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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  • A real estate sea change

    Earlier this month, Howard Marks published a memo called “Sea Change“, where he argued, among other things, that it is “nearly impossible to overstate the influence of declining [interest] rates over the last four decades.” In fact, he goes on to say that he would be “surprised if 40 years of declining interest rates didn’t play the greatest role of all” in the success that investors have seen since the 1980s. Of course, the reason the memo is called “Sea Change” is because his overarching point is that this tailwind is now over.

    Let’s consider this in the context of commercial real estate. If you bought a real asset at a 4% cap rate (calculated by dividing net operating income by the price of the asset) and were able to put debt on it at say 3%, you would be receiving positive leverage. Your cost of debt is less than the yield that your asset is generating, and so you are in effect magnifying your returns.

    Now let’s imagine a scenario where interest rates decline even further and somebody could put debt on this same asset at 2%. This is likely to put downward pressure on the cap rate, meaning that somebody might be willing to pay more for the same amount of yield. That is, they’re willing to accept a lower yield. This phenomenon is what Howard is describing in his memo. Declining interest rates tend to create upward pressure on asset values. And in the world of real estate, this is referred to as a compression of cap rates.

    But what happens when things go the other way? Well if you had the same real asset generating a 4% yield, but now the only debt you can find is at 7%, then you are in a scenario where, unless you can afford to pay with all cash, you will be receiving negative leverage. Your cost of debt is greater than the yield that your asset is generating. And that’s the thing about leverage: it cuts both ways. It can magnify your returns, but it will also magnify any losses.

    If the only debt that you can find for your asset is now at 7%, then your 4% cap rate is almost certainly going to need to widen/increase. That is, investors are going to want to pay less for the exact same income stream. This is significantly less fun than cap rate compression, where values just seem to always go up. But, it does also create new opportunities for well-capitalized investors.

    All of this is playing out right now. And it is part of the “sea change” that Howard has called.

  • Building better cities — one floating pool at a time

    This is one of my Christmas gifts. And it is, of course, exactly the sort of thing that gets me excited. Thank you Bianca. You clearly know me.

    I am endlessly fascinated by cities. I keep a running list of places I want to explore (everywhere from São Paulo to Shanghai). And frankly, I consider it to be an important part of my job to think about how to make our cities better.

    As I was flipping through the book this morning, I was reminded of something that I have been saying for years on this blog. Toronto could use a floating public pool like the Badeschiff (“bathing ship”) in Berlin:

    Constructed from the hull of an old cargo vessel, the Badeschiff opened in 2004. The Spree itself is too polluted to swim in (or at least that was the case back in 2004), and so this has become an important swimming outlet for the city.

    Paris is in a similar situation with the Seine, but it’s looking to clean it up in time for the Olympics.

    The real benefit of a floating pool is that you’re mostly in a big body of water, but now you can also heat it. In the winter, the Badeschiff is covered and turned into a spa/sauna. This would be particularly useful in a place like Toronto.

    It’s easy to bring people to water in the summer. Apparently Summer-Badeschiff even has a bar and regular DJ sets (presumably all techno given this is Berlin).

    The real challenge is in the winter. And if you’ve ever read an RFP involving a public space in Canada, you’ll know that this question invariably comes up: So, how do we, like, get people to come here when it’s 10 below?

    Hot water, nice views, and a little food & drink. I promise that’s all you need.

  • Twitter just censored my tweet about this Eiffel Tower replica

    This morning, I came across an FT article talking about how mainland Chinese people are right now flocking to Macau to receive western mRNA vaccines. Apparently the Special Administrative Region has a single hospital offering the western varietals to “tourists”, and lots of people now want them and presumably think they are more efficacious than the Chinese alternatives. This is not surprising.

    So what actually stood out to me was the photo that FT chose for the article. It’s of the half-scale Eiffel Tower replica that was built as part of a $2.5 billion casino resort in Macau known as The Parisian Macao (pictured above). There’s even a faux Louvre-like building behind it and a “Jardin” in front of it so you can get that axial view of the tower. Welcome to Paris!

