also true of many other businesses. And one common reason for this is that it ties up a lot capital that could be otherwise deployed in the core business. If, for example, you’re in the business of producing exclusive handbags, it usually makes sense to spend your excess cash on making better handbags. And if you find that you’re actually making more money on real estate, then it could be a sign that you’re in the wrong business.

    There are, however, instances where owning your own real estate may make the most sense. Maybe you have an irreplaceable location that you want to secure for the long term. And so there’s real strategic value. Or maybe you keep having annoying legal fights with your landlord and you just want to get back to focusing on luxury handbags. There are other motivating factors to consider here, but these two seem to be behind Prada’s recent acquisition of 724 Fifth Avenue in New York.

    Prada has had a flagship 5-storey retail store at this location since 1997 (and most recently was paying US$22 million in rent). In December, they announced that they had acquired the entire 12-storey building for US$425 million. (That works out to be about $5,395 psf on the gross building area!) And then shortly after, they announced that they had acquired next door — a hard corner — for another US$410 million (total US$835 million).

    All of this makes the deal one of the largest in New York last year. But was it a good deal? I would need some more information to answer from a quantitative real estate perspective. But if I’m Prada, I know that I need to be on Fifth Avenue for the foreseeable future. And now I get access to a hard corner and I no longer have to deal with my landlord. These are clearly strategic things. Last year was also a pretty good time to be buying retail/office buildings with all cash, which is what Prada did.

  • Merry Christmas

    For those of you who celebrate, I wish you a Merry Christmas.

    This year has been a hectic year for many; certainly for those of us in real estate. I’ve heard a lot of people tell me that they’ve “never worked so hard only to feel like they have accomplished so little.”

    Looking back at what I wrote on the first day of this year, I was wrong about many of my 2023 predictions. I thought the interest rate hikes would be over by the first quarter of the year and that the spring would bring greater optimism for new development projects.

    This was partially true — we did see some buoyancy around spring — but then further increases over the summer really quashed the pre-construction condominium market and overall developer sentiment for basically the rest of the year.

    I also thought that we would see distress within the industry in the first half of the year. That didn’t quite play out, as far as I can tell, and I now think that 2024 will be the year for this.

    All of this said, I do feel that 2023 was a highly productive year. I’m proud of what I accomplished both personally and professionally. And this holiday season, I’m looking forward to slowing things down, spending time with family and friends, and catching up on some life management.

    Hopefully you are all able to do something similar. Merry Christmas, everyone.

  • Pink glow

    Here’s a potentially hypothetical question.

    If you were in the market for a 3-bedroom penthouse, and its 1,100 sf wraparound terrace with skyline views just so happened to have an enormous neon-like sign above it, would you consider this to be a feature or a bug?

    The sign does turn off at 11PM, but before then, it creates this awesome/lovely pink glow on the terrace. My sense is that this will be fairly divisive. You’re either going to love it or you’re going to hate it. Which side are you on?

    Let me know in the comment section below.

  • Spatial videos

    If you have an iPhone 15 Pro (and iOS 17.2), you can go into Settings -> Camera -> Formats and turn on a setting called “spatial video.” It will then enable this (excerpt from Om Malik):

    Spatial video is a mixed-reality video format that allows videos to record the depth and spatial information of the scene, and when you play it back, you get a more immersive, three-dimensional (3D) experience. The iPhone 15 Pro utilizes its main lens and the ultra-wide lens to capture the depth and spatial information of the videos. The spatial videos are captured at 1080p, 30 frames per second, and use the HEIC format.

    What you can then do is watch your videos on something like an Apple Vision Pro. It’s not going to be exactly perfect right now — given that the Vision Pro display is over 8k and the above is 1080p — but it will give you an indication of what’s to come for photography, video, and many other use cases.

    Some examples.

    As a regular consumer, this might allow you to capture videos from a trip and then more fully relive the moments once you’re at home. And as Om argues in his post, this will inevitably change photography/video. Because how we consume media, impacts how and what we capture.

