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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  • Ground-floor retail?

    I recently asked this on Twitter:

    You live in an apartment/condominium. If you could pick one ideal use/tenant for the ground floor of your building, what would it be?

    And a number of people responded.

    But I suppose I should also answer my own question.

    I lean more towards utility. My ideal use — assuming an urban storefront — is not a fancy restaurant or a super cool coffee shop. It would be some sort of quality bodega that:

    • Sells essential grocery needs (milk, eggs, toilet paper, etc.)
    • Sells wine & beer
    • Has a deli/food counter where you can buy a breakfast bagel, a sandwich for lunch, or a quick dinner when you’re in a pinch
    • And, yes, has pretty good coffee

    It would also need to be open early and late: 7am to 12am, please.

    What would you want?

  • The neutral rate and housing supply

    Below are two interesting excerpts from this recent Globe and Mail interview with Tiff Macklem (the current governor of the Bank of Canada of the former dean of the Rotman School).

    The first has to do with where he believes the “neutral rate” will be in the foreseeable future. He believes it will be higher than where it has been in the past:

    We have different models we use to estimate the neutral rate [the central bank’s estimate of where its policy rate would settle if the bank were neither trying to stimulate nor restraining the economy]. … Those models, based on the data we have, still suggest a neutral rate in the range of 2 to 3 per cent.

    When we look forward, and we look at a number of the forces, it seems more likely that the neutral rate is going to be higher than that … [rather] than lower than that. We don’t have that data yet. But there are a number of factors.

    More people are retiring. The labour market looks like it could be sort of structurally tighter going forward. Globalization has at least stalled, if not reversed. That could create more cost pressures. We’re going to need a lot of new investment in cleaner technologies if we’re going to meet our emissions-reduction targets. When I say ‘we,’ it’s the world – so that’s going to affect global real interest rates.

    So when you look forward, it seems more likely that the neutral rate is higher, not lower. And the message is that households, businesses, governments, the financial system, they need to be prepared for that possibility.

    The second is about his view on Canadian housing:

    The fundamental issue in the housing market, and this has been an issue in Canada for 10 years, at least, is structurally the demand for housing is growing faster than the supply. And so yes, interest rates go up, the housing market will slow. But it’s only going to slow so much because there is a sort of structural shortage of supply relative to demand.

    I think what you’re seeing is that with supply growing less than demand, the housing market has started to tick back up, housing prices have started to tick back up. That’s something we need to take into account in monetary policy. But we’re not targeting the housing market. We have one target: CPI inflation.

    These two forces are opposing ones. Higher rates create downward pressure on home prices. But, as we all know, a structural housing supply problem does the opposite. Where these two forces balance out is anybody’s guess. But as Tiff mentions above, his concern is not home prices; it is inflation.

    I am not an economist, but my view is that the broader real estate market is still going through its reset. There will be more pain and less housing supply overall in the short-term. Risk and leverage are still being unwound and that takes time. It also sucks.

    Because of this, I think if you ask most people today, they will likely tell you to wait: “We haven’t yet hit the bottom of the market.” This is likely true. But I have zero ability to time the bottom of a market. And at the same time, the future does feel a lot more knowable compared to a year ago.

    My philosophy is more akin to what I blogged about earlier in the week: If it’s cheap, if the thesis is sound, and if you have the ability to think long-term, then these downturns are when you want to buy. And that is how I’m starting to feel about things right now. This includes everything from real estate to NFTs.

    Disclaimer: This is not investment advice.

  • Toward the childless city

    There is a common narrative that, when it comes time to start a family and have kids, you should probably consider moving to the suburbs. Sure, you’ll have a painful commute, but you’ll get more space for your money, and maybe you’ll end up with better kids.

    I don’t know, obviously not everyone agrees with this. I certainly don’t.

    But it is something that commonly happens and, in many cities, it is now happening more often. Here is a map from the Centre for London showing the change in the proportion of households with at least one dependent child from 2001 to 2021:

    A darker borough means that it lost households with at least one child. And a lighter borough means that it gained more kids. Why this is concerning is that it means the trendline is toward more, and not less, childless cities. Here’s an excerpt from a recent FT article:

    A future with dwindling numbers of children is one many cities, including San Francisco, Seattle and Washington DC, are grappling with. In Hong Kong, for every adult over 65 there are, to put it crudely, 0.7 children, and in Tokyo it is even fewer (0.5).

