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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  • Writing into an abyss

    Sometimes I stop and think to myself, “my god, I’ve been writing my daily blog for over 9 years. That’s a huge commitment. Should I stop? Is it really worth it?”

    But of course I do think it is worth it, mostly because I enjoy writing, I enjoy thinking about things, and I enjoy connecting with people through this blog. I don’t want to stop. It’s perhaps also important for me to keep in mind that 9 years maybe isn’t all that long.

    I read this FT article today about investor Howard Marks. Marks is co-founder of Oaktree Capital Management, a person with billions of dollars, and the author of a popular investing memo (200,000+ subscribers) that I generally never miss. And after reading about his backstory, I now feel very much like a blogging baby:

    He began writing the memos in 1990, initially sending them by post to Oaktree’s 50 or so clients. For the first 10 years, “I never had one response,” he says. And then, on January 2 2000, Marks distributed a memo called “bubble.com”, in which he made the “overwhelming” case for “an overheated, speculative market in technology, internet and telecommunications stocks”, similar to past manias such as the 18th-century South Sea Bubble. The memo “had two virtues”, says Marks. “It was right and it was right quickly.” The technology-heavy Nasdaq index slumped four-fifths from peak to trough between March 2000 and October 2002. “After 10 years, I became an overnight success.”

    I have no particular end goal in mind for this blog. I have no need to become an overnight success. My plan is to just continue writing as an adjunct to all of the other things I do. However, I am attracted to the value of discipline, compounding consistency, and long-term thinking.

    It’s not easy doing something for a decade and having nobody respond. At least with this blog, I get the occasional heckler telling me that I’m a greedy developer out to destroy our cities.

    P.S.: If you’re into longish memos about investing, I would encourage you to check out Marks’ latest memo about what really matters. In it, he talks about why short-term events — such as, interest rates might do this — are by far the least important thing to focus on.

  • The effect of new market-rate housing construction on the low-income housing market

    Here is an interesting working paper that assesses the effect of new market-rate housing construction on the low-income housing market:

    Increasing supply is frequently proposed as a solution to rising housing costs. However, there is little evidence on how new market-rate construction—which is typically expensive—affects the market for lower quality housing in the short run. I begin by using address history data to identify 52,000 residents of new multifamily buildings in large cities, their previous address, the current residents of those addresses, and so on. This sequence quickly adds lower-income neighborhoods, suggesting that strong migratory connections link the low-income market to new construction. Next, I combine the address histories with a simulation model to estimate that building 100 new market-rate units leads 45-70 and 17-39 people to move out of below-median and bottom-quintile income tracts, respectively, with almost all of the effect occurring within five years. This suggests that new construction reduces demand and loosens the housing market in low and middle-income areas, even in the short run.

    This paper is not suggesting that everything will be fine so long as you build lots of new and expensive market-rate housing. But it is suggesting that a “filtering” of housing downward does oftentimes take place.

    When you build new supply, you tend to free up some existing supply, and that generally has the opposite effect of what we recently spoke about here, which is an instance of housing filtering upward.

  • Opendoor wants to be a transaction layer for homes

    We have spoken a lot over the years about Opendoor. And for a period of time, iBuying seemed like a very good idea. Zillow go into it. Redfin got into it. Everybody was iBuying. But then this year everybody started losing money, mostly due to algorithms that could not contend with falling prices.

    It turns out that being a market maker for homes can be a tough business because there is a lag between when you buy the home and when you hope to sell it. And so right now, few people want to be an iBuyer. Zillow no longer does it. Redfin no longer does it. And Opendoor’s stock is, at the time of writing this post, down 87.19% YTD.

    It is pretty easy to be pessimistic on this space, and that pessimism may be warranted. Though it may not be. My thinking has always been as follows. The process of buying and selling a home will eventually move online. The industry is ripe for change and there is no debating that. The real question is: how the hell do you do it? Everybody, including me in my late 20s, has tried.

    Two-sided marketplaces are tricky, because you always run into a chicken-and-egg problem. If you don’t have buyers, no seller is going to bother with your real estate marketplace. And if you don’t have sellers (i.e. homes), no buyer is going to bother with your real estate marketplace. So generally speaking, the way to build a marketplace is to start with one side, somehow get them on and using the platform, and then open it up to the other side.

    And this is exactly what iBuying hopes to do. Today it is largely a tool for sellers. It is a tool that says, “I will give you instant liquidity for your home so you don’t have to worry or care about who might actually buy it.” This is, of course, convenient for sellers, which is why people have been using it; but it is capital intensive and, as we have seen this year, it transfers some risk to the iBuyer.