    If you’re in the business of selling real estate to people, you can also imagine this set up having a profound impact on virtual tours. Because now you have something that’s pretty damn close to reality, if not eventually indistinguishable. Why even go in person until you have to?

    Of course, all of this will depend on whether Vision Pro actually sees widespread adoption. But if the technology is as good as everyone who has tested it seems to think, then surely there will be at least some initial users who find immediate value.

    And if that is the case, it opens the door for the masses. To once again quote Om: “It is not hard to be excited about the possibilities.”

  • Blockchain applications in real estate

    I opened up X this afternoon and I saw a photographer tweet that he hadn’t sold a single NFT in the last four months. His conclusion: The NFT market is dying, if not already dead. There are no collectors left. Damn.

    I’m sure it probably feels this way to most. But the reality is that there are a lot of asset classes that feel this exact same way today. (I know that many of you will contest whether NFTs are actually an asset class.) There aren’t a lot of buyers out there right now.

    But that doesn’t necessarily mean that the NFT market, in particular, is done with. In fact, if you look around, there are countless signs that point to the opposite.

    I, for example, find it interesting that if you’re an architect or a city planner in the US, and looking to check off some continuing education units, you can now register for a course at Harvard called From Crypto to the Metaverse: Blockchain Applications in Real Estate.

    And if you look at the learning objectives, it includes things like demystifying how Blockchain technologies work, how they might impact real estate businesses in the future, and what opportunities they may create. This suggests we’re still early.

    Right now just feels like that time in the cycle that tests both your conviction and your discipline. It’s easy to believe in something when everyone else does. But what about when most people don’t?

  • It shouldn’t take 17 years to build affordable housing

    If you are the Los Angeles County Metropolitan Transportation Authority and you own excess land next to a transit line that you’ve just recently built, one possible option could be to give this land to a non-profit housing developer so that they can build some affordable housing. And this is exactly what was agreed to in 2007 with the Lorena Plaza site in the Boyle Heights neighborhood of LA. The proposal: 49 affordable units geared toward people making 50% of the AMI.

    However, like all things in development, things do take time. And when building new 4-storey housing complexes, there is always the real possibility that you might face several years (or longer) of fierce opposition. In the case of Lorena Plaza, it apparently took the developers from 2013 to 2020 to reach a settlement with the local councilman and their immediate neighbor (a commercial plaza). In the end, this project is now expected to occupy next summer (2024), which brings the total project timeline to 17 years.

    This is probably an extreme example and, thankfully, some of the rules have since been changed to help speed up projects like this one. Still, it is no wonder we can’t build enough new housing. (Los Angeles wants to build some 450,000 new homes by 2029.) Time isn’t free. And according to the WSJ, this relatively small project ended up costing US$34.2 million to build. That’s nearly US$700k per suite. A number that will buy you a lot of home in many cities across the US.

  • Snowboarders are annoying

    There are three resorts in the United States that do not allow snowboarding. They are: Deer Valley and Alta in Utah, and Mad River Glen in Vermont. New York-based Extell is also developing a new resort next to Deer Valley that was previously known as the Mayflower Resort. For a while, it was up in the air whether they would allow snowboarders, but this past summer it was announced that it will become part of Deer Valley and that their snowboarding ban will remain firmly in place.

    As a snowboarder, I’m not overly fussed by this. There are, of course, lots of other places that will welcome my kind. But I do think it’s both interesting and worth poking fun at. It speaks to the tribal-like nature of humans. I get down the mountain on this device and you get down the mountain on that device. So we are fundamentally different humans. And I do not want to associate with you. At the same time, I do respect the ability for private resorts to make their own decisions. And this seems to be what their paying customers want.

    But what about if the resort happens to be on public land? Does that make things any different? Deer Valley sits on land that is privately owned; whereas Alta sits on land that is owned by the National Forest Service. Which is why in 2014, a bunch of cantankerous snowboarders sued the resort, claiming that its ski-only policy violated the 14th Amendment to the Constitution. I’m not a lawyer, but I am told that this is typically used in cases involving discrimination.