    Of course, this is not a new phenomenon. And we know the main drivers:

    Randal Cremer is one of several planned primary school closures and mergers in inner London triggered by low birth rates, families moving away because of expensive childcare, Brexit, and parents re-evaluating their lives during the pandemic. The biggest factor, says Riley, is that “housing is just becoming unaffordable”. Philip Glanville, mayor of Hackney, calls it “the acute affordability crisis”.

    So how do we start to solve this? Here are a few ideas that we recently talked about on the blog, but it is by no means an exhaustive list. In my opinion, this is a problematic trend that deserves a lot more attention. Because cities are at their best when they work for everyone — from the young to the old.

  • Spring break tourists are bad; cultural tourists are good

    This is the message that the mayor of Miami Beach, Dan Gelber, delivered this week as it moved to sell $97.6 million of new municipal debt. The proceeds are intended to help the city fund more cultural projects and move away from its “old economic model” of selling Bellinis on Ocean Drive. But it is also a case of Miami Beach flexing its rising property values.

    According to Bloomberg:

    • Residential property values across Miami Beach grew by about 125% over the past decade
    • Between 2019 and 2022, the number of “million-dollar zip codes” more than doubled (presumably these are just zip codes with median home prices above $1 million)
    • And from 2012 to 2022, the number of high-net-worth individuals in the city increased by about 75% (I wonder how many moved to the city versus just got richer while already living there)

    All of this has been good for property tax revenues:

    And now the city is leveraging them to invest in culture.

    Chart: Bloomberg

  • Utah just chose an urban gondola for Little Cottonwood Canyon

    Every now and then somebody comes forward and proposes an urban gondola. The most recent one that I have heard about here in Toronto was this one from 2016 called the “Don Valley Cable Car.” But like many gondola proposals, it sort of just disappeared. Probably because it wasn’t entirely necessary. (I just checked their website and it is now down.)

    However, there are rare instances where a gondola makes a lot of sense. Medellin, for example, has a very successful urban gondola system that my friend Alex Feldman wrote about, here on the blog, after a visit to the city back in 2014. In this case, the gondola was instrumental in connecting hill-side communities that were previously disconnected from the rest of the city.

    Another less urbanized example is the one that Utah (Salt Lake County) is planning to build in Little Cottonwood Canyon. I wrote about this project back in March when I was there and, today, the Utah Department of Transportation announced their preferred mobility option. It is called Gondola Alternative B and, as far as I can tell, it is still the longest and most expensive urban gondola ever proposed.

    Here are the details in graphic form:

    To summarize, though:

    • The system is being designed to carry 1,050 passengers per hour, with cabins departing every 2 minutes.
    • The gondola itself is expected to cost $370 million, but when you add in a new parking garage for 2,500 cars, tolling infrastructure on the existing State Route, and other improvements, the total all-in capital cost is projected to be $729 million. The route itself is somewhere around 10 miles, so let’s call it $73 million per mile.
    • At the same time, the projected operating costs are relatively low at $8 million per year, so this option actually has the lowest 30-year lifecycle cost out of all the ones that were studied. The other alternatives included widening the existing roadway, enhancing the bus service, and adding rail. There was also one other gondola option, which was presumably called Gondola Alternative A.

    If you’re wondering why this is likely a good idea, check out my post from this past winter.

  • Mail-order homes speak to a simpler time

    There was once a time — generally in the early 20th century — when some people used to order their new home from a catalogue.

    You would pick the model you wanted and then all of the required materials, along with assembly instructions, would get mailed to you.

    Mind you, this was never the most popular way to make a new home. According to Brian Potter, mail-order homes, even at their peak, represented less than 10% of all yearly housing starts in the US.

    So arguably, it was never entirely successful as a model. Building a home is tough work, especially without fancy power tools.

    Still, it’s interesting to think about its relative simplicity: “Here’s a bunch of raw building materials and some instructions. Go figure it out. It’s like an Ikea bookshelf, except it’s your entire house.”

