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

  • We should waive the HST on purpose-built rentals

    We have spoken recently about the reset taking place in the development industry right now. It is difficult to underwrite new projects.

    But even before this current environment, it was challenging to make new rental housing pencil. Condominium projects almost always look more attractive (at least here in Toronto) and generally speaking, the spectrum for rental housing feasibility goes from “no, this doesn’t work” to “yeah, maybe this will work if we trend rents over a long enough time horizon.”

    The problem with this is that we know more rental housing would be a positive thing for our cities. So how do we address this? Here are some common solutions that get thrown around:

    • Make condominium projects less attractive to build. If fewer developers want to build condominiums and if fewer investors want to buy them, then maybe new purpose-built rentals will become more enticing to build. On some level, this makes sense. It should create downward pressure on land values. But this doesn’t help rental housing supply if it isn’t feasible to begin with. And why limit overall housing supply? (Related post, here.)
    • Make rental housing projects less attractive to build. I know this sounds counterintuitive when I say it this way, but we do do this. Rent controls, to give just one example, generally make it harder to build new rental housing. Yes, it can help those who are already housed, but it can disincentivize proper building maintenance, it can lead to more people being over-housed, and it absolutely hurts new supply. So there are trade-offs.
    • Make rental housing projects more attractive to build.

    I find this last one intriguing, and so here’s one specific idea that I have raised before. Though this time, I’m quoting Benjamin Tal of CIBC:

    But, by far, the most pragmatic step to take in the immediate future would be to waive or defer HST payments on purpose-built rental projects from first occupancy to the sale of the building, while keeping the same valuation methodology as the current regime.

    It’s the most realistic option since it’s relatively easy to implement, and Ottawa will have a willing partner in the Ontario government. Buried in page 84 of the recent Ontario budget was the following sentence, “we call on the federal government to come to the table on potential Goods and Services Tax/Harmonized Sales Tax (GST/HST) relief, including rebates, exemptions, zero-rating or deferrals”.

    Such a move alone would shave close to $60K from the unit cost of that 400-unit project in Toronto, resulting in a meaningful reduction in rent, while at the same time unlocking tens of thousands of rental units across the country in short order — clearly a step in the right direction.

    We should do this.

    P.S. Sam, thanks for sharing Tal’s article with me.

  • A line vs. a circle — which is the optimal urban form?

    So I guess I was wrong. I thought “The Line” in Saudia Arabia was never going to be built — at least not in its current incarnation. But apparently it is now under construction, and it is still planned to be 170 km long and house some 9 million people when it’s complete. I suppose something could happen between now and when all 170 km are complete, but I’m happy to accept that, for the time being, I was wrong.

    Now it’s time to ask ourselves what a 170 km long city would even be like. To answer that, here is a fascinating article from npc Urban Sustainability describing how mobility and urban interactions are likely to work in this kind of a linear city. And it turns out that a line is actually an optimal urban form if you’re trying to both maximize commute times and maximize the average distance between inhabitants:

    One of the most critical aspects related to The Line is distance. If its 9 million inhabitants are homogeneously distributed in the city, each km will have roughly 53,000 people. If we randomly pick two people from the city, they will be, on average, 57 km apart. Although The Line occupies only 2% of the surface of Johannesburg, if we pick two random people in Johannesburg, they are only 33 km apart. Keeping the surface fixed, a line is the contiguous urban form that maximises the distance between its inhabitants. In The Line, people are as far away from others as possible. Considering that a walkable distance is 1.0 km, in The Line, only 1.2% of the population is at walking distance from others. Active mobility is not viable in The Line since distances are too long. The plan for The Line has no cars but also gets rid of most active mobility. Although in The Line, basic needs could be satisfied within 5 min, most journeys to school, work, leisure or visiting other people will depend on public transport.

    So what would be better? Well if you’re trying to minimize the average distance between people and increase urban interactions, then the optimal form is generally the one that cities have been using ever since they were first created:

    We can think of a city called The Circle, where we take the same tall buildings as in The Line but put them next to each other, forming a circular shape. A circle that occupies the same surface as The Line (34 km2) has a radius of only 3.3 km. In The Circle, the expected distance between two random people is only 2.9 km. In The Circle, a person is at a walking distance of 24% of the population (and within 2 km, they could reach 66% of the destinations), so most of their mobility could be active. In The Circle, a high-speed rail system is unnecessary since people could walk or cycle to most places, and buses could supply the rest of the journeys. The Circle occupies roughly the same surface as Pisa, Italy, but has 50 times its population. A round urban form is the most desirable since it reduces commuting distances and the energy required for transport.

    This is one of the challenges with building large scale cities from scratch. It’s easy to become enamoured with a particular plan or symbol; whereas in reality, cities don’t care about these kinds of visual representations. They don’t care that, in plan, the city may look like an eagle (see “Helicopter Urbanism“, a term that was supposedly coined by Jan Gehl). What matters is how interactions between humans play out at street level.

  • How to create narrow European-style streets

    If you’re a regular reader of this blog, you’ll know that I have a thing for narrow streets. Which is why when I travel I sometimes (okay, oftentimes) bring a laser distance measuring device with me. I like measuring things so that I have dimensions that I can feed back into our own development projects. But perhaps most importantly, it allows me to appear as nerdy as humanly possible while traveling. Walking around with just a camera in hand isn’t enough. You need to try harder than that. And so far the narrowest street that I have come across was in Noto, Sicily at just over 1.3m wide.

    If you also like to fawn over narrow European streets, you may enjoy this recent video by City Beautiful. In it, Dave Amos compares European cities, like Rome, to US cities, like Salt Lake City and Philadelphia, and then asks: Can the US build European-style street networks? His immediate answer is, “probably not.” And this is something that we have talked about before on the blog. Street networks tend to be really sticky. They’re hard to change. However, there is another possible solution: create new smaller mid-block streets. And that’s the focus of Dave’s video:

    But if you think about it, this condition already exists in a number of cities. Here in Toronto, we have somewhere around 300 kilometers of laneways, which tend to range in width from 4 to 6m. These are European-scaled streets and amazingly they’re already in place! The only difference is that, today, they mostly serve a back-of-house function. They provide access to garages. However, that is quickly changing with the introduction of laneway suites. And so over a long enough time horizon, our laneways are going to inevitably flip from back-of-house to primarily residential.

    Though maybe there’s even more we could do with this asset. European cities manage to fit retail, restaurants, patios, and more within 6m. Why not do the same with some of our narrowest streets?

  • Read, write, own

    I have been following Chris Dixon for many years and, yesterday, I learned that he has written a new book called, Read Write Own: Building the Next Era of the Internet. It is a book about web3 (crypto things) and the title is based on thinking about the evolution of the internet in terms of these three phases:

    The first act, called the “read era”, circa 1990-2005, democratized information. Anyone could type a few words into a browser and read about almost any topic through websites.

    The second act, the “read-write era”, roughly 2006-2020, democratized publishing. Anyone could write and publish to mass audiences on social networks and other services through posts.

    The third act, the “read-write-own era”, 2020-present, is democratizing ownership. Anyone can become a stakeholder in a digital service or network, gaining power, governance rights, and economic upside previously reserved for only a small number of corporate affiliates, like stockholders and employees.

    The book won’t be out until March 2024, but if you’re interested, maybe you want to pre-order it or at least get it on your radar. I immediately put this in my queue and I’m looking forward to welcoming it to the pile of books next to my bed.

    Full disclosure: I don’t get anything if you pre-order this book. I’m only putting this out there because I have a high degree of conviction about this coming shift and because, in the future, I want to be able to look back at posts like this one here. I think they’ll age well.

  • Land prices can be weird

    Jeremiah Shamess of Colliers made the claim this week that land values in some areas of the Toronto region are down 25%. He then shared a chart from Alan Leela showing how various factors have increased or decreased land values since 2020.

    Broadly speaking, a revenue increase and/or more development density should increase land values; whereas something like inclusionary zoning, which is a cost to the project, should decrease land values. Indeed, this is one of the arguments in favor of inclusionary zoning: “Don’t worry about the additional cost to the project because landowners will simply pay for it through reduced land prices.”

    In theory, all of this is correct.

    Land is (or should be) the residual claimant in a development pro forma. Start with your revenue, subtract your costs, and then see what is left over for the land. (Though keep in mind that what is left over for the land could be $0 or even a negative number.)

    But as I have argued before in the context of inclusionary zoning, I don’t think things always play out so neatly in the market. Put differently, if the cost impact of inclusionary zoning is something like $44 psf, I don’t think all landowners suddenly drop their prices accordingly — especially in a rising market where developers are competing fiercely for land.

    They don’t care about your residual value model. Many or most will just hang on to their number and wait for someone to pay it.

    So what I am saying with all of this is that, yeah, there are factors that put either downward or upward pressure on land values. But how it all actually plays out in the market tends to depend on the macro environment and what else is going on at the time. And right now we are at a point in the cycle where there is clearly downward pressure on land values.

  • Most new condominiums are not owner-occupied — is that actually a bad thing?

    Here’s some data (via Jeremy Withers) explaining that a large portion — about 61% — of new condominiums built in Ontario between 2016 and 2021 were not owner-occupied. In the case of low-rise houses, the figure is lower — about 24%.

    Now, the premise of Jeremy’s tweet storm is that non-owner-occupied housing is bad and that the government should be doing more to discourage this. Simply taxing and restricting foreign buyers is not enough (and I agree that this is mostly symbolic).

    But is non-owner occupied really such a bad thing?

    First of all, non-owner occupied implies that somebody else is renting the place. I don’t think that a significant chunk of these homes are being left vacant. So isn’t the fact that somewhere around 61% of all new condominium apartments are becoming rental housing something that is potentially positive?

    One counter argument would be that these investors are bidding up new home prices and squeezing out end users. But that brings me to my second point: small-scale individual investors are a critical ingredient in the delivery of new condominium housing in Ontario.

    This point cannot be overstated.

    The lender requirement to pre-sell suites in order to obtain construction financing means that developers rely heavily on buyers who are willing to purchase many many years before occupancy. And this is generally a lot more challenging for end users, as we have talked about many times before.

    So if it weren’t for investors, I am certain that we would see a lot less new housing getting built. And in turn, that would mean a lot less new rental housing getting built.

  • Transparent homeownership

    Yesterday, I asked this on Twitter:

    And then I learned that Victoria-based Aryze is already doing it:

    I was a little surprised by some of the numbers here, namely municipal fees. But that is not the point here. The point is that this is a great idea and that, judging from the comments on Twitter, many people seem to want this.

    The obvious benefit is that it allows consumers to better understand where their money is going. But I also think that by showing people all of the costs that get levied on new housing, it could benefit the overall development industry.

    What do you think? Should developers in Toronto adopt a similar approach? Let me know in the comments below.

  • The case for point access blocks

    We have spoken before about buildings, such as this 6-storey one in Paris, that were allowed to be built with only a single exit stair. This is noteworthy because, here in Canada, if you were to try and build an equivalent 6-storey building on an equivalent 100 square meter site, you would be required to have two exit stairs. And that would create more non-leasable space and make it even more challenging to develop such a small building.

    It is for this reason that single-stair buildings have been getting an increasing amount of attention as of late. They are seen as a way of encouraging more missing middle housing.

    So where are single-stair buildings currently allowed? Below is a map from Seattle-based Larch Lab showing the maximum number of storeys for point access blocks (what they call single-stair buildings) around the world. Based on this, Canada is one of the most conservative countries on the planet when it comes to required exiting (I don’t want to speak for any of the grayed-out countries). It also shows that much of the world allows 6 or more storeys.

    Larch Lab is a major advocate for point access blocks and they have this policy brief outlining the problem and the opportunities. One of their most interesting statistics has to do with minimum project size inflation. As recent as 2000, only about 13% of all multifamily completions in the US had more than 50 units. Today, this number has jumped to more than 55% of all new multifamily buildings, meaning we are quickly losing our ability to build small and intimate.

    Point access blocks can help with this.

    Of course, the reason we have exiting requirements in our building codes is because of life safety. But there’s research to suggest that this level of redundancy may not be needed in certain buildings. According to the above policy brief, the average death rate (caused by a building) in point access block countries like Switzerland, France, Italy and Germany, is significantly lower than that of the US. On top of this, almost no countries in the EU require buildings less than 28m tall to be sprinklered. The US does.

    All of this said, I don’t think that single-stair buildings are a silver bullet for missing middle housing. It is just one important ingredient in a complicated recipe. And as evidence of this, we can look to Seattle. The 2018 Seattle Building Code allows point access blocks up to 6 storeys, which is a rare occurrence in the US. However, the city appears to be still working on missing middle reform. Presumably other ingredients are still — missing.

    Image: Larch Lab

  • Less new housing — for now

    Approving new housing is one thing. And it is an important one thing. But you also need to sell/lease and finance the project. And that is a lot more challenging in today’s environment compared to a few years ago. I think a lot of people look at our cities, see a shortage of housing, and wonder why developers don’t just build more of it. But it’s not that simple:

    “Our industry is now taking a second look at our [calculations] and saying it’s costing more to build, it’s costing more to lend,” he said. “And there is a threshold in regards to what a purchase price or sale price can be. So there’s a bit of a pause in the market right now in regards to starting construction.”

    Throughout this last development cycle and, in particular, during the pandemic, development costs increased dramatically. But the revenue side was also increasing — meaning you could sell and/or lease space for more. That kept development going. You could still successfully underwrite new projects.

    But now the cost of debt has increased and the revenue side has expectedly slowed both in terms of pricing and velocity. This dramatically changes the feasibility of new projects, which means the market is going to need time to adjust to this new environment. This, of course, will happen. But in the interim (i.e. right now), it is going to mean a lot less new housing.

    This should not come as a surprise.

  • Vacation rentals in Park City

    We spent his morning meeting with prospective property managers for Parkview Mountain House. Here’s what we learned about the short-term rental market in Park City, Utah:

    • Property management fees generally range from 20-35% of revenue (these are turnkey solutions)
    • Airbnb is somewhere around 80% of the market here; though it does tend to skew toward slightly smaller rentals, whereas VRBO skews larger
    • Sundance Film Festival and New Year’s Eve are the two busiest times in Park City (demand greatly exceeds the available vacation rentals — 120%?)
    • Many Sundance guests tends to be people on expenses accounts: not price sensitive, but apparently very demanding
    • Winter is obviously peak demand because of snowboarding and skiing, but demand is still strong in the summer because of cycling, hiking, golfing, fishing, etc.
    • The two slowest times are spring (mud season) and fall
    • Many PMs will track booking lead times, which is the period of time between booking and check-in
    • This past winter season, demand was strong but average lead times were way down — meaning people were booking last minute and responding to snowstorms
    • During heavy snowfall seasons, like the one Utah had this past winter, you’ll likely need to budget for roof snow clearing (a few thousand for the season)
    • Heated driveways are a very good idea in the mountains
    • The most popular / most searched amenity is by far a hot tub; servicing one will run you about $125 per month

    I always find it fascinating to dig in and learn about a new industry and/or market. And that’s exactly what we did this morning.