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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  • Market making vs. home trading

    Matt Levine’s latest column is a good follow-up to yesterday’s post about Zillow exiting the algorithmic home-buying business. In it, he talks about the differences between being a market maker and being a trader of homes. Part of his argument is that if you’re a pure market maker then, in theory, you don’t really care about where home values are going. Because either way, you’re just earning a spread.

    Here’s an excerpt:

    A market maker is someone who buys and sells an asset in order to profit from the spread, not someone who accurately forecasts the price of an asset six months from now. End users want to buy or sell stocks or bonds or houses, they want to do it quickly at a predictable price, so they go to a market maker who will provide that service. The market maker buys from sellers and sells from buyers and does its best to match them up; ideally it buys an asset from a seller and resells it to a buyer within a fairly short time. It collects a “spread” from the buyer and seller: It buys from the buyer at a bit less than the fair market price, and sells to the seller at a bit more than the fair market price, because it is providing them a valuable service, the service of “immediacy” or “liquidity,” the service of always being available to buy or sell. 

    The problem with real estate is that you’re not able to buy and sell with the same kind of rapidity:

    But in the house business you can’t generally buy a house in the morning and sell it in the afternoon. You sign a contract to buy a house in the morning, then you do an inspection and title search and stuff, then a few weeks later you close on the house and deliver the money, then you spruce up the house a bit, then you wait for a buyer to come in — which takes, not seconds as it does in the stock market, but days or weeks or months — then you show the house to the buyer, then you sign a contract to sell it, then they do an inspection and title search and stuff, then you wait around for them to get a mortgage, then a few months later you close on the sale.

    This is an important distinction. And so he argues that what we’re actually talking about is the business of trading homes, which means that you have to have a view (and hopefully some conviction) on where home prices are going to go in the future. Sometimes you will be wrong. But that’s okay, as long as you’re right more often than you’re wrong.

  • Zillow exits algorithmic home-flipping business

    Things are happening in the algorithmic home-flipping business right now.

    A few weeks ago I wrote about Zillow pausing this part of its business. It was then later revealed that the company was set to take a loss on many/most of the homes that it had purchased through this “iBuying” division. In October, it listed some 250 homes in Phoenix and on average they were priced about 6.2% below what they had bought them for.

    So it is perhaps no surprise that today the company announced that it will be the exiting the business of buying high and selling low. Turns out this isn’t good for business.

    But does this mean that the model doesn’t work or that Zillow simply didn’t have its algorithms tuned correctly? Following the news, competitor Opendoor took to Twitter to reassure everyone that the digitization of real estate is still well underway:

    https://twitter.com/Opendoor/status/1455650519804829696?s=20

    Opendoor also announced today that it will be expanding technical hiring into Canada — starting first with Toronto. The plan is to hire upwards of 100 people over the next several years. Presumably this is about access to talent, but presumably it also means that Opendoor is looking toward one day expanding into Canada.

    Stay tuned.

    Disclosure: I continue to be long $OPEN.

  • The real smart city is going to be a crypto city

    Vitalik Buterin — who is best known as the cofounder of Ethereum — recently penned this post on his blog where he argues that “crypto cities broadly are an idea whose time has come.” (Credit to Shamez Virani for sending the post to me this morning.) There has been a lot of discussion over the years about the rise of smart cities. I for one am not really sure what that means besides the fact that it sounds good and it likely involves a bunch of tech and data collection. But maybe crypto can help.

    What Vitalik argues in his post is that we are now at a point in time where blockchain technologies have the opportunity to do two things for cities. One, we can take existing systems and processes and use blockchains to make them more “trusted, transparent, and verifiable.” That would be a very good thing. But the more interesting one is number two. We have the opportunity to use blockchains to create radically new forms of asset ownership (land and other scarce assets) and municipal governance.

    One specific example is that of a “city coin”, which cities like Miami are already experimenting with. Supposedly they are one of the first, which of course aligns with Mayor Suarez’s vision to position Miami as a preeminent tech and crypto hub. Though as Vitalik points out in his post, it’s important to maintain some optionality, especially since we are still very much in the early innings of this new frontier. (This recent episode on the Tim Ferriss Show had a great analogy in saying that the anthem at the beginning of the game isn’t even over yet.)

    So how might a “city coin” living on a blockchain work?

    Well let’s imagine that there are incentives in place for all of us who live in Toronto to own the Toronto coin (there’s still time to come up with a better name). You need it to pay your property taxes, you need it to pay for parking, and you need it to vote in the next election, among many other things. So there’s an incentive to buy and hold it if you’re a resident of this great city, but there is far less incentive to hold it if you don’t live here. (Maybe you own a bit of it because you’re a frequent visitor and/or your relatives live here.)

    One of the interesting things about something like this is that it would immediately create economic alignment. Now all of a sudden, everyone who lives in Toronto and owns Toronto coin would have a vested interest in seeing Toronto thrive. At the very least they would want to see the coin hold its value and ideally they would hope to see it appreciate.