    In the world of Opendoor, they call this a first-party (1P) transaction. It is them buying directly from sellers. But the larger vision is for Opendoor to become more of a transaction layer and instead just facilitate third-party (3P) transactions. This is currently being done through Opendoor Exclusives and the objective here is to match buyers and sellers directly, so that Opendoor can avoid taking on the risk of actually owning homes for a period of time.

    Will this work? I don’t really know. But I do think it is exciting and I do think it is the way to think about what Opendoor is ultimately trying to do with their business.

    Reminder: I am long $OPEN

  • Mid-rise development land is more expensive

    As is the case every quarter, Bullpen Research & Consulting and Batory Management have just published their latest Greater Toronto Area land insights report (for Q3-2022). The average price per buildable square foot (pbsf) in this report remains the same as in Q2 at $95.

    But once again, it’s important to keep in mind that this represents a fairly small sample size (34 land sales in the quarter versus 46 in Q2); that the range in land pricing can be significant across the GTA (here it is $24-274 pbsf); and that there can sometimes be a lag between a deal being struck and actual closing. Here is the summary data:

    Another interesting data point from the report is land price compared to building height. The average price for high-rise development land was $88 pbsf, and the average price for mid-rise development land (5-15 storeys) was $131 pbsf.

    This once again speaks to the cost differential between high-rise and mid-rise housing. The mid-rise scale is certainly a desirable form of infill, but it is also a more expensive form of housing.

  • Bright Moments should come to Toronto

    I love what Bright Moments is doing. And Fred Wilson’s post this morning — about their latest event in Mexico City — reminded me of that.

    Bright Moments describes themselves as “an NFT art collective on a mission to create environments where artists and collectors witness the birth of generative art together.”

    What this means is that they are working to move the experience of NFT art away from individual computer screens toward physical events where the art can be consumed and also created (i.e. minted) in a group setting.

    For a taste of what this actually means, check out their website and then hang out for a bit with their homepage video.

    So far they have hosted an event in the following 5 cities: Venice Beach (okay, actually a neighborhood), New York, Berlin, London, and Mexico City. And at each stop on their tour of what will be 10 places, they have done an in-person minting of their official collection, called CryptoCitizens.

    I haven’t been to one of them, but I can see how it would be a lot of fun and how it might change your perception of NFTs. So I am hoping that for one of their last 4 stops (the first stop was in the “Galaxy”), they’ll come to Toronto. Ethereum was pretty much created in this city, so I think it only makes sense for there to be Toronto CryptoCitizens.

    If you too would like to see this happen, make sure you tweet at Bright Moments and tell them that they should come to the greatest city in the world.

  • What gentrification looks like

    One criticism that you will sometimes hear about development is that the construction of new housing can spur gentrification. The thinking, I think, is that when you create new market-rate housing, richer people will then move in and the area will begin (or continue) its ascent upwards.

    If on the other hand, one were to just stop developing new housing, then the neighborhood would remain stable and static and the fear of gentrification would simply go away. But the flaw in this line of thinking is that it assumes no infill development equals some sort of urban homeostasis.

    Cities are constantly changing. The reality is that what we are talking about, particularly in the case of low-rise single-family areas, is that we want the physical character of neighborhoods to remain more or less the same. But what happens on the inside is whatever.

    Here’s an example:

    https://twitter.com/LenniBug/status/1593645422370848777?s=20&t=goCZ5T0V7CX6VEclAdMnNg

    What you are seeing here are 4 electricity meters, meaning that at some point this structure housed 4 separate homes. But 3 of the 4 meters have now been removed, which presumably means that this structure has been converted (probably back) to a single-family home. So this is 4 homes being reduced to 1.

    I don’t know what this place looks like on the outside, but I’m going to guess that not much has changed in terms of its physical character. It probably looks about the same. But this is still gentrification; it is still an example of a neighborhood moving upmarket.

    The irony is that we tend to be generally okay with this change. We are okay with reducing the number of homes in a neighborhood so long as it happens in a largely inconspicuous and convenient way. But what we are (sometimes) not okay with is increasing the number of homes in a neighborhood. Apparently that creates too much pressure on the existing housing stock.

  • The next hot thing

    When I was in grad school at Penn I was active in two clubs: the real estate club and some tech/entrepreneurship club (I can’t remember the exact name). These were two areas that I was interested in and so I wanted to hang out with people who were also interested in these things and I wanted to hear from experienced people who were active in these fields.