    Of course, this is not the sort of thing that excites me in the least. I understand why it is done and that there is clearly a market for it, but I don’t get it. It feels totally empty. Have we really run out of new ideas? So I decided to tweet something out to this effect and, in it, I included the fun fact that Macau is a former Portuguese colony and currently a Special Administrative Region of China, just like Hong Kong.

    But it turns out that you can’t say this on Twitter. I don’t know why, but my tweet was immediately filtered out of my feed — twice. Instead what you can say is “Macau is a SAR of a country that starts with C and ends with A.” Apparently, this is acceptable Twitter language. Hmm. This has never happened to me before.

    Thankfully, I have my own domain (which you are now reading from) where things are much freer. And collectively, we have things like the Ethereum Name Service, which is trying to create an even more censorship-resistant version of the internet. So today I decided that it was time to cancel my Twitter Blue account and put some more money into ENS tokens. This feels more like the future.

  • Climate lessons from 16th century England

    We don’t like coal today, but it certainly transformed Victorian-era architecture:

    “It is the biggest transition in the history of our species, with the possible exception of starting to use fire at all in the first place,” says Barnabas Calder, author of the groundbreaking study “Architecture: From Prehistory to Climate Emergency.” Fireplaces had to be redesigned for coal, smaller, and more efficient, and could now be distributed throughout the house, warming a sequence of smaller rooms that contained heat more efficiently. Brick, which also requires substantial amounts of energy to produce, became affordable. And glass, too, was accessible to ordinary people. “Coal affects the way you can achieve comfort conditions in a building, and it is a very affordable way of producing a significant amount of warmth, which allows for bigger windows. Even more significant is that it opens up a series of new building materials.”

    But as new technologies transformed how we thought about it architecture, they also transformed how we thought about climate. Buildings used to have to be carefully “tuned” to their local environment. You had to think about where the sun was coming in, how you were going to trap it during the winter months, and how you were going to release it during the summer months, among many other things.

    Eventually though, this stopped mattering.

    We had building systems that could take care of these matters, which then meant that we were free to aspire to build the exact same architecture in Phoenix as in London. But we now know that that this doesn’t make much sense. And this recent architectural tour from the Washington Post, which starts in 16th century England, is a good reminder that the lessons learned many centuries ago are in fact still relevant today.

    Maybe even more so.

  • Merry Christmas from Toronto

  • What happened in 2022 and how I did on my predictions

    It has become tradition around here that at the end of each year I write down my predictions for the following one. And in 2022, I did that here. The overarching point of writing something like this down publicly is not necessarily to be right (because you can do that through obvious predictions). The point is to dedicate time to thinking (which is oftentimes hard to do throughout the year), to search for non-obvious things, and to generally be okay with being wrong. So I plan to do this again in the coming weeks for 2023.

    But first, let’s see how I did with my 2022 predictions:

    1. COVID: I argued that 2022 would be the year that the pandemic becomes endemic and it reaches a point where it no longer factors into decision making in the same way that it has since 2020. Some of you may disagree whether this is a good thing, but I would still say that this happened, at least in this part of the world. I started the year in lockdown here in Toronto and I ended the year having taken multiple overseas trips where testing was no longer required. (Right)
    2. Return to office: I was kind of close. I thought that the majority of people would be back in their offices by September. I didn’t say that hybrid/flex work was going to disappear, but that we would see a great return. That did happen, according to my super scientific Jimmy the Greek Reopening Index. But if you look at the latest swipe card data for the 10 largest US cities, average occupancy is hovering just below 50%, which is not a majority. (Wrong)
    3. Recreational/fringe housing: I felt very strongly that we would see a pullback in residential real estate this year, specifically recreational properties and properties in tertiary markets. This 100% happened, but I’ll be honest in that I was not thinking about the interest rate hikes that we saw. I just saw it as a pandemic bubble. I also thought that apartment rents would do very well and surpass pre-pandemic levels. This happened in many markets. (Right)
    4. Return of travel: Yup. (Right, but maybe too obvious?)
    5. Intensification of single-family home neighborhoods: This continued to be an important topic in 2022. Did we see some a tipping point-like moment, like I had predicted? I think it depends on the market, but here in Toronto we did see things like Bill 23, as well as additional efforts on the part of Mayor John Tory. (Right)
    6. Autonomous vehicles: Progress was made this year. You can now hail an autonomous taxi in places like San Francisco. But I also thought that this would be a fantastic year for Uber as the world reopened, and that they’d finally become profitable. As of Q3 of this year, that had not happened. (Wrong)
    7. Public transit and micromobility: I got the public transit ridership piece correct. I assumed that ridership levels would remain depressed. Perhaps an obvious one. But I also figured that e-scooters would be one of the main beneficiaries. While it is true that e-scooters remain very popular, particularly with French people, we did see ridership decline in the US, as the availability of cheap capital waned. (Mostly right)
    8. NFTs and augmented reality: There’s a lot happening in this digital world and I continue to be incredibly bullish. But we are certainly in a “crypto winter.” I also thought that Apple would announce something big related to augmented reality this year, but supposedly that has been pushed to next year. (Wrong)
    9. Climate change and carbon prices: I thought that the price of carbon on the EU’s Emissions Trading System would surge this year. It did not. Right now it’s looking like it’ll end up being fairly flat for the year. Of course, I also had no idea that Russia would do terrible terrible things to Ukraine, which has had dramatic impact on energy markets. (Wrong)
    10. More crypto (Ethereum, Bitcoin, and Solana): Well, I got this last one really wrong. ETH is down ~70% over the last year relative to the US dollar. I was not predicting a “crypto winter.” And I did not know that Sam Bankman-Fried was operating a weird cult-like ponzi scheme out of a penthouse in the Bahamas. None of this changes my views on crypto, but I was still wrong in 2022. (Wrong)

    Looks like I’m somewhere around 5/10.

    Stay tuned for my predictions for 2023. In the meantime, if any of you have predictions of your own, I would love to hear from you in the comment section below or on Twitter.

  • Upsizing in Hong Kong

    It is well known that Hong Kong has some of the most unaffordable housing in the world and that one response to this has been to build increasingly smaller homes — some with the moniker of “nano apartments.”

    But then earlier this year Beijing decided that these nano apartments are actually too small for people, and so a new rule was created requiring homes in Hong Kong to be no smaller than 280 square feet.

    At the same time, interest rates obviously went up, the price cap on homes that can be bought by a first-time buyer with just 10% down was increased, and people have continued to leave Hong Kong for places that are, I’m guessing, more open and less Chinese.

    The unsurprising result is that home prices are now down some 14% for the year, according to Bloomberg. But the other interesting thing about all of this is that buyers are now shifting toward larger homes:

    Developers were only able to sell 48% of the studio apartments available in the first 11 months this year, while the rate for one-bedroom and two-bedroom apartments stood at 53% and 67% respectively, according to Midland Realty.

    Even with the interest rate hikes that we have seen, what seems to be happening is that people are starting to take advantage of this softer market to buy something bigger. Hong Kong is still Hong Kong, meaning grab whatever space you can find when you can.

  • 10 years of contactless payments on London’s public transport

    I was having coffee this week with a self-described luddite and, after we ordered our coffees, he surprised me by pulling out his iPhone and initiating ApplePay. Knowing him and his general views on technology, I said, “I’m surprised that you of all people are now using ApplePay.” To which he responded, “I can’t believe it took me this long to start using it. It’s so convenient! I now barely ever pull out my wallet.” Yup, it is very convenient.

    It also just so happens that this month marks the 10 year anniversary of contactless payments on London’s public transport network. This meaning payment via a bank or credit card, and not via an Oyster card. In fact, part of the reason why London did this was because bus drivers were struggling with both having to give change and having to deal with people who didn’t have enough funds on their Oyster cards.

