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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  • Family-sized apartments are a luxury good

    My friend Alex Feldman sent me an article from the Philadelphia Inquirer this week called: Why is it so hard to build family-sized apartments in Philadelphia? As is the case in many/most North American cities, the article talks about how the majority of new multifamily builds are filled with studios and one bedrooms.

    It then goes on to suggest that some of the reasons for this include: cultural biases in favor of suburban living, antiquated building codes (such as the requirement for two means of egress), exclusionary zoning ordinances, bad urban schools, financing availability, and so on.

    This is something that we have talked about many times before on the blog and, while I do agree that it’s complicated and that there are many variables to consider, I think the key factor remains price. As I said before: “Everybody wants a 3 bedroom condo until they see what they cost.”

    So I think this is probably the most important point in the article:

    Partly that’s because Philadelphia, unlike Boston, New York, and Washington, has a vast supply of rowhouses that are still affordable to people in a position to buy. For those who prefer new construction, the past couple decades have seen a burst of modern rowhouse building.

    If large multi-family apartments were more cost effective than Philadelphia’s vast supply of rowhouses, I am certain that demand would increase markedly. But that is not the case. So I think a more accurate way to view large apartments is as a luxury good. They’re a terrific way to live, if you can afford it.

  • China is estimated to have nearly 25% of the entire US building stock under construction right now

    I’m not an economist, nor am I an expert on China, but according to this recent FT article, more than half of the country’s largest developers (based on 2020 sales) are now in default:

    On top of this, there’s a lot currently in the pipeline:

    The National Bureau of Statistics of China is saying that, as of last August, there was about 8 billion square meters of real estate under construction in the country. That’s very roughly about 80 billion square feet of space, which I’m assuming covers all asset classes.

    This is such a big number that I really have no idea if it’s excessive or not for a country that is rapidly urbanizing and has some 1.4 billion people. So let’s compare it to the US.

    Back in 2020, Brian Potter came up with estimates for the entire US building stock. Interestingly enough, he determined that about 90% of buildings in the US are single-family homes. This is what the US builds and continues to build, by a long shot.

    However, single-family homes do tend to be smaller than, say, office buildings. So if you instead look at square footage (and not the number of buildings), this percentage drops to about 60% of all buildings in the US.

    On a square footage basis, single-family homes are estimated to represent about 200 billion square feet. And in total, Brian estimated the entire US building stock to be around 340 billion square feet (again as of 2020).

    This means that, right now, China could have nearly 25% of the entire US building stock under construction. I think that seems like a lot.

    Images: FT

  • The oldest company in the world was founded in Japan in 578

    My construction partner sent me an email last week that said: “Check out Kongo Gumi. Search them. Pretty cool history.” So I flagged the email and made a mental note to come back to it over the weekend when I had more time. I finally looked them up this morning and, he was right, it is a pretty cool history.

    It turns out that they are/were the oldest continuously operated company in the world. Founded in 578 to build Japan’s first Buddhist temple, the construction company was active for over 1,400 years. They eventually became insolvent in the mid-2000s and the company was then purchased by Takamatsu Construction Group; but before that they had successfully operated across 40 generations.

    That is something that doesn’t happen very often.

    Supposedly, there were two important ingredients contributing to this long run: (1) They forced sons-in-law to take the family name. This ensured that the line continued even when there were generations of only daughters. And (2), they were in the business of building Buddhist temples. So as long as there were millions of Buddhist followers in the world, they were ensured work.

    I’m not sure what happened to make the company insolvent in 2005-2006, but imagine the pressure facing each subsequent generation. I know I wouldn’t want to be the generation that ultimately took down the 1,400+ year old family business.

    For more on the history of the company, click here.

    Photo by Ken S on Unsplash

  • The global cities attracting talent, visitors, and investment

    Earlier this month, Resonance Consultancy published its 2024 World’s Best Cities ranking. Or, in their words: its definitive power ranking of the 100 global cities that it believes are shaping tomorrow.

    These are always fun to flip through, which is I guess why people do them and why people look at them; but I do think it’s important to look at the underlying methodologies. Otherwise, what does “world’s best” even really mean?

    In this case, they’re looking at global cities through the lens of three key categories: livability, lovability, and prosperity. More specifically though, the report looks at factors that are demonstrated to have moderate to strong correlations with attracting talent, visitors, and/or businesses.

    This makes it distinct from rankings that are more focused on things like livability. Because according to Resonance, factors such as commute times, crime, and housing affordability don’t tend to correlate strongly (at least in the short-term) with a city’s ability to attract talent, tourism, and investment.

    While this may seem a bit counterintuitive, it does also make sense. People don’t move to London because they’re looking for affordable housing and a reasonable commute. They move to London because they want to be in the center of the world.

    And yes, London tops their power ranking:

    The top of this ranking isn’t all that surprising. It’s the usual suspects. But I continue to be impressed by how quickly Dubai has transformed itself into a top global city. Also impressive is how Dublin punches above its weight of just over 500,000 people.

    I am medium surprised to see Hong Kong nowhere on this first page (there are another 65 cities not shown here). It usually features as a top global city. But presumably this is the result of Beijing meddling. People are looking elsewhere — like Singapore.

    For the full list of cities and to download a copy of the report, click here.

  • Paris on top of Toronto

    There are about 2.1 million people who live in Paris (2023 figure).

    The metro area is, of course, much larger with over 13 million people. But if you look at Paris proper — that being the 20 arrondissements within the Boulevard Périphérique — it’s the 2.1 million number.

