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.

Subscribe

Category: Tech

  • Longer-term benefits of Airbnb for housing supply

    There is a commonly held view that short-term rentals (such as the ones you might find on platforms like Airbnb) are bad for housing affordability because they take long-term rentals out of the market and they help to drive up property values. And there’s evidence for this. A study published in Harvard Business Review found that home-sharing alone might be responsible for about 20% of the average annual rent increases across the US.

    Findings like these have encouraged municipalities around the world to put restrictions in place for STRs. But like most policy issues, there are nuances. And the thoughtful answers are rarely as obvious as they may initially seem. This has been part of my complaint around inclusionary zoning. It sounds good when politicians say it: let’s just get developers to build us free affordable housing. But again, there are nuances to consider.

    Short-term rentals are similar. A recent follow-up study that was again published in Harvard Business Review has actually uncovered some interesting longer-term benefits to STRs.

    Using residential permit data, Airbnb listings, and STR policies across the US, the team found that when you look over a longer time horizon, Airbnb listings actually tend to increase the supply of residential housing. On average, a 1% increase in Airbnb listings led to a 0.769% increase in permit applications. Supply is of course good for a whole host of reasons, one of which is boosting the local tax base.

    Conversely, they found that restricting STRs tended to reduce the supply of new housing and renovations. After new regulations were put in place affecting STRs, Airbnb listings fell on average by about 21% and residential permits fell by 10%.

    Restrictions also seem to have a direct impact on the construction of things like accessory dwelling units (laneway and garden suites for us here in Toronto). When analyzing data in and around the borders between jurisdictions in Los Angeles County, the researchers found that areas without STR regulations saw 17% more ADU permit applications compared to the areas that had restrictions.

    For the 15 US cities that the team studied, they conservatively estimated that STR restrictions reduced property values by about $2.8 billion and impacted tax revenues by about $40 million per year. Some cities, like Chicago, have also found success using STRs as an economic development strategy in distressed neighborhoods, which would further bolster the tax base.

    All of these findings suggest that a more nuanced approach to STR policies is probably merited.

    Photo by Andrea Davis on Unsplash

  • The Tower — NFT Residences of Solana

    I am not counting on my nascent NFT collection to fund my retirement. At least not yet. But I have enjoyed collecting them this year and using them to learn about and get involved in the crypto space. Playing around and experimenting is one of the best ways to learn.

    I recently discovered a project called The Tower (DAO) and I think that many of you, particularly those in the real estate community, might find it interesting. In its simplest form, it is an NFT project where you buy “residences” in a virtual metaverse tower. They look something like this:

    The tower has 500 floors and 20 units per floor. And so there are 10,000 units in total. Each is unique.

    When you buy a residence, you get, among other things, a profile page on the web that allows you to show off your residence and all of the other NFTs in your crypto wallet. You can also see who else owns on your floor.

    Of course there are plans for a lot more. As part of The Tower’s roadmap, the team wants to direct some of the funds that it raises toward real-world affordable housing. There’s also a roommate model in the works where, presumably, people can share their residences and earn tokens.

    Now, I have no idea how a project like this ends up evolving or what it ultimately becomes. But I think it’s a fun example of the kind of creative projects that are being developed as a result of the fact that we can now all take ownership over scarce digital assets.

    Many of these “assets” will likely end up going to $0. But others, as we have seen, will come to be worth a lot.

  • The Zillow postmortem

    The postmortems surrounding Zillow’s exit from the algorithmic home-flipping business are starting to surface. Here’s an article from the WSJ and here’s Matt Levine’s take on it. The latter piece is very Levine-like and is called, “Zillow tried to make less money.”

    The obvious story is that Zillow’s algorithms were not valuing homes correctly. But the story is more nuanced than this. In Q1 of this year, Zillow’s home flipping business was actually more profitable than it had initially expected. And that’s because its algorithms were consistently undervaluing homes. So when it did transact, it was doing so at favorable / low cost bases.

