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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  • What’s real anymore?

    Generative AI has made it a lot easier to make things up using software like Photoshop. This, of course, isn’t a new thing. But it has gotten significantly easier for people like me who aren’t experts in photo editing.

    Here are two examples that I created this morning. The first is a photo of me from last summer in the Salt Flats of Utah:

    And here I am again after adding new clothes, a dog friend, a couple taking photos, a more impressive backdrop, and some sort of body of water in front of me:

    The second is a photo from Paris:

    Now here it is again with tall buildings in the background, glass storefronts, a few neon signs, string lights above the middle of the street, a bollard blocking car access, and a few more people:

    These aren’t entirely perfect if you’re really paying attention. But for the most part, I think they’re pretty convincing — especially the second one.

    Generated images are only going to get better going forward and I don’t think that’s a bad thing. But we do have to start training ourselves to question whether something is real or doctored. It’s already hard to tell.

  • Learning French, again

    I grew up going to a French school. For a significant portion of my early education, I had every single class — except English class — in French. But to be honest, I never really loved it. I had started midway through elementary school and so I always felt like my French was never quite good enough.

    I was behind relative to my classmates. I needed special tutoring to get caught up (while my classmates were off learning a third language). And so I used to constantly beg my mom to take me out of French school and put me in a, you know, regular English school. I know this was tough for my mom, but her response was always steadfast: “You’ll thank me when you’re older.”

    At the time, I couldn’t possibly imagine her ever being correct with this statement. But it turns out, she was. Today, I’m grateful to be able to travel to a place like Paris and kind of speak the language. (I say kind of because, hey, it’s been a long time since high school!)

    And I’m grateful that when I go into Mabel’s Bakery across from Junction House that I can order a coffee and a croissant in French. (Most of the people there are from France. Try it for yourself. They’re lovely humans.)

    In fact, I enjoy it so much that I recently decided to enroll in a French class at Alliance Française here in Toronto. (Fresh $80 textbook pictured above.) Obviously the 9-year-old version of myself would be completely shocked with this absurd decision. But I guess this is just what happens when you’ve been indoctrinated from a young age.

    Or maybe I just really want to build something in France one day.

  • 1/21st of a second home

    I don’t know for exactly how long, but for a very long time people have been trying to solve this real estate problem: “I have a desire to own a home, or multiple homes, around the world. However, I don’t know how often I’d actually use it/them, and this desire is both expensive and a pain in the ass.”

    And so unless you have a lot of money and can make the pain in the ass part go away, there seems to exist an ongoing need to make fulfilling this desire both cheaper and easier. Perhaps the most common ways are through a timeshare property or through some kind of fractional ownership structure, where you own a share of a property.

    Some companies are even “tokenizing” this second structure on blockchains. I have read about one company that is buying vacation homes and then issuing 365 corresponding tokens. Each token represents 1 day of occupancy (and actual title ownership apparently). In theory this sounds kind of neat, but you’re also buying a second home with potentially 364 other strangers.

    So here’s another approach that I just learned about. The UK-based company, August, has devised a model that works like this:

    • August starts with “homeowner curation.” Meaning, they start by vetting homeowners to make sure that they’re not weird or something.
    • Once they have a suitable collection of homeowners, August sets up a new real estate entity that all of the homeowners must then fund equally.
    • This entity, by way of August, goes out and buys 5 properties, and each homeowner receives an equal share of the ownership. (Typically, they target 16-21 groups per entity.)
    • August renovates the 5 properties, gets them ready for occupancy, and then manages them on ongoing basis. This includes bookings.
    • Finally, each homeowner gets an average of 8-10 weeks per year across all of their homes.

    In terms of the homes themselves, their pied-à-terre collection includes homes in Paris, Rome, Cannes, Barcelona, and London. They are typically between 70-100 square meters with 2 bedrooms and 1-2 bathrooms. And the average price/value is supposedly around €1,250,000 (post-renovation?), with the entry price of a share starting at €340,000.

    I’m not sure if this share figure is based on 21 homeowners, but if it is, then that’s €7,140,000 of equity being raised in order to buy somewhere around €6,250,000 of real estate. Is the spread their margin for setting this all up? There’s also an annual fee per owner (€8,600), which presumably covers operating costs and the ongoing management of the properties.

