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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  • Real estate marketplaces are not like NFT marketplaces

    A lot less people are buying NFTs today compared to last year. But that’s okay, everything will be fine. So let’s talk about some of the characteristics of NFT marketplaces and how they differ from real estate marketplaces today:

    • When you create or “mint” an NFT, you are doing so on a particular blockchain, such as on the Ethereum blockchain. You might do that minting through a marketplace like OpenSea, but at the end of the day, your NFT now lives on a public blockchain and not on private OpenSea.
    • What that means is that if OpenSea suddenly decides to do something bad that you don’t like (I am in no way picking on OpenSea), you can simply stop using them and just access and trade your NFTs from some other marketplace. As I understand it, there are also lots of smart people working on blockchain interoperability.
    • Once you have your NFT on a blockchain, you can choose, through various applications, to list it for sale, run auctions with a reserve price, or just hold it and do nothing, among other things. You can also set it up so that any proceeds from a future sale are automatically split with someone else — maybe they are a co-creator of the NFT that you minted.
    • Whether you’ve decided to list your NFT for sale or not, there is also the option for the market to make unsolicited offers on it. It is up to you whether or not you’d like to accept any of the offers, but in all cases the offers you receive are made fully public to the market. As a bidder, it’s easy to hide behind “burner” wallets, but you generally can’t hide real intent.
    • If/when you do sell, that sale becomes public record for all to see. The blockchain never forgets and it doesn’t matter which marketplace you decide to use.

    In some real estate markets, it’s fairly easy to see the sales history of a property. But in other markets, such as here in Toronto, it’s still fairly gated. Generally speaking, you are accessing a controlled database and so you need to abide by whatever rules might be in place. If you want to build a new application on top of your local real estate board’s database, that is going to be tricky and it will likely involve more than a few lawyers.

    It is, however, fun to imagine how this might all change with public blockchains. And I think that NFT marketplaces do offer some clues in terms of what could happen to our real estate markets.

    Consider this potentially unexpected scenario:

    In the world of NFTs, there is something known as creator royalties. And they function just as you might expect. As the creator of an NFT, you can set a royalty % that gets paid to you each and every time the NFT is sold. And because the blockchain never forgets, you never have to worry about enforcing and collecting your royalty fee. It just gets automatically distributed.

    Now imagine a world where people like the architect and the developer of a new property are able to attach their own creator royalties. This would be massively cumbersome to administer today, but it’s entirely straightforward once you’ve got everything on a blockchain. And it would be a huge boon for business models that today do not benefit from reoccurring revenues.

    In theory, it might also better align interests, because if you’re a “creator” who wants a good solid royalty fee stream, maybe you’re a little more motivated to do good long-term work. Who knows? This model might never actually happen, but I do think it is indicative of the kind of changes and innovations that we might see as crypto continues to filter through the economy.

  • Consuming architecture

    Is this a true or false statement?

    “It is through media, of course, that we primarily consume architecture.”

    Witold Rybczynski recently spoke about this on his blog. Initially he thought it was a preposterous statement. But then he begrudgingly accepts that it is actually the case today. This in turn leads to an interesting distinction between what it means to experience architecture versus consume architecture.

    The former takes more time. You have to do laborious things like actually be in the space, walk around it, and generally just experience what it’s like to be there. Consuming, on the other hand, is much easier. Maybe it’s as simple as an image in your social feed that you forward to a friend so that they can in turn respond with a single fire emoji. Cool. Consumption done.

    Naturally this distinction translates into different ways of thinking about architecture. In the words of Witold, when you’re a consumer of architecture, you want to be “amused, titillated, and entertained.” You don’t have time for subtleties — things like tactile materials, historical references, light, and shadow. This is about consuming architecture.

    Now, I’m not sure if Witold has given any thought to what web3 and a mixed-reality future will mean for architecture, but it’s an obvious and interesting question. Intuitively, one would think that the more time we spend with digitally mediated experiences, the less time we will have to experience architecture the way nature intended it. Though maybe that’s not the way to think about this.

    I tend to be a bit more rosy about the current state of affairs and the future than Witold, but here are two points. One, consumption allows more people to interact with a piece of architecture. In fact, before writing this post I consumed Studio Gang’s recently completed project in Hawaii. It was nice, and maybe one day I will also experience it. That, I agree, would be even nicer.

    Two, architecture is always a product of the zeitgeist at the time. Part of its job is to reflect culture and, for better or for worse, speak to who we are as a society. And so if architecture has become effective at reflecting our current milieu, isn’t it doing exactly what it is supposed to be doing?

  • Dismantling the capital of neon

    You probably already know this about Hong Kong:

    Neon signs exploded in popularity in Hong Kong after World War II, when the city’s economy started to take off led by its manufacturing industry. As consumerism grew, neon signboards became the go-to format of advertising for all kinds of businesses ranging from restaurants to mahjong parlors to pawn shops. In an era where shopping mostly took place on the street level, the biggest and brightest signs got the most attention.

    But this component of Hong Kong’s aesthetic is rapidly fading. As recent as 2016, it was estimated that there were some 120,000 outdoor signboards, including neon signs, in the city. Today, thousands of neon signs are being removed each year in an effort to “clean up” the city. The result is that about 90% of the city’s neon has now been removed. (Here is an interesting visual essay from Google showing how the city has changed over the years.)

    However, it is also partially a case obsolescence. Neon is a dying craft now that we have technologies like LED. And so as sad as it may be, it’s hard to imagine a world where Hong Kong ever returns to its former glory as a capital of neon.

    Neon signs exploded in the post-war years, but most of them were illegal and I guess some were dangerous by virtue of there being no real enforced standards. But the British clearly didn’t care. Signs were good for business and good for capitalism. And so they let them proliferate. But then the handover to China happened, and it would seem that the Chinese care a little more about neon signs.

    But I think my favorite part of this story is that the origin of these signs is, of course, informal and utilitarian in nature. It was a case of one person erecting a sign and then a neighbor saying, “hey, your big neon sign is blocking my big neon sign, so I’m now going to make an even bigger and bolder neon sign. Maybe I’ll even hang it in the middle of the street.” The result was a self-organizing system that ended up creating, through no overarching plan whatsoever, a unique visual language for Hong Kong.

    That system is now being systematically erased. But lots of people are working to preserve its various artifacts and to celebrate its cultural legacy. These are all good things. But of course, there are other options. At the end of the day, Hong Kong’s visual language is not disappearing because neon is disappearing. It’s disappearing because we’ve decided that is what should happen.

  • TikTok wants to open warehouses

    Last week, Axios revealed that TikTok is looking to hire a bunch of people that can help the company build out fulfillment warehouses and an entire e-commerce supply chain system for its users. All of this was discovered through various job listings that the company has posted to LinkedIn.

    Broadly speaking, this is I think interesting for two reasons. Firstly, it is an atypical approach compared to other social networks. Instagram allows people to sell stuff via its platform, but it’s done through an asset-light approach. What TikTok is doing is more Amazon meets social. (Though this is not my area of expertise and I’m going to need someone like Ben Thompson to do a deep dive into TikTok’s business model.)

    Secondly, I like to think about the physical spaces that service our online activities and what any changes might mean for our cities. Today if you order something from UberEats, it may come to you from a ghost kitchen that is servicing multiple restaurant brands and various food apps, and has no front-of-house operations. Tomorrow if you order something you see on TikTok, it may come to you from one of their warehouses.

    This is not any different than how Amazon works today, except for the fact that TikTok has this incredibly powerful and sticky social layer. If you take this to an extreme, it’s almost as if our physical spaces are slowly becoming back-of-house providers to front-of-house spaces that only exist somewhere online. Who needs Zuck’s metaverse, we may already be living in one.

  • How 20% affordable can impact development pro formas

    This Twitter thread by Richard Wittstock of Domus Homes (developer out in Vancouver) is a timely follow-on to yesterday’s post about housing supply, land-use regulations, and specific policies such as inclusionary zoning. What Richard clearly describes in his thread is the economic impact of a Community Amenity Contribution (CAC) that requires developers to provide 20% social housing.

    https://twitter.com/rwittstock/status/1581061030540873728?s=20&t=EGty0SC2Fk6AYt3qk3IE5g

    The thread will walk you through all of the specific numbers, but I think there are three important takeaways:

    1. Everything has a cost. It is entirely disingenuous for anyone to refer to inclusionary zoning or other similar policies as a mechanism for “no-cost” affordable housing. Even if you believe it is the right public policy approach, there is still a cost. Social housing doesn’t just appear out of thin air.
    2. In Richard’s thread, the remaining market rate condominiums end up needing to be sold for $1,750 psf in order for the entire project to pencil. This is a significant number. But in this case, it is a result of these homes needing to shoulder the cost of the social housing. It is basically saying “housing is too expensive, so let’s make it more expensive so that we can use some of the incremental proceeds to finance less expensive housing.”
    3. If the math doesn’t work, developers will not build new housing.

    P.S. Thank you Volodya Gusak for pointing out Richard’s thread to me.

  • Housing supply in low-cost and high-cost municipalities

    Here is a housing study that looked at housing supply — in the US from 2000 to 2020 — relative to median housing values. And here is the key takeaway:

    What this chart is saying is that new housing is rarely added in cities with the lowest-value homes. The bar on the left represents municipalities whose median housing values are less than 50% of the metropolitan average. And this makes sense. If values are low there is likely little to no incentive to build. The math just doesn’t work.

    However, as home values increase, the incentive to build and the ability to finance new projects also increases, and that is what we see in the above chart. This also makes sense.

    But something interesting happens in the highest-value cities — housing supply once again starts to fall off. And it turns out that there is a bit of a sweet spot. Municipalities whose relative housing values are 110 to 130% of the metropolitan average actually produce the most overall housing. Any higher than that and things start to decline.

    Why is that? The answer likely has to do with restrictive land-use regulations. The highest-value cities (and wealthiest suburbs) often have a lot of large single-family lots, as well as policies to ensure that this kind of built form doesn’t change. This has the effect of both limiting supply and enshrining values.

    So when it comes to housing supply, what you don’t want are low-cost areas. But you also don’t want the highest-value areas. What you want are areas that are doing well, but no so well that they start really restricting new entrants. This is what our industry often refers to as exclusionary zoning.

    Now, one of the most common ways to respond to this problem is to develop an opposing policy, namely inclusionary zoning. But usually what this policy doesn’t do is direct more supply to these high-value and low-density areas. Instead what it typically does is force the segment that is producing the most housing — let’s call it the 110 to 130% band — to deliver more affordable housing.

    It’s a neat trick that sounds pretty cool, but it is not at no cost.

  • Repurposed parking space patios brought in $181 million for Toronto restaurants

    So here’s the thing.

    Given the option, and assuming the weather is favorable, I think that most people would rather eat outside than inside. I know that I certainly would. And that is why one of the great silver linings of the pandemic has been the allocation of more public space toward outdoor dining. Here in Toronto that initiative is called CaféTO, and the impact has been significant:

    Researchers for an association of local business improvement areas estimated that customers spent $181-million in the repurposed parking spaces in the summer of 2021. The same spaces would have generated $3.7-million in parking revenue, according to the local parking authority, and even that modest figure assumed prepandemic levels of demand.

    The above figure is based on the 940 restaurants that participated in the CaféTO program in the summer of 2021. And the estimate is that they served some 4.9 million customers on repurposed parking spaces in the 13 weeks that officially make up summer.

    What I’m not able to figure out from the report, though, is how much of this $181 million is truly incremental. If you look at the breakdown of restaurant sales in the report, participating restaurants saw 36% of sales from CaféTO, 26% from indoor dining, 25% from permanent patios, and 13% from takeout/delivery.

    It generally makes sense that CaféTO would make up the largest share of sales. It was summer. And outside is where people want to be. But again, to what extent did CaféTO drive additional revenue for restaurants? Did it induce more people to dine out? And if these patios weren’t there, how much of the above 36% would have just shifted to indoor dining?

    I don’t know exactly. We would need to see historic sales. But I’m sure it has been a boon to restaurants. There is no doubt in my mind that CaféTO is a great benefit to the city and that it should be a permanent fixture for as long as there are humans who both need to eat and who enjoy being outside in the summer.

    Photo by Udara on Unsplash

  • Development approval timelines in the Greater Toronto Area

    Altus Group recently completed a study for BILD (Building Industry and Land Development Association) that looked at the various factors that might be contributing to housing affordability and supply issues here in the Greater Toronto Area. One area that they looked at was development approval timelines, and I thought these were two interesting charts:

    What this is suggesting is that approval timelines don’t seem to really vary based on project size. Whether you’re rezoning for 3-50 homes or 400-500 homes, it’s probably going to take you a similar amount of time. This in turn creates a strong incentivize to want to develop bigger projects. Among other things, it brings down the “number of days per unit” metric shown in this second chart.

    I have spoken anecdotally before about minimum project size inflation, and here’s some data to support why that is happening. But it really is too bad. We should be doing more to incentivize smaller infill projects. Our cities need development at all scales.

  • [Podcast] Making development work

    I was recently a guest on Aaron Cameron and Adam Powadiuk’s Commercial Real Estate (CRE) Podcast. This is a podcast that they have been doing since 2016 (and it’s “powered” by First National Financial). In this episode, we spoke about making development projects work in this current environment, as well as a bunch of other things. If you’d like to have a listen, click here. It’s about 53 minutes.

    Thanks for having me on your podcast, Aaron and Adam.

  • Use-it-or-lose-it entitlements

    One of the things that cities often try and stamp out is speculation. Homes should not sit empty (enter vacant home tax). Storefronts should not sit empty (enter vacant commercial tax). And development land should not sit undeveloped. To correct this latter problem, one idea that is sometimes floated around is “use-it-or-lose-it” zoning.

    The way it works today in, I believe, most cities, is that if you do a site-specific rezoning on a property — and secure additional density — you get those special permissions forever. If you want to wait 100 years before starting construction, you are technically entitled to do that. Of course, in the interim, no new housing is actually being created. It’s all just on paper.

    The idea with “use-it-or-lose-it” entitlements is that — instead of these permissions lasting forever — they would expire after a certain period of time, which would mean that the entire rezoning process would need to be done all over again. These take time (at least a few years) and cost money (it’s in the millions). And so it has been suggested that this would incentivize developers to not sit on entitled land.

    While I do understand where this line of thinking is coming from, let me make a few points:

    • Generally speaking, most developers don’t just sit on entitled land for fun. They need things to happen, and to happen quickly, so that value can be realized. If there is a problem of too many developers not actually building, it could be a sign that there are other market factors impacting feasibility.
    • There is nothing wrong with rezoning a property and then “flipping it out” to another developer. This is often viewed negatively. But some developers only rezone properties and some developers only buy zoned sites. These can be different phases of the value chain. A rezoning can take years and millions of dollars, and so sometimes developers don’t have the wherewithal or desire to do both.
    • A use-it-or-lose-it approach unfairly punishes developers during market cycles and bear markets, like the one we are experiencing right now. There is no way to predict when the next global pandemic will hit, when construction costs might surge 40%, and when the fed could start rapidly increasing rates to calm inflation. Maybe waiting out the storm is all you can do.
    • If you’re building condominium housing in our market, you generally need pre-sales in order to secure a construction loan. Let’s call it 70% pre-sold. What happens if this takes longer than expected? And what happens if you sell 50%, your site-specific rezoning expires, and then you have to restart the entire process? At this point and in this current market environment, you would likely have to cancel the entire project and reboot it.
    • Timing is important. To give a specific project example, we had planned to launch condominium pre-sales for our One Delisle project in the fall of 2020. And we were ready to do that. But sentiment didn’t feel right. Too pandemic-y still, and so we waited until the spring of 2021. This turned out to be the right decision. But what would have happened had we had this timing gun to our head? (Truthfully, it always feels like there’s a timing gun to our head.)
    • I have written about this before, but go-to-market strategies are changing in this current environment. It is taking longer to start sales and construction because, among other things, developers are spending more time trying to pin down their construction costs. Would rezoning expiries take all of this into consideration and adjust accordingly?
    • Finally, if one is going to do something like force developers to pull all of their building permits within X months of receiving zoning approvals — or else suffer the consequences — then everything required to get there should also have a maximum timeline associated with it. In other words, cities would also need to do things like commit to issuing permits within Y months of receiving a submission — or else. It’s only fair that this cuts both ways. But just to be very, very clear, I do not think this is a good idea.

    What I am broadly saying is that (1) development is a pain in the ass and (2) developers are already heavily incentivized to move quickly and make things happen. It is not uncommon for projects to take 5-10 years from site acquisition to completion. And a lot of unexpected things can happen during that time period. Hopefully losing your entitlements doesn’t become one of them.