    At the same time, the Toronto coin could be used for all sorts of governance matters. Take for example, land use and zoning decisions. What if we set things up such that these decisions weren’t made by the people who show up to community meetings in the basement of their local church but that they were instead made by everyone who holds the Toronto coin? i.e. The entire city, all of whom are, in a way, equity holders.

    In theory we could do this kind of voting today. However, part of the problem is that the economic alignment isn’t there without something like a Toronto coin. Right now a big part of the economic incentive rests with homeownership. If I own a home and a new development is proposed next to me, I am incentivized to do whatever it takes to selfishly maximize my own individual outcomes. And if that means no development and no more homes for people, then so be it.

    But what if we all had part of our net worth tied up in the Toronto coin? And what if when housing supply did not meet housing demand, the value of our coins dropped because it meant fewer residents (less demand for Toronto coin) and more people voting with their feet and moving to other geographies (more demand for some other coin)? This is one of the things about the crypto space. It turns everyone into evangelists because there are now strong economic incentives to be that way.

    Who knows if this is the way that things will actually play out. But it is part of the promise of crypto and it is not some pipe dream. It is already starting to take hold around the world and in the US in places like Wyoming and Colorado. For more on this topic, make sure to check out Vitalik’s full blog post.

  • Apartment rents in San Francisco have yet to fully recover

    https://twitter.com/donnelly_b/status/1453466587835535364?s=20

    On last week’s earnings call, apartment landlord Equity Residential mentioned that the two US markets most impacted by a delayed return to office appear to be San Francisco and Seattle. They went on to say that San Francisco is the only market in which they operate where rents have not fully recovered to pre-pandemic levels.

    According to Bloomberg (which is relying on employee swipe-card data), office utilization in the San Francisco area is sitting at around 25% as of October 20, 2021. This is compared to a national average of around 37%. The obvious rationale here is that large tech companies have delayed their return to office and/or been more aggressive in adopting remote/hybrid work.

    Looking at these numbers, it is clear that as someone who has been going into the office every day since the start of summer, I am currently in the minority.

  • Schematic design phase complete for Parkview Mountain House

    Some of you may be aware that Globizen is working on a new project in Park City, Utah right now called the Parkview Mountain House.

    It was first announced on the Globizen Journal back in the summer and then a later announcement was made appointing New York-based Mattaforma as the project architect. It’s kind of a great story because Mattaforma is a relatively new firm that was formed by two architects who used to be at Studio Gang. So we have a long history of working together.

    The vision for the project is a creative retreat in the mountains. A place to unplug, be active, and hopefully a place to foster creative expression, whatever that may be for you. It was inspired by the trip that I have been making to the mountains each year where we try and do exactly this. It’s one of my favorite times of the year and one that I look forward to the minute the last one is over.

    The team has just finished the schematic design phase for the house (see above axonometric). And we are now working through some of the structural and geotechnical issues that come with building in the mountains on very steep terrain.

    To give you all one example, we had initially contemplated large multi-storey retaining walls to hold back the earth and embed the house into the side of the mountain. But that is now being changed to a stepped foundation that minimizes the amount of excavation and reduces each retaining wall to no more than a single storey. This move will also result in more wood and less concrete. It has been a fun learning process.

    The creative retreat concept has also been evolving and we recently decided to make digital NFT art an integral part of the experience. We have a few collections that we have been stocking up on, but if any of you have any recommendations we are, of course, all ears.

    Once the floor plans have been finalized, they’ll be posted up on the Globizen Journal. So make sure to e-mail subscribe and follow along on Instagram at @parkviewhousepc.

  • Toronto green-lights new inclusionary zoning policy

    Toronto’s new inclusionary zoning policy went to Planning and Housing Committee this week. Agenda item, here. The recommendations were approved, which means that the item will move onto City Council next month for final approval.

    Here’s a summary of some what is being proposed (though keep in mind that I am not a planner and you should probably do your own due diligence if you’re looking to buy land and/or develop here):

    • IZ to come into force next year in 2022.
    • IZ to only apply on projects with 100 or more residential units.
    • Three distinct market areas across the City with differing set aside rates (see below charts). This strategy acknowledges the fact that you generally need submarkets with expensive housing and rising prices to be able to absorb the financial burden of the affordable housing units. I’ve written a lot about this dynamic on the blog. Relevant posts, here.
    • It’s in the chart, but it’s perhaps worth repeating: Purpose-built rental projects will not be required to deliver any affordable housing units at the outset of this policy. This is important to note because the margins on purpose-built rentals are razor thin.
    • The set aside rates are planned to increase to 8-22% by 2030.
    • The affordable units will need to remain affordable for 99 years. And the rents and prices are to be geared toward low and moderate income households, which are currently defined as those earning between $32,000 and $92,000.
    • Clear transition period for the development industry.
    • Ongoing monitoring of the policy to make sure it doesn’t suck.

    If you’re interested, the full staff recommendation report can be found here and the draft OPA and zoning by-law can be found here and here.

  • OMA New York has just published its first book

    OMA NY — the New York office of OMA — has just published its first monograph. It’s called OMA NY: Search Term. For those of you who may be unfamiliar, Office for Metropolitan Architecture (OMA) is an architecture firm that was founded by Rem Koolhaas in Rotterdam in 1975.

    The firm is considered to be one of the most influential in the world because of their projects, the writing and thinking of Rem Koolhaas, and because of how many notable architects developed their craft under his tutelage.

    When I was in architecture school, OMA was a firm that people wanted to work at and I had friends who did. You weren’t paid very much from what I remember, but people put up with that because you wanted OMA on your resume and you wanted to learn things from Rem (apparently he’s a big fan of Raisin Bran in the morning).

    The New York office of OMA is run by Shohei Shigematsu and Jason Long who are both partners. The practice started out as an American outpost, but it has become more independent over the years and, from what I can gather, it now prides itself on having its own attitudes and views on architecture and urbanism.

    This monograph is about that. Twenty radical projects from the firm’s new guard. It also includes interviews from people like Virgil Abloh (Off-White). I don’t have a copy yet, but if you’re an architecture and urbanism person, you probably want this one on your bookshelf.

    Image: Rizzoli

  • NFTs and real estate

    I have started using my NFT collection as a rotating face on my Apple Watch. The one you see below is a Cool Bean, but I have many others in the gallery. Lately, I have been gravitating towards NFTs on the Solana blockchain because of how fast and cheap it is to transact. Though I am still much longer with ETH.

    https://twitter.com/donnelly_b/status/1453406293256024074?s=20

    This is all pretty geeky stuff, but it reminded me just how early we are when it comes to web3. NFT art has exploded over the last year, but the broader ecosystem is still getting built out. We are all going to want mediums in which to display and experience this new form of art. And as soon as that happens, I suspect they won’t be thought of as “just JPEGs” anymore.

    (One of the nicest digital art displays that I have seen is the MONO X7. It’s currently available for pre-order but I haven’t yet pulled the trigger.)

    On a related note, I follow a human on Twitter who goes by 6529, because that is the Cryptopunk number that she/he owns. 6529 is incredibly bullish on crypto and NFTs, and tends to write long and insightful threads about it. One of the most recent ones is about real estate and I think that many of you will find it a worthwhile read.

    https://twitter.com/punk6529/status/1452797543478448129?s=20

    What I particularly like about it is that it reminds us that so much of what we consider to be normal and the status quo is actually just a construct that people before us created. Usually it’s not perfect and there are many inherent flaws, but it’s the best that could be done at the time. That or it just worked.

    And because it’s the way it’s been “always done”, it just recedes into the background and most of us don’t give it much thought. Of course, so much of entrepreneurship is about questioning the status quo and doing things differently. Why this way? Could it be better? And it’s precisely during these moments of change where lots of value is created.

  • New Zealand just abolished single-family zoning (for the most part)

    New Zealand has been in the news lately for sweeping housing legislation that effectively abolishes single-family zoning throughout most of Auckland, Hamilton, Tauranga, Wellington, and Christchurch.

    But before I get into how this will all work, here’s a bit of background from an article that Matt Gurney wrote talking about Toronto’s inability to build affordable housing and create safe streets:

    Now it’s time to segue back to the New Zealand thing, and there’s no particularly graceful way to do it, so I’ll just be blunt and inelegant: the federal government in New Zealand intervened on local housing rules because there was a crisis that local leaders were unable or unwilling to address. New Zealand has severe housing-affordability challenges (though Canada seems determined to close the gap). This has been a problem in New Zealand for years, and not enough was done, so the federal government stepped in… The government expects this to immediately spur construction of new housing units.

    It is no doubt a top down approach. But we all know how difficult it is to build anything at all when you start from the other end.

    So the way this new legislation will work is that it forces local councils to allow landowners to build up to 3 homes and 3 storeys on most lots. This is instead of 1 home per lot. The maximum site coverage has also been increased to 50%. And all of this will be available on an as-of-right basis, so no special permissions or variances needed.

    The pitch is that this will unlock as many as 105,000 new homes in already built-up areas. This is, of course, a good thing for a whole host of reasons. It uses land and infrastructure more efficiently, it makes public transit more viable, and it increases housing supply in a highly constrained market.

    I suspect that we will be seeing a lot more of this in the coming years.

  • Paris announces plan for “100% cycling city”

    Paris just announced plans to become a “100% cycling city.” A follow-up to plan vélo 2015-2020, which saw a doubling of the city’s bike lanes, plan vélo 2021-2026 includes 130 km of new bike lanes and 52 km of pandemic bike lanes that will now be made permanent.

    In addition to cycling lanes, the plans include new bike parking, new transit integrations, and a bunch of other things that are meant to strengthen the overall ecosystem in the city. The total budget for this second plan is about €100 million, which will bring the total cycling investment over the last 10-11 years to about €250 million. This is a serious commitment to cycling.

    It’s also a good example of one of the things that we have been talking about on this blog. This pandemic forced us to rethink how we allocate urban space — everything from outdoor restaurant patios to bike lanes. And as we can see here, many of the positive changes are not surprisingly starting to stick.