    Alta ultimately won the case. They argued that even though the land they sit on is public, their lifts are still private. And so they get to decide who uses them. I guess that’s fair. But at the same time, this technically means that snowboarders are allowed on the mountain, they just can’t use any of the lifts. I tried to confirm this fact with Alta on X the other day, but they have yet to respond.

    In any event, my prediction is this.

    Snowboarding is a relatively young sport. It grew massively in popularity during the 1990s (which is when I switched over from skiing), and so its participants tend to skew younger (my assumption). This is probably why fancy resorts like Deer Valley don’t feel the need to cater to them. However, young people tend to both grow up and, you know, make more money. And so at some point — when there’s a real business imperative — we may find that people suddenly change their minds.

    If you’re trying desperately to sell luxury condominiums at the base of a resort and if snowboarders keep showing up at your sales office, for how long will you continue to say no to their money?

  • Interest rates are expected to start coming down this summer

    Last week was “forum week” in Toronto. (That is, it was the Toronto Real Estate Forum.) And as is the case every year, Benjamin Tal, deputy chief economist of CIBC, opened up the event with his usual macro view of the world. For those of you who missed it (as I did), here are some of his key points (via RENX):

    • The Bank of Canada’s overnight rate will ultimately/likely settle into the 2.75-3% range (currently it sits at 5%). He expects rates to start coming down this summer.
    • Inflation is down, but we’re not yet at the 2% target. The “last mile” is always the toughest.
    • But as we know, the BofC will take a recession over high inflation, any day.
    • The mortgage market has fallen faster than in the early 90s recession. Tal said that the residential real estate market in Canada is right now facing “the biggest test” since then.
    • Canada is in what he calls a “per capita recession”. But for the million or so immigrants that the country accepted over the last year, we’d be in a full-blown official recession.
    • Finally, he called this correction in the housing market both “real” and “healthy”; he spoke about normalcy returning in 1-2 years; and he posited that the market will be “crazy” when it does return because of a supply deficit.

    This last point is an important one. New housing supply is mostly shut off right now. I say mostly because there are obviously still projects under construction, and there have been and there will continue to be some successful launches. But by and large, most developers are waiting right now, principally because the absorption isn’t there. They have no other choice.

    But Canada continues to grow. People from around the world continue to want to move here. And there continues to be a need for a lot more new housing. So when the market does return — and it, of course, will — there is going to be a supply-demand imbalance. And as is always the case in real estate, there will be a lag in responding to this imbalance.

    This is what Tal means by “crazy”.

    Photo by Wiktor Karkocha on Unsplash

  • Exclusionary zoning cuts both ways

    Here is Wikipedia’s definition of exclusionary zoning:

    Exclusionary zoning is the use of zoning ordinances to exclude certain types of land uses from a given community, especially to regulate racial and economic diversity. In the United States, exclusionary zoning ordinances are standard in almost all communities. Exclusionary zoning was introduced in the early 1900s, typically to prevent racial and ethnic minorities from moving into middle- and upper-class neighborhoods. Municipalities use zoning to limit the supply of available housing units, such as by prohibiting multi-family residential dwellings or setting minimum lot size requirements.

    This is a common way to think about it. Prohibiting multi-family residential is a way to try and keep renters away. And mandating minimum lot sizes is a way to ensure that lots don’t get subdivided and that nobody builds homes of, you know, lesser value.

    It’s more or less a way of setting a minimum bar, which is why the term exclusionary zoning is used. If you don’t meet this minimum bar, you are excluded.

    Many of you will know my views on this (related post, here). But for the purposes of today’s post, consider this question: Should there also be an upper bound? In other words, should there be things like maximum lot sizes?

    Manhattan Beach, California seems to think so, which is why when Rob DeSantis bought three adjacent lots in 2000 for $13 million and proceeded to build a 12,640 square foot home — one that is currently on the market for $150 million — the City reacted by forming a “Mansionization Committee.”

    And ultimately they decided, through the passing of a new ordinance, that mansions of this fortitude should not be allowed in Manhattan Beach. It’s just too much.

    So it turns out that exclusionary zoning actually cuts both ways. You can be too poor for a particular community. Or, you can be too rich.