    The footprint of this area is 105 km2, and so that means that Paris has an average population density within its administrative boundaries of just over 20,000 people per km2.

    This is about 4.5x more dense than the City of Toronto as a whole. Which is why if you overlay the outline of Paris on top of Toronto, as Gil Meslin has done over here, you get this:

    To be fair, there are pockets of Toronto that are very dense, even by Paris standards. North St. James Town, for example, was estimated at over 44,000 people per km2 back in 2016. But generally speaking, Toronto is not that.

    And Gil’s maps do an excellent job of demonstrating it.

  • Scarcity in a world of AI

    As someone who collects NFT art, I now see a lot of AI-generated images. Usually I can tell when an image was generated by a computer, but sometimes it’s hard to tell and I’m sure eventually I won’t be able to tell. But if I’m being honest, today I find that I have a bias toward art that was created without any AI prompts. Maybe that changes in the future, or maybe it doesn’t.

    Either way, the marginal cost of producing new content, such as images and videos, has now gone down to zero as a result of AI tools. (Here are some of my crappy creations.) That means that, if you aren’t already, you’re soon going to be faced with a deluge of things created in this way. This will almost certainly become the dominant form of content that we consume.

    I don’t think that we need to be scared by this future, but I do agree with Ben Thompson and others that it’s going to make authenticity and human-content more valuable. In other words, we’re probably going to need to know what is digitally scarce and what is just another thing generated by AI. Thankfully we have a suitable technology for this: it’s called a blockchain.

  • A spread over the risk-free rate

    There is no such thing as an investment with absolutely zero risk. But you can get pretty close to zero-risk with things like US Treasuries and other government bonds, which is why when people think of the “risk-free rate of return” they usually think of instruments like these.

    Not completely risk free, but pretty damn close.

    Over the last cycle, and specifically between 2009-2021, the risk-free rate was at historic lows. What that meant is that if you wanted to generate any sort of meaningful return, you had to both look to other types of assets, such as real estate, and you had to take on more risk.

    How this usually works in practice is pretty simple. Find asset. Figure out how much said asset yields (or could yield). And then decide if the spread you’ll be earning above the risk-free rate is worth the amount of incremental risk you think you’ll be taking on.

    One challenge in bull markets is that it can get very competitive for assets, which can lead to investors accepting lower spreads. But regardless, the underlying idea remains the same. If you’re going to take on more risk than no risk, you should be compensated for it.

    Today, the problem is a different one. 2022 led to a “sea change” in the market. The risk-free rate is much higher, and that means that previously attractive assets yields are now no longer attractive. Things need to be reset.

    It doesn’t feel like this has happened yet, but it has to eventually. That is, assuming rates don’t go back to 0-1%, which I don’t believe they will.

  • Difficult work

    There is an old saying that if you can find something you love to do, you’ll never work a day in your life. But this is probably bad advice.

    Here is a simple graph, from Seth Godin, to help explain:

    The problem with fun things (y-axis) is that they’re fun. So lots of people want to do them. And if there’s a small or no market for said fun thing, then it’s probably a hobby. (Hobbies are still important.)

    Sometimes you can be fortunate where something that previously had no market eventually has a big market. Take, for example, tinkering with computers in the early days.

    This is what Chris Dixon was getting at when he said that what the smartest people do on the weekend is what everyone else will do during the week in ten years.

    But if this doesn’t happen or if a big market already exists — and you do want to be successful at something fun — it’ll likely follow a power law.

    Meaning, you’ll need to be the very best in the world and it’s almost certainly going to be a “slog”. (Bottom right quadrant.) One example of this would be the phenomenon of “starchitects.”

    And that’s pretty much it for the fun stuff. The rest of this graph is for things that are difficult, which means that 3 out of these 4 quadrants are difficult and/or a slog.

    This is not nearly as much fun as not ever working.

  • Epidemic of boringness

    Designer Thomas Heatherwick has a book coming out this week that is about how most buildings suck:

    Heatherwick’s reticence makes his latest work more surprising. He is launching a 10-year campaign against the “catastrophe” of how buildings are built. Our cities, he argues, are in the grip of an “epidemic of boringness”. Most modern buildings are too flat, too plain, too straight, too shiny, too monotonous, too anonymous and too serious. They make us unhappy and ill, they make us not want to come into the office.

    In his book Humanise, out on Thursday, Heatherwick derides architects as members of a modernist “cult”, which indoctrinates them during their seven-year training into thinking they don’t need the public’s approval. The result is the UK’s commercial buildings are so unloved that they have an average lifespan of perhaps 50 years, leading to huge carbon emissions as they are replaced.

    I haven’t read it yet, but something tells me that I’ll probably agree with some/many aspects of the book and be annoyed by others.

    What I’ll likely agree with is that our cities should be more playful, beautiful, and creative. They should be more human. And we should be more daring.

    But what I’ll likely be annoyed by is the impracticality of the proposed approach(es). There are markets. There exists money. And there are reasons why many of Heatherwick’s projects are “luxury” ones.

    Or maybe I’m just being cynical and I should wait and see.

    Here’s a link to the book.

  • Sunday morning is for riding

    This is a fun circuit.

    Go west to the Humber Bay Arch Bridge.

    Shoot up the Humber River and pass under various bridges and subway tracks.

    Arrive in Weston (which, by the way, was established in 1796). Go west on Lawrence to Royal York (there are a couple of hills here that will get your bum up).

    Then bomb down Royal York as fast as you can until you arrive at San Remo Bakery for coffee, donuts, cured meats, and other wonderful things that I don’t normally order.

    The circuit: