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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  • The inclusionary zoning shortfall

    Colliers recently hosted a webinar about inclusionary zoning here in Toronto. On the panel was Jeremiah Shamess (SVP at Colliers / moderator), David Bronskill (partner at Goodmans), Giulio Cescato (senior planner at IBI Group), and Richard Witt (principal at BDP Quadrangle). I wasn’t able to attend (either because of a critical meeting or because I was off attending to a gluttonous lunch burrito), but the slides are now available online. I was going through them this morning and I came across this chart from NBLC:

    What you are seeing here is a comparison between a typical market development before IZ and a development after IZ. As you can see, soft costs remain the same, hard costs remain the same, and the profit margin remains the same. What changes is the overall revenue. Market revenue goes down because you now have fewer market-rate units and a new IZ revenue is added, which is the revenue generated from the addition of affordable units to the project.

    But when you add up the market revenue and the IZ revenue, you don’t get back to the same economic equilibrium. In other words, there has been a destruction of value, and so something is going to have to give in order for this project to pencil and remain financeable. Otherwise, no development will take place. This shortfall is the red box area in the above graph that says, “impact of inclusionary zoning.”

    We have discussed this red box gap a lot on the blog, because how you think this gap gets filled might determine how you think of inclusionary zoning as a policy tool. In this particular instance/graph, the gap is filled by a reduction in the value of the land. Everything else remains static. So what is effectively happening in this model is that the landowner, who has decided to sell their land to the above developer, is now the one who has to indirectly pay for this new affordable housing.

    This may seem like a sensible way to go about it. I mean, people who own land must be rich. Let’s make them pay. But is this actually what is going to happen in practice and over extended periods of time? Soft costs — things like development charges — are always going up. Why aren’t land values perpetually declining in order to offset these additional costs? It is largely because market revenues have also been increasing. Housing keeps getting more expensive. And that is what has been keeping the market going.

    I suspect that over an extended period of time, the same thing will happen here.

  • Do rent controls actually function as intended?

    In 2020, Berlin implemented a rent cap that applied city-wide to both new and existing rental housing contracts. The policy was later found to be unconstitutional and so as of April 2021 this is no longer in place. But for a brief period of time, and for better or for worse, Berlin had a blanket rent control policy. Berlin is, of course, not alone when it comes to rent caps. They are seen by some as a solution to rising home prices, gentrification, and displacement. But do they actually work?

    This recent working paper argues that the answer is no. And that there are other better tools available. Yes, overall rents do tend to decline. But when you have a city-wide policy, it means that rents also decline for high-income households. And in this paper, the economists argue that this tends to benefit the rich more than the poor. Rent caps also tend to decrease overall housing supply, which, as we all know, is counterproductive when you’re trying to make something more affordable/accessible.

    But perhaps the key argument is this one here: Rent controls create a misallocation of housing that can actually decrease overall welfare for lower-income households. The reason behind this is that homes stop getting allocated to those who value it and need it the most. Instead, you get people who may be overhoused or underhoused, but who remain firmly put because of what are below-market rents.

    There are a number of ways in which this distortion might play out. But it could involve someone with a very large older apartment who now no longer needs a large apartment, but is staying put because of their favorable and irreplaceable rent structure. This in turn precludes someone who desperately needs a large apartment from finding a suitable place. And since overall supply has also decreased because of the controls, the problem is exacerbated.

    It can all get a bit complicated, but if you’re interested in this topic, here is another technical research paper from Edward Glaeser and Erzo Luttmer that deals specifically with the misallocation of housing under rent controls.

  • Architecture is a zero-sum game

    Witold Rybczysnki recently had this to say about the American Institute of Architect’s plans to ensure better equity across the profession:

    But the architectural profession is not the post office. It depends on the availability and preferences of clients, it depends on the swings of the economy, and success relies on individual drive and talent. Architecture is a zero-sum game, of course: there are a limited number of building commissions at any one time and if one architect gets the job, another doesn’t. Some of the most prominent commissions—the ones that build a reputation—are the result of architectural competitions. In these blind auditions, only the most talented have a chance to shine. And talent is not evenly distributed; “cream rises” as Stewart Brand memorably wrote in the Whole Earth Catalog. Hard to put your thumb on that scale.

    When I read this I couldn’t help but think of Malcolm Gladwell’s account of what happened when orchestras first started conducting blind auditions in the 1980s. I think he talks about this in his book Blink. As soon as selection committees could no longer see the sex of candidates — and could only hear their musical output — orchestras immediately started hiring more females.

    This is a neat and tidy example that seems to demonstrate that women are perhaps better classical musicians than men, even though the opposite was believed to be true before large screens started obfuscating our inherent biases.

    But the selections process for architects isn’t always as simple. This makes it a bit more difficult to determine if we truly have a meritocracy or if there are in fact some deep rooted prejudices that we maybe aren’t aware of.

    Of course, there is also the possibility that we have more or less a meritocracy, but that we have structural issues which are precluding certain people from fully developing their merits in quite the same way.

    Whatever the case may be, I agree with Witold that blind design competitions are probably a fairly reasonable way to level the playing field. The problem is that design competitions are not universally used. We have never done one when searching for an architect.

    I would like to think that we simply look at their portfolio (in search of both cool and relevant projects), objectively assess their abilities, and then consider their fees. But I also know that us humans are riddled with biases.

  • Pre-fall fashion and Le Corbusier in Firminy-Vert

    I’m not exactly sure what a “pre-fall” menswear collection is all about. But Louis Vuitton recently honored the late and great fashion designer Virgil Abloh by photographing one of them in and around Le Corbusier’s Firminy-Vert complex about an hour outside of Lyon, France.

    Abloh was apparently a huge fan of the work of architect Le Corbusier. And he tried to apply the same kind of utilitarian approach to fashion as Le Corbusier had done to cities, buildings, and housing.

    The Firminy-Vert complex is a series of buildings, one of which is the last of his “Housing Unit” designs (1965). Le Corbusier designed and built a number of these, with the most well known one being in the south of France in Marseille (1952).

    They were a utopian model for high-density housing, with “streets” instead of corridors and with schools and other social functions being housed high up and inside the building. They were intended to act as a kind of vertical city.

    To the untrained eye, they might resemble the kind of public housing that today goes unloved in many cities throughout the world. But for whatever reason, these particular renditions have largely stood the test of time.

    Maybe it’s because of their importance to the development of modernist architecture, or maybe it’s because most of them (if not all of them) are now UNESCO World Heritages sites.

    My take is that it shows you that architecture and built form alone can’t solve every problem. The same building in different places and different contexts, can and will perform very differently. In this particular case, in Firminy-Vert, the complex seems to be doing rather well. The perfect backdrop for a luxury pre-fall fashion collection.

  • Ontario proposes target of 1.5 million new homes over the next 10 years

    Yesterday I wrote about our housing doom loop.

    Today, the province of Ontario responded (maybe not to my post) by publishing this Housing Affordability Task Force report. In it, are 55 recommendations to improve overall housing supply across the province, with the end goal of adding 1.5 million homes over the next 10 years.

    I’m still making my way through the report, but the recommendations can basically be grouped into these five main buckets (taken verbatim from this press release):

    • Make changes to planning policies and zoning to allow for greater density and increase the variety of housing.
    • Reduce and streamline urban design rules to lower costs of development.
    • Depoliticize the approvals process to address NIMBYism and cut red tape to speed up housing.
    • Prevent abuse of the appeal process and address the backlog at the Ontario Land Tribunal by prioritizing cases that increase housing.
    • Align efforts between all levels of government to incentivize more housing.

    Reform is badly needed. And I have gone on and on and on and on over the years about a number of the problems associated with how we build new homes and how we expect them to suddenly become more affordable.

    Still, I think that most of the general public would be shocked to learn how long things take, how complicated we have decided to make land use approvals, and how a single person with a vested interested in seeing no development can hold up the delivery of thousands of new homes.

    Progress is measured in years and decades. Months simply evaporate while you wait for the next PDF document to grant you access to some other labyrinthian planning hurdle. It doesn’t need to be this way.

  • Housing doom loop

    This discussion between Patrick O’Shaughnessy and Marc Andreessen is a great follow-up to my recent post about the productization of housing. Broadly speaking it’s about tech, software eating everything, and the future of the world. But if you skip to around the 15 minute mark, Marc talks about the growing divide in our economy between sectors that are changing rapidly and sectors that are changing slowly.

    Examples of the former include things like computers, media, retail, cars, and a lot of the other stuff that we regular consume. Examples of the latter include things like healthcare, education, and housing (you know, the pillars of the American Dream).

    The noteworthy problem with this divide is that the fast changing sectors are producing things that have been getting more affordable over time. The specific example that he gives is televisions. Think about how much more TV you can get today compared to when they were first introduced.

    In contrast to this, things in the slow changing sectors keep getting more expensive. The same university education is exponentially more expensive today than it was a few decades ago, even though it’s far more important for people to have an education than to own TVs.

    A similar thing can be said about housing. How much has really changed in terms of the way we build new homes?

    One of the common threads across these slow change sectors, Marc argues, is strong government intervention. We restrict supply such that we can’t meet demand. We then respond to higher prices by trying to subsidize demand, but this only drives prices up even further. Because, at the end of the day, we haven’t addressed the underlying issue.

    The result is a doom loop.

    If you can’t see the embedded podcast above, click here.

  • Coldest place in Canada

    I have never been to the Canadian Arctic, but it’s something that is on my list and that I plan to do. And because of some random dinner conversation over the weekend, I have just added Eureka, Nunavut to my weather app so that I can keep tabs on what is the coldest place in Canada.

    The average annual temperature is close to -20 degrees celsius, but as you can see from the above screenshot, it’s a bit colder than that right now. I have it placed next to Rio de Janeiro in my app for dramatic effect.

    First established in 1947, Eureka is a research community / weather station at 80°N with apparently no permanent population. Staff rotate through it with more people coming in the summer months. There is no sunlight between October and February.

    It is the third northernmost settlement in the world after Alert (which is also in Nunavut on Ellesmere Island) and Nord in Greenland. But again, Eureka is on average the coldest.

    The weather station was established in partnership with the United States. Prior to this, we had very little data from the north. But there was a general understanding that having it would be valuable for improving forecasting across the continent.

    So on April 7, 1947, six people showed up on the shorelines of Eureka, built some temporary structures (apparently they were done in time for dinner), and started reporting weather data. Now that data is available on my phone whenever I want it.

  • The productization of housing is set to start in San Jose

    Nabr, which I wrote about last year over here, recently announced its first residential project in San Jose’s SoFA district. Named SoFA One, the project is expected to have 125 apartments that will be offered up on a hybrid lease, own, and lease-to-own model. In this latter scenario, the company is saying that people will be able to buy with as little as 1% down. Construction isn’t scheduled to start until later this year, but if you’d like to get early access, you can add yourself to their waitlist, here.

    As a reminder, Nabr is touting itself as a direct-to-consumer real estate company that aims to bring the same manufacturing and supply chain efficiencies that we have seen in virtually all other industries to the production of housing. This, of course, is not a new ambition. The flatlining of construction productivity is well documented, and lots of architects, builders, and entrepreneurs have tried to innovate in this space over the years. But it’s clearly a notoriously difficult problem to solve. So the obvious question here is: What is going to make Nabr any different?

    Nabr is trying to productize housing. To do this, they’re building a vertically integrated process, going deep into supply chains, and trying to standardize their product offering as much possible. In the case of SoFA One, the base building is expected to consist of a CLT loft-style frame that can then be fitted out with various interior offerings. The idea here is that 90% of the build will be a repeatable system but that the remaining 10% is something that their customers will be able to customize — similar to when you’re buying a new car. The car is the same, but would you like black leather or brown leather?

    Continuing with the car analogy, the company is also taking a move out of Tesla’s playbook for how they plan to roll out their products. The plan is to start at the top of the market (like what Tesla did with its expensive roadster) and then move downmarket as they drive efficiencies and cost savings in their delivery process. What they are trying to do is find the compounding innovation that has been present in most industries but that has been noticeably lacking from construction.

    This all sounds great, but we know that buildings have a myriad of unique challenges compared to other products like cars and smartphones. My iPhone is the same as your iPhone, except for maybe the color and the case I put on it. But each development site is unique. Some have a high water table below it and some don’t. Some have adjacencies that will impact how you need to build and some don’t.

    Each jurisdiction also has unique codes and regulations — everything from urban design guidelines to more or less stringent seismic requirements. Some cities have snow and some cities don’t. The list goes on. So what Nabr is going to have to do is create regionalized products with as much repetition as possible. And if they can generally lock the ~90% base building systems and just adjust the balance as needed, maybe that’s enough to do it.

    At the end of the day, our industry is not completely void of innovation. It’s just a bit slow to change. We never used to build skyscrapers, but now we do. So I’ve decided to cast my developer cynicism aside. Today, we don’t have truly productized housing, but maybe we will.

    As an aside, Nabr also recently shared their leaderboard of cities where people want to see a future Nabr building. Those cities are New York, London, Los Angeles, Toronto, and San Francisco.

    Image: Nabr

  • Case studies on inclusionary zoning

    Back in 2017, Portland, Oregon enacted new inclusionary zoning policies mandating that all new residential projects with 20 or more units must deliver a specified amount of affordable housing. Early accounts, by people like Joe Cortright of City Observatory, suggested that the market was reacting to this new requirement as you might expect. Developers rushed to get new applications onto the books and then there was a drop off in new housing supply.

    Now that it’s been a couple more years, it is perhaps worth checking in on Portland. Cortright did that in the fall of last year and the housing numbers are continuing to fall. From 2019 to 2020, new multi-unit housing permits in Portland fell by more than 60%. I really don’t know the Portland market and so it’s hard for me to comment on whether it is solely the fault of IZ, but there was a peak in 2017 and now housing permits are down significantly. However, they were also down significantly during the financial crisis. It’ll of course be interesting to see how this plays out over a longer time horizon.

    That said, a similar market response was recently reported in another Portland — Portland, Maine. In 2020, the city implemented a “Green New Deal” that stipulated, among other things, that all new residential developments with 10+ units would be subject to their new IZ policies. It has only been just over a year, but according to the city’s planning department, there were 756 new housing units on the books in 2020 prior to the new IZ policies. And since then, that figure has dropped to 139 new housing units. This is admittedly a small market and a relatively short time horizon, but it is still a data point.

    As many of you know, I struggle with inclusionary zoning. Maybe it’s confirmation bias, but I just haven’t been able to find much data suggesting that it can meaningfully increase overall housing supply and the supply of new affordable units. So if any of you are aware of some good case studies outlining successful examples, please share them in the comment section below.

  • A world with less concrete

    Some people like to refer to concrete as cement. But that is technically incorrect. Cement is just one of the main ingredients in concrete, along with water and aggregates. So it’s a bit like referring to a beer as a bottle of yeast.

    That said, cement is pretty integral to concrete and it’s largely the reason why the embodied carbon is so high in this widely-used building material. According to Brian Potter, cement production is responsible for somewhere between 5-10% of global CO2 emissions.

    This is coming from the roughly 4.25 billion metric tons of cement that is produced annually and the 30 billion tons of concrete that it ends up in. The world likes concrete. And in particular, China likes concrete.

    China alone is now producing about half of the world’s cement. And since consumption generally tracks production, and the consumption of cement generally translates into concrete, China is using, by far, the most concrete.

    I don’t know what the right answer is to this particular carbon problem, but Brian Potter’s latest construction physics post is perhaps a good place to start thinking about it. In it, he covers who is producing it, where it is being used, and how we might get to a world with less concrete.