    At that time, which was before the Great Recession, the real estate club was bigger and more active than the tech club. I think it was something like 3 to 1. But I remember one of my professors telling me that participation across the various clubs generally ebbs and flows. Before the dot-com bubble, the tech club was where you wanted to be. But that asset bubble had burst, and so people had moved onto real estate, which, at that time, was in the midst of creating its own asset bubble.

    What we students were effectively doing — by way of deciding where to spend our time — was chasing the next hot thing. They were chasing where they thought they’d be able to make the most money coming out of school. There is, of course, nothing wrong with this. The pursuit of profit is fundamental to capitalism. But at the same time, I think it’s crucially important to have some conviction.

    Right now we are going through another cycle. Real estate was hot last year and it is not right now. Tech was hot last year and it is not right now. NFTs were hot last year and they are not right now. The list goes on. But if you like these things and if you have some conviction, is it really the time to move onto the next club? You may find the opposite to be true. Now is actually the time to ramp up participation.

  • Families in multi-family buildings

    There is an ongoing debate in Toronto, and many other North American cities, about how to encourage more families to live in multi-family buildings. And here that has generally translated into (1) mandating a certain number of larger family-sized suites and (2) creating design guidelines to better equip both suites and buildings for families.

    But what we often ignore is the very real economic reality of buying a large family-sized suite. If you look at the latest Q3-2022 data from Urbanation, the average price of a new condominium in the entire Greater Toronto Area right now is about $1,427 psf.

    So if assume that a good family-sized suite is, oh I don’t know, 1,200 sf, the average price would be about $1.7mm, before you add in any parking (if necessary).

    If this is too big and you can get away with something more similar to a post-war bungalow — let’s say 900 sf — you’re still at nearly $1.3mm, again before any parking. At these sorts of prices, you have a few options, particularly if you’re willing to sprawl outward. And I think it’s important to recognize this.

    The other hurdle remains our industry’s requirement to pre-sell suites in order to obtain financing and start construction. What this effectively means is that you need buyers who can say to themselves, “I’m probably going to need a family-sized suite for the 1.4 kids I may have in 4-5 years.” This isn’t for everyone.

    So if we are truly serious about encouraging more families in multi-family buildings (which is an obviously good idea), I think it can’t just be viewed as a design problem and/or the result of greedy developers who just want to profit maximize by building smaller suites. We need to be looking at both the cost structure behind these homes and new ways to finance them.

  • Are multi-way boulevards at least part of the answer?

    This short video by City Beautiful makes the case for multi-way boulevards. The way to generally think about a multi-way boulevard is that it is a really big street that has been subdivided into areas that move cars relatively quickly and into areas that are a bit more conducive to calmer traffic and doing things like cycling and walking. More specifically, they are streets that have local access lanes on either side.

    And in this video, it is proposed as a possible fix for two kinds of situations: (1) as a solution for what to do when you take down an elevated highway and (2) as a solution for retrofitting suburban arterial roads. I thought this would be a good video to share given that I can think of an elevated highway that should come down and because I have written before about how challenging it can be to change streets after they’ve been built. They tend to be pretty sticky.

    But beyond this, it’s also a good primer on how suburban transportation approaches are highly effective at making cities that you can’t walk around in.

  • World’s largest 3D-printed community

    I’m not sure how I missed this before, but ground has just been broken on what is being called “the world’s largest 3D-printed community.” Co-designed by ICON and Bjarke Ingels Group and “implemented” by Lennar, the community, which is located north of Austin, Texas, will consist of 100 homes ranging from 1,500 to 2,100 square feet. There are 8 different floor plans and 24 different elevations to choose from. Each home will also come with rooftop solar panels.

    Here’s a short description on how the overall construction process is working:

    To automate the manufacturing of homes ICON is using its Vulcan robotic construction system, a large, transportable printer that can be used in tandem with Magma, a cement mixing machine. The homes are being constructed out of Lavacrete, a durable-concrete polymer added in layers to form the structure’s facade and foundation by Vulcan. Their design blends Texas ranch vernacular with sustainable technology, providing a model for the future of large-scale 3D construction. The residences will adhere to a common design, featuring metal roofs, concrete floors, and distinct curvilinear and rib-textured concrete walls, which are the product of 3D printing.

    It is quite a different looking construction site:

    https://twitter.com/ICON3DTech/status/1590826831368040449?s=20&t=arC32yYkYM1hEqOyQNOflA

    Now, there is certainly a conversation to be had about what these machines are building as a housing typology: This is still suburban sprawl, regardless of how the homes are being made and if there are solar panels on the roof. But if you ignore all of this for a minute, there is obviously something pretty incredible about 3D printing being able to now deliver stuff at the scale of a suburban housing project. It represents a fundamental change in how we build, in an industry that has a long history of changing very little.