    The problem was that the company was not transacting enough and there was a fear of losing ground to competitors like Opendoor. Apparently only about 10% of people who requested an offer from Zillow actually ended up accepting it. Margins were good, but volumes were too low.

    So what Zillow did was tweak its algorithm to be more aggressive (see above chart from the WSJ). But this created the opposite problem: low/negative margins, higher volumes.

    Once again, it shows you some of the challenges with bringing real estate online. The supply of homes is largely heterogenous and there are a lot of qualitative factors that play into what someone is willing to pay.

  • Toronto is missing out on one of the biggest economic development opportunities right now

    Wired published a great article last week talking about “the 10,000 faces that launched an NFT revolution.” What they are of course talking about are the CryptoPunk NFTs that I think most people would agree are one of the “OGs” of NFT art. Initially minted in 2017, they are usually credited with starting the NFT craze that we are all living through today. CryptoPunk #7523, for example, sold for $11.75 million. I think this is the most expensive CryptoPunk in the world. Either way, it is one of the most expensive NFTs out there.

    But as I was reading through the article I was reminded of something. Toronto is doing an awful job celebrating the fact that an immense out of crypto innovation has and continues to come out of Toronto. CryptoPunks, which is Larva Labs, was started by two guys from Toronto who met at the University of Toronto. I know that it is still early days for crypto and web3, but why are we not telling this story to the rest of the world and using it to continue to attract the smartest and most ambitious people to our great city?

    This is a missed economic development opportunity. And the door won’t be open forever. If any of our city leaders are reading this post (which is unlikely), I would encourage you to give this some serious thought and take action.

    On a related note, the above article is great evidence for Chris Dixon’s argument that, “what the smartest people do on the weekend is what everyone else will do during the week in ten years.” Larva Labs was started by two software developers who worked during the day and used their evenings and weekends for new passion projects. CryptoPunks wasn’t their first initiative, but it has obviously come to define them. Smart people need room to play and experiment. Often that happens after hours.

  • The great reopening: Planet Fitness vs. Peloton

    I came across this chart in Charlie Bilello’s latest newsletter. It was under the heading “the great reopening in 2 charts.” The other chart was live nation (so concerts) vs. zoom. Both are showing returns over the last year. And both are showing a similar divergence between in-person and online activities.

    Now, I’m not a Peloton guy.

    But I know many people who swear (or swore) by them. Maybe it’s because I’ve never been a class guy. I prefer to self direct myself at the gym and I like doing lots of different things. So I have a hard time believing that connected at-home gym equipment can completely supplant traditional gyms. There’s also a social aspect to in-person workouts that I think a lot of people value. I personally find it more motivating to be working out around others.

    But this wasn’t the narrative last year. We were all going to move to the country, zoom into our meetings, and then switch to another sitting device and another screen so that we could connect with our trainers. For me, this chart is yet another reminder that 1) cities are resilient and 2) there are always opportunities in the midst of short-term market dislocations.

  • Market making vs. home trading

    Matt Levine’s latest column is a good follow-up to yesterday’s post about Zillow exiting the algorithmic home-buying business. In it, he talks about the differences between being a market maker and being a trader of homes. Part of his argument is that if you’re a pure market maker then, in theory, you don’t really care about where home values are going. Because either way, you’re just earning a spread.

    Here’s an excerpt:

    A market maker is someone who buys and sells an asset in order to profit from the spread, not someone who accurately forecasts the price of an asset six months from now. End users want to buy or sell stocks or bonds or houses, they want to do it quickly at a predictable price, so they go to a market maker who will provide that service. The market maker buys from sellers and sells from buyers and does its best to match them up; ideally it buys an asset from a seller and resells it to a buyer within a fairly short time. It collects a “spread” from the buyer and seller: It buys from the buyer at a bit less than the fair market price, and sells to the seller at a bit more than the fair market price, because it is providing them a valuable service, the service of “immediacy” or “liquidity,” the service of always being available to buy or sell. 