    A model like this naturally provokes a lot of questions. What happens if somebody wants to sell? Does the next buyer need to be similarly vetted for overall weirdness? And how liquid is 1/21st of a 5-property apartment portfolio? I don’t know these answers, but intuitively these shares have got to be less liquid than a 100% sale.

    However, as a solution to the problem of “I have a desire to own homes across Europe but I’m not quite rich enough to make it truly carefree”, this seems like a pretty clever solution.

  • What’s land worth?

    Generally speaking, the value of a piece of land depends on what you can do with it. If the highest-and-best use is agriculture, then it might be worth $X. But if the highest-and-best use is a supertall skyscraper, then it’s going to be worth a lot more than $X.

    This is why the land component is typically thought of as the residual claimant in a development pro forma. Start with what you can build, forecast your revenues and expenses, and then see what is left over and can be attributed to the land. This is, at least in theory, how the mechanics should work.

    An interesting thought exercise, though, is to consider how different developers might value the exact same piece of land.

    One obvious scenario is that a developer could just get their forecasts wrong. For instance, maybe they understate their costs, which then leads them to believe that they can pay more for the land. In this case, an error makes them the highest bidder.

    In a rising market, there will also be developers who believe that they can almost certainly collect higher revenues in the future. In this case, the most bullish developer often becomes the highest bidder for land. And as long as the market continues to rise, they might not be wrong.

    But things change in a slower or flat market.

    Now the market isn’t there to save you if you happen to overpay for land. It’s a less forgiving environment. But it’s also a market where you really benefit from conservative underwriting and solid execution. Now it’s these groups who are the high bidders.

    And I know that some/many developers prefer it this way.

  • Don’t screw it up, New York

    New York City is set to become the first in the US to implement a congestion charge (a form of road pricing). I first wrote about this back in 2018, and then again in 2019, but now it is looking more and more like it may actually happen sometime next year.

    I think all urbanists agree that this is an important step in the right direction. But some are now worried that New York isn’t going about it in the right way. Here is an excerpt from a recent Vice article by Aaron Gordon:

    With all these plans, you could be excused for thinking New York is doing congestion pricing—a potentially transformative policy that would be a first in the nation—right by not only charging drivers to access some of the densest, most valuable land in the world, but also giving them alternatives. Unfortunately, New York isn’t doing that, and in fact looks set to completely screw up congestion pricing so badly it may discredit the policy in a way that makes it harder for other cities to adopt it. Rather than approaching it as a lynchpin to a wide-ranging effort to reshape Manhattan’s relationship to the private car, congestion pricing has become solely about money—specifically, paying off enough of the credit-card bill New York has run up with a variety of ill-conceived and poorly-executed projects that it can get more credit cards.

    You can rightly say that this is decades in the making. Mayor Bloomberg first proposed the idea back in 2007, and I’m sure there were others before him with a similar idea.

    So Gordon raises a valid point: It’s important that NYC gets this right. Otherwise, it’s going to be that much more difficult for other North American cities to even think about implementing road pricing.

    For the full Vice article, click here.

  • Paris in August 🇫🇷

    We’re no longer in Paris. We’ve been back in Toronto for about 3 weeks now. But the pictures live on and I finally got around to processing all of the ones that I took on my Fujifilm X-T3 (23mm f/2).

  • Canadian views on housing

    At the beginning of this month, between Sep 2 and Sep 4, the research company Nanos conducted a random survey asking Canadians about their views on housing. The survey reached 1,044 adults and you may find the results interesting:

    • Nationally, three in five Canadians “support” or “somewhat support” decreasing the number of immigrants coming into Canada until housing becomes more affordable. (The feds plan to welcome 500,000 immigrants per year by 2025.)
    • The provinces that are the most in support of reduced immigration are the Prairies (65%), and the province with the lowest support is BC (52%).
    • 82% of Canadians are “opposed” or “somewhat opposed” to building new housing on land currently set aside as green space. Of this group, 64% responded with “opposed”.
    • 55% of Canadians “support” or “somewhat support” giving tax incentives to private developers to build new rental housing. The highest support for this is in BC (61%), Quebec (60%), and among Canadians 55 or older (55%).
    • However, this support flips when Canadians are asked about giving tax incentives to private developers to build for-sale housing. 58% of Canadians are “opposed” or “somewhat opposed” to doing this.