    Contrast this to what it takes to build new urban housing today. There is a litany of new barriers. It’s nowhere near as simple as ordering a kit of parts; so it’s no wonder housing is more expensive.

    For more on “The Rise and Fall of the Mail-Order Home”, check out this recent post from Brian Potter’s Construction Physics newsletter.

  • If it’s cheap, buy it

    Reading Howard Marks’ investment memos is up there with reading Paul Graham’s essays. You just need to do it. Howard’s latest is about “taking the temperature” of the market and I think you’ll find the lessons invaluable for everything from equities to residential real estate.

    Here’s an excerpt that I liked:

    We don’t say, “It’s cheap today, but it’ll be cheaper in six months, so we’ll wait.” If it’s cheap, we buy. If it gets cheaper and we conclude the thesis is still intact, we buy more. We’re much more afraid of missing a bargain-priced opportunity than we are of starting to buy a good thing too early. No one really knows whether something will get cheaper in the days and weeks ahead – that’s a matter of predicting investor psychology, which is somewhere between challenging and impossible. We feel we’re much more likely to correctly gauge the value of individual assets.

    These are investing words to live by. Avoid your own emotionality and value the asset. If it’s not cheap, don’t buy it. If it’s cheap, buy it. Then take a long-term view. It all sounds simple enough, but it’s clearly not so easy. And that’s why we have extreme highs and extreme lows in the market.

    Eighteen months ago, everyone wanted to buy residential real estate. Today, prices are lower, but fewer people want to buy residential real estate. Part of this is obviously because of interest rates. But part of it is also just because of emotion.

  • Rail + property — let’s try it again, okay?

    The Eglinton Crosstown line is going to open, here in Toronto, sometime next year — I think. And I’m sure that it is going to be a massively beneficial addition to Toronto’s transit network. But at the same time, we should be talking about this:

    Urban transit stations shouldn’t look like this. It’s a missed opportunity, both in terms of the foregone housing (and other uses) that could be on top of these stations and the additional value that could have been captured from these air rights. Transit is a crucial lever for land values and development overall, and so it’s no wonder that many of the best transit authorities around the world think in terms of “rail + property”.

    So what happened here?

    I don’t know exactly. But I do know that nearly a decade ago I called up Metrolinx and said, “Hey, so I’m a developer who can build things. I see that you’re building a number of exciting transit stations along Eglinton. Want me to build on top of them for you?” Now obviously Metrolinx wasn’t going to be able to sole-source to Brandon, but regardless, I thought it should happen and I just hoped to be in the mix.

    In 2015, things did start to happen. Avison Young, on behalf of Metrolinx, issued a request for proposal to developers for 4 sites/stations along the line. There were two at Keele Street, one at Weston Road, and one at Bathurst Street. And at the time, it was thought that these sites could generate somewhere between $14-22 million (speaking of reasonable).

    I think it was also being viewed as a bit of a pilot. If things went well with these 4 initial sites, then this same approach was going to be rolled out across all suitable sites on the line. I’m not sure what happened with the RFP or the broader intent — maybe some of you know — but it clearly didn’t pan out as planned.

    That’s too bad. But I suppose done is better than perfect. Plus, now we’re building the Ontario Line and so we have another opportunity to get it right. And right means lots of density on top of stations — both directly on top and all around it.

  • Real estate investors are outbidding people who own strollers

    Here’s a potential scenario:

    “When you have investors competing with first-time buyers who walk in with a couple of [baby] strollers, typically the investor is going to win,” Mr. Pasalis says. “They are well capitalized. They can pay a higher price. And this is why our home ownership rate is declining, because more and more homes are actually going into the hands of investors who rent them out, and amplifying home and amplifying condo prices. We are seeing that.”

    But let’s break this down a little.

    Where are these first-time buyers walking into? Is it a resale home showing or is it a pre-construction showroom? If it’s the latter, then we know it’s going to be difficult / atypical for them to make a buy decision so far in advance. They already have multiple strollers in hand, do they want to wait 4-7 years for their pre-construction home to be ready?

    I would also add that in our current environment — where investor demand for pre-construction homes has waned significantly — the development industry has not seen a marked uptick in end-user demand. Why are they not stepping up now that they’re not being outbid by investors? In my opinion, it’s an ideal time to buy!