    The problem with real estate is that you’re not able to buy and sell with the same kind of rapidity:

    But in the house business you can’t generally buy a house in the morning and sell it in the afternoon. You sign a contract to buy a house in the morning, then you do an inspection and title search and stuff, then a few weeks later you close on the house and deliver the money, then you spruce up the house a bit, then you wait for a buyer to come in — which takes, not seconds as it does in the stock market, but days or weeks or months — then you show the house to the buyer, then you sign a contract to sell it, then they do an inspection and title search and stuff, then you wait around for them to get a mortgage, then a few months later you close on the sale.

    This is an important distinction. And so he argues that what we’re actually talking about is the business of trading homes, which means that you have to have a view (and hopefully some conviction) on where home prices are going to go in the future. Sometimes you will be wrong. But that’s okay, as long as you’re right more often than you’re wrong.

  • Zillow exits algorithmic home-flipping business

    Things are happening in the algorithmic home-flipping business right now.

    A few weeks ago I wrote about Zillow pausing this part of its business. It was then later revealed that the company was set to take a loss on many/most of the homes that it had purchased through this “iBuying” division. In October, it listed some 250 homes in Phoenix and on average they were priced about 6.2% below what they had bought them for.

    So it is perhaps no surprise that today the company announced that it will be the exiting the business of buying high and selling low. Turns out this isn’t good for business.

    But does this mean that the model doesn’t work or that Zillow simply didn’t have its algorithms tuned correctly? Following the news, competitor Opendoor took to Twitter to reassure everyone that the digitization of real estate is still well underway:

    Opendoor also announced today that it will be expanding technical hiring into Canada — starting first with Toronto. The plan is to hire upwards of 100 people over the next several years. Presumably this is about access to talent, but presumably it also means that Opendoor is looking toward one day expanding into Canada.

    Stay tuned.

    Disclosure: I continue to be long $OPEN.

  • The real smart city is going to be a crypto city

    Vitalik Buterin — who is best known as the cofounder of Ethereum — recently penned this post on his blog where he argues that “crypto cities broadly are an idea whose time has come.” (Credit to Shamez Virani for sending the post to me this morning.) There has been a lot of discussion over the years about the rise of smart cities. I for one am not really sure what that means besides the fact that it sounds good and it likely involves a bunch of tech and data collection. But maybe crypto can help.

    What Vitalik argues in his post is that we are now at a point in time where blockchain technologies have the opportunity to do two things for cities. One, we can take existing systems and processes and use blockchains to make them more “trusted, transparent, and verifiable.” That would be a very good thing. But the more interesting one is number two. We have the opportunity to use blockchains to create radically new forms of asset ownership (land and other scarce assets) and municipal governance.

    One specific example is that of a “city coin”, which cities like Miami are already experimenting with. Supposedly they are one of the first, which of course aligns with Mayor Suarez’s vision to position Miami as a preeminent tech and crypto hub. Though as Vitalik points out in his post, it’s important to maintain some optionality, especially since we are still very much in the early innings of this new frontier. (This recent episode on the Tim Ferriss Show had a great analogy in saying that the anthem at the beginning of the game isn’t even over yet.)

    So how might a “city coin” living on a blockchain work?

    Well let’s imagine that there are incentives in place for all of us who live in Toronto to own the Toronto coin (there’s still time to come up with a better name). You need it to pay your property taxes, you need it to pay for parking, and you need it to vote in the next election, among many other things. So there’s an incentive to buy and hold it if you’re a resident of this great city, but there is far less incentive to hold it if you don’t live here. (Maybe you own a bit of it because you’re a frequent visitor and/or your relatives live here.)

    One of the interesting things about something like this is that it would immediately create economic alignment. Now all of a sudden, everyone who lives in Toronto and owns Toronto coin would have a vested interest in seeing Toronto thrive. At the very least they would want to see the coin hold its value and ideally they would hope to see it appreciate.

    At the same time, the Toronto coin could be used for all sorts of governance matters. Take for example, land use and zoning decisions. What if we set things up such that these decisions weren’t made by the people who show up to community meetings in the basement of their local church but that they were instead made by everyone who holds the Toronto coin? i.e. The entire city, all of whom are, in a way, equity holders.

    In theory we could do this kind of voting today. However, part of the problem is that the economic alignment isn’t there without something like a Toronto coin. Right now a big part of the economic incentive rests with homeownership. If I own a home and a new development is proposed next to me, I am incentivized to do whatever it takes to selfishly maximize my own individual outcomes. And if that means no development and no more homes for people, then so be it.

    But what if we all had part of our net worth tied up in the Toronto coin? And what if when housing supply did not meet housing demand, the value of our coins dropped because it meant fewer residents (less demand for Toronto coin) and more people voting with their feet and moving to other geographies (more demand for some other coin)? This is one of the things about the crypto space. It turns everyone into evangelists because there are now strong economic incentives to be that way.

    Who knows if this is the way that things will actually play out. But it is part of the promise of crypto and it is not some pipe dream. It is already starting to take hold around the world and in the US in places like Wyoming and Colorado. For more on this topic, make sure to check out Vitalik’s full blog post.

  • NFTs and real estate

    I have started using my NFT collection as a rotating face on my Apple Watch. The one you see below is a Cool Bean, but I have many others in the gallery. Lately, I have been gravitating towards NFTs on the Solana blockchain because of how fast and cheap it is to transact. Though I am still much longer with ETH.

    This is all pretty geeky stuff, but it reminded me just how early we are when it comes to web3. NFT art has exploded over the last year, but the broader ecosystem is still getting built out. We are all going to want mediums in which to display and experience this new form of art. And as soon as that happens, I suspect they won’t be thought of as “just JPEGs” anymore.

    (One of the nicest digital art displays that I have seen is the MONO X7. It’s currently available for pre-order but I haven’t yet pulled the trigger.)

    On a related note, I follow a human on Twitter who goes by 6529, because that is the Cryptopunk number that she/he owns. 6529 is incredibly bullish on crypto and NFTs, and tends to write long and insightful threads about it. One of the most recent ones is about real estate and I think that many of you will find it a worthwhile read.

    What I particularly like about it is that it reminds us that so much of what we consider to be normal and the status quo is actually just a construct that people before us created. Usually it’s not perfect and there are many inherent flaws, but it’s the best that could be done at the time. That or it just worked.

    And because it’s the way it’s been “always done”, it just recedes into the background and most of us don’t give it much thought. Of course, so much of entrepreneurship is about questioning the status quo and doing things differently. Why this way? Could it be better? And it’s precisely during these moments of change where lots of value is created.

  • In real life in New York City

    This past weekend Bright Moments opened up their NFT art gallery in New York’s Soho. This is the company’s second gallery. The first was in Venice, California. And there are plans for eight more cities, with Berlin being the next one. (When is Toronto?!)

    Bright Moments is a decentralized autonomous organization (DAO), which is interesting in its own right but is a topic for another post. You can read a bit more about Bright Moments and DAOs, here and here.

    What I would instead like to talk about today is how Bright Moments is operating at the intersection of NFT art and real-world spaces. They are in effect a community. It’s a place for artists to release/showcase their work and a place for people to connect.

    One of the things that the company is doing with each gallery launch is minting an NFT collection that is tied to the city and that uses the local demonym. When they opened their popup in Venice, they launched the CryptoVenetians. And last weekend in New York they launched the CryptoNewYorkers.

    In each case, 1,000 NFTs were minted and the idea is that once they have expanded to their 10 cities, there will be a collection of 10,000 NFTs.

    I have said it before, but this is an exciting time in the world. Maybe this current NFT craze ends up being a massive bubble, or maybe it doesn’t. Either way, things are exciting.

    But here’s the thing.

    Organizations like Bright Moments show you just how important physical spaces, live communities, and cities continue to be. It doesn’t matter that this is digital art being displayed on a screen and that one could be viewing it from anywhere. People want to hang out in the same room and experience these sorts of new things together.

    I can’t see that ever going away.