    These last two points took me a second to decipher, because the wording in the article is “new rental units” and “new homes.” Naturally, I initially read these two things as being the same thing. New rentals are new homes. So what are they trying to say here?

    My assumption (in the above) is that it’s a housing bias coming through and that a “new home” equals a for-sale low-rise house. Hmm. We really need to be more mindful of the semantics in our housing vocabulary.

  • Why is housing viewed so differently?

    Here is a study by three researchers out of California that asked Americans to predict the impact of a supply shock on various things, such as durable goods, commodities, labor, trade, and yes, housing.

    For basically all of these items, people tended to answer correctly. Usually by a factor of at least two to one. In other words, when asked what reducing the supply of new cars would do to the prices of used cars, the majority of people responded saying that it would lead to an increase in prices.

    However, when asked about the impact of a 10% increase in housing supply, about 40% said that it would cause prices and rents to rise. Only about a third believed they would fall (the correct answer). This is fascinating because it shows that housing seems to be an outlier. Most people don’t have the same intuitive sense.

    Why is this? Well, one commonly held belief is that building market-rate housing leads to gentrification, and that this ultimately leads to the displacement of existing residents. This might have been why some people responded saying that new housing will cause an increase in prices and rents. It’ll lead to all housing going up.

    However, there’s research to support that this isn’t the case. The problem isn’t outward displacement following new market-rate housing. The greatest driver of gentrification is actually “exclusionary displacement”, which is the inability of people to move into areas because of a lack of housing. (This study was based on 2010-2014 housing data from the UK.)

    The thing about housing supply is that it relieves pressure across the entire market. Instead of a high-income person buying an old home to renovate (and causing outward displacement), they can instead choose to buy a new home (and not cause any outward displacement).

    By doing this, they also leave behind a home that can then be absorbed by lower earners. One US study found that for every 100 new market-rate homes that are built, somewhere between 45 and 70 people move out of a below-median income neighborhood.

    It is for reasons like these that, time and time again, increased housing supply has been shown to moderate home prices and rents (see above regarding Minneapolis and the Midwest as a whole). So if you’re worried about the cost of housing, the answer is to build more. And if you’re worried about gentrification, the answer is also to build more.

    Our intuitions are telling us that this is true for most things. But for whatever reason, housing feels different. It’s not, though.

    Source: The charts and studies in this post are from this great FT article by John Burn-Murdoch.

  • Claude Cormier (1960-2023)

    Today, one of the top landscape architects in Canada — Claude Cormier — died from complications associated with something known as Li-Fraumeni Syndrome. He was only 63.

    Claude, and the firm he founded CCxA, have been responsible for some of the most beautiful, whimsical, and critically acclaimed public spaces in Canada.

    Those of you familiar with Toronto will know Berczy Park, Sugar Beach (pictured above), the new Love Park, and others. These are easily some of the most successful public spaces in the city, and for good reason.

    CCxA is also the landscape firm behind our 100 Lombard project, where we have been similarly working to create a new and whimsical public space in downtown Toronto.

    We’re all sorry to see you go, Claude. Canada is a better — and more fun place — because of your work.

    Photo by Filip Mroz on Unsplash

  • No more sales tax on new rental housing

    Big news today in development land. The federal government just announced that it has removed sales tax (GST/HST) from new rental housing effective immediately. This is a significant step in the right direction, and something that we have spoken about many times before on the blog.

    Here’s how things used to work:

    In the case of a newly constructed or substantially renovated multiple-unit residential complex or addition to a multiple-unit residential complex, the builder must generally self-assess GST/HST on the fair market value of the whole of the substantially completed multiple-unit residential complex or addition when possession of the first unit is given under a lease, licence or similar arrangement as a place of residence of an individual.

    What this is saying is that if you build new rental housing, and even if you plan to continue owning it forever, you need to determine the fair market value of the property and then pay HST on that amount. In Ontario, the HST rate is 13%. However, the effective rate was a bit lower because of new rental rebates. Let’s say it was somewhere around 11%.

    Now that this no longer needs to be paid, a lot of rental projects that were flirting at the margin should suddenly make economic sense. Which is why I tweeted earlier today that every housing developer in Canada is right now dusting off their “what if we built rental” development pro forma. It didn’t work yesterday, but maybe it does today!

    Today is a good day for new rental housing supply in Canada.

    Update: This announcement only relates to the federal portion of the HST. The feds are now calling on provinces to follow suit.