    One reason could be that people who own strollers still largely prefer low-rise housing. Maybe it’s for reasons of affordability, maybe it’s a cultural bias, or maybe it’s a genuine preference. Either way, let’s turn our attention to resale homes. In this scenario, who is likely to pay the most?

    If you’re an investor, then you are looking for a specific yield. And so in theory, it should be a mostly dispassionate decision: “Here’s the most that I can pay in order to meet my minimum returns. Do not exceed.” But the question is whether is this is going to be more or less than what a stroller-owning group of people would pay.

    The answer is probably that it depends. However, if the answer is that the investor wins and they then turn around and rent it to people who own strollers, is this actually a problem? And if this same investor happens to own 25 other rental homes and they’re all rented to people who own strollers, is this an even greater problem?

    I suppose it is a problem if you’re worried about Canada’s homeownership rate, which has in fact declined from about 69% (in 2011) to 66.5% (in 2021). But what does this even mean? Is a higher homeownership rate always better? Does Canada have a target number? As of February of this year, the homeownership rate in Switzerland was only about 36.3%. And the last time I checked, it was still a rich country.

    There is nothing wrong with renting. I know wealthy people who have opted to rent their entire life because they enjoyed the flexibility and/or had better places to put their money.

    All of this said, the argument in the above scenario is that, but for investors outbidding people with strollers, these homes would be more affordable and that would in turn increase the homeownership rate. It’s a similar argument to, but for foreign buyers or but for Airbnbs, these homes would be more affordable.

    But in a city like Toronto, we are building very little in the way of new low-rise houses. New supply is virtually non-existent. Similarly in Seattle, they are now building more accessory dwelling units than they are single-family houses. So it is any wonder that demand is constantly outstripping supply and that prices are being bid up?

    In my opinion, a better solution is to rethink how we build our low-rise neighborhoods. And here and here are two good places to start.

  • Every home is for sale; it’s just a question of price

    Over the last few weeks, a number of people have told me that, when it comes to their current home, they have a number in mind. They more or less said, “I’ve already spoken with my husband/wife about it and, if someone were to offer us $X, we would sell and move immediately.”

    What’s fascinating about this is that it’s a form of housing supply that generally doesn’t exist anywhere right now. Sure, the people I was speaking with would sell and move for a price, but how does something like this actually happen? How do buyers find them?

    I suppose it could happen through word of mouth. I now know their prices and so if someone I know were interested in such homes, I could tell them. It is a low probability, but it’s still a possibility. Alternatively, someone (an agent or otherwise) might just show up on their doorstep and make them an offer. My dad actually sold his last home this way.

    But again, how likely is this to happen? It doesn’t seem scalable. And this is why Zillow used to have something called a “Make Me Move” listing. Rather than a traditional listing, it was a listing for, “I don’t necessarily need to sell, but if you offered me $X, I would move.” For whatever reason, though, Zillow no longer offers this service. Presumably, it’s because it wasn’t working. Hmm.

    Here’s how I’m thinking about it.

    Today, most housing markets are binary. A home is either for sale or it’s not. Sometimes enterprising people manage to secure an “off-market home”, but generally speaking the market is binary. If a home isn’t for sale, most people don’t usually bother with it. Mostly because they can’t easily find it.

    But market conventions aside, the conversations I’ve been having suggest that it’s actually more of a gradient. On the one side are people who really don’t want to sell. Maybe they’re never sellers. Let’s pretend that the home has been in their family for generations and so to convince them to sell you’d probably have to offer them an absurdly high price and that might not even do it.

    On the other end of this gradient are people who are ready to sell today. In an extreme example, they might even need to sell by a certain date, or else. In this case, a below-market price could get them to sell. They are highly motivated and one sure-fire way to increase speed is to lower price.

    But for everyone else in between, it is a big unknown gray area where price and desire to sell are, I would think, inversely correlated. As desire to sell increases, expectations around price probably need to come down until they reach a point where the market can bear it and a transaction will occur. This is my hypothesis at least.

    But if it’s true, and there’s a big untapped gray area, then the housing market is a lot bigger than we think it is.