    So Transport for London (TfL) decided to spend £11 million, design and code the entire thing in-house, and then roll it out across the network starting in 2012. Apparently, adoption started off relatively slowly. At the end of 2013, only about 6 million journeys were made using contactless payments — this is against an initial projection of 25 million. But fast forward to today, and around 70% of all bus journeys are now contactless.

    What is also interesting about this is that TfL now licenses their contactless technology to other cities around the world. Here is a £15 million deal that was announced in 2016, which suggests that they could be generating a fairly respectable return on their initial investment. But aside from this, contactless payments are an obviously good way to onboard people onto public transport. There’s no special card. No lining up at a ticket kiosk. And yes, you can even use your phone.

    Photo by Tomas Anton Escobar on Unsplash

  • Two somewhat useless housing polls

    I tweeted two polls today. The first one is mostly useless:

    It asked whether developers should build more 3-bedroom apartments/condominiums. And not surprisingly, the vast majority of people voted yes. Of course, the problem with this poll is that it says nothing about the overall affordability of these larger suites. (We’ve talked about this many times before on the blog.)

    So it is akin to asking: Should Mercedes put this concept car into production and make it widely available? My answer would obviously be yes. It’s a sweet car. I would like one. But I also don’t like spending money on depreciating “assets”, so in the end I probably wouldn’t buy it. That said, if you’re in the market for a sweet 3-bedroom condominium, I could sell you one right now.

    The second poll is this one here:

    My overly simplistic view of taxes is that it is generally good practice to tax the things you want less of — you know, things like cigarettes and pollution — and reduce taxes on the things you want more of — you know, things like housing and income.

    The irony of this poll is that the vast majority of people voted for road tolls as the way to increase municipal funding. But in practice, this is not what we do at all! We heavily tax new housing and we are extremely reticent to even accurately price the usage of roads and highways.

    Here in Toronto, I guess we kind of tried a few times, but in the end it never passes. Part of the problem, I think, is visibility. New home taxes are easy to hide from consumers. It is also easy to just vilify big bad developers. Road prices, on the other hand, are highly visible and they hit you repeatedly.

    Perhaps what we ought to do is become more transparent about the charges that are levied on all new housing. I bet most people would be surprised.

  • Uber announces micro-fulfillment robots in Miami

    These are autonomous sidewalk robots from Cartken:

    And last week, Uber announced that customers in Miami would start to see some of their food and grocery orders being delivered by them. The way it works is pretty simple. The app tells you when you need to meet your robot on the sidewalk (they apparently don’t do elevators). You open their secure compartment through your phone (or a code?). And then there’s your food! Next year, both companies intend to roll out this service across more of Miami-Dade and in other cities.

    This isn’t the first sidewalk robot in existence. I’ve seen a handful of ones here in Toronto. But if it works, this could be a pretty meaningful partnership. Uber used to do self-driving autonomy in-house, and it was always positioned as central to the company’s future. Uber ended up selling off that part of its business in 2020 in order to raise cash and because autonomy started feeling a lot more difficult than probably most people expected. But what seems clear is that automation remains an important objective for the company. And for good reason.

    I would imagine that, for some people, it’s going to feel weird seeing fleets of sidewalk robots roaming around our cities with shawarma wraps and burritos. But one of the things that services like Uber Eats have taught us is that a lot of people are willing to pay a premium for extreme convenience. So if these robots can add to that convenience and also make fulfillment a little cheaper, I suspect that people will quickly get over the weirdness.

    Supposedly on-demand shawarma is also good for communities:

    “We are excited about how this partnership with Uber will bring the advantages of robotics to food delivery—and ultimately create more connected communities,” said Christian Bersch, Co-founder and CEO at Cartken. “Together, we have the opportunity to reduce traffic congestion, help local merchants to increase delivery capacity, and bring consumers fast, convenient, and emission-free deliveries.”