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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  • Building on rooftops in New York City is really tough

    Hedge fund manager Bill Ackman is a pretty wealthy guy and so it is fairly safe to assume that he could choose to live almost anywhere. For some people the ideal might be a low-rise house with a backyard in the suburbs.

    But since 2018, Ackman has chosen a kind of penthouse apartment on the roof of a 1920’s co-op building in Manhattan’s Upper West Side. It was formerly the home of author Nancy Friday and Ackman supposedly purchased it for $22.5 million.

    He is now looking to demolish the penthouse and build a new two-storey residence designed by architect Norman Foster. The design looks like this, which kind of reminds me of Philip Johnson’s The Glass House:

    Today it was in the news that Ackman has been having a fun time trying to convince his co-op board that a new set of glass boxes on the roof their building is a good idea. FT reported that the project has created “an atmosphere of fear and distrust among residents in the building.”

    I’m not exactly sure what it is about this proposal that is causing fear and distrust but Ackman is on record saying that he thinks this isn’t about heritage preservation or architectural integrity; it’s about people not wanting the disruption that comes along with construction. Fair.

    One way to test this, I suppose, is to propose something more traditional or similar to what’s already there. But I suspect that the other dynamic at play here is simply that he is a rich guy with a starchitect trying to build something cool.

    Building things is tough.

  • Hong Kong needs bigger apartments

    CityLab recently published this article about “why Hong Kong is building apartments the size of parking spaces.” It’s about the city’s “microflats” which are typically in the range of 150 to 300 square feet. Supposedly there about 8,500 of these apartments across Hong Kong and in 2019 (this was apparently peak microflat) they represented about 7% of all new residential construction.

    Hong Kong is one of the densest and most supply constrained real estate markets on the planet. And so there are very good reasons for these affordability pressures and the push toward smaller apartments. The article gets into a number of them. The concern I have is that the article also seems to blame developers for a number of these problems, without a clear understanding of the economics behind new construction.

    It is not enough to simply say that developers need to be less greedy and build bigger apartments. If a 250 sf apartment currently costs $1 million and you think it should be twice as big, then the price is now also going to be somewhere around twice as big. Is the answer more $2 million apartments? Developers trade in space and more space costs more money to build.

    All of this is not to say that housing affordability isn’t a problem worth addressing. It of course is. I am simply saying that there is a cost structure behind every new development that is driving decision making and driving what ultimately gets built. Understanding it can be helpful when looking for solutions. Believe it or not, not all developers are bad. Some actually want to help build beautiful, sustainable, and prosperous cities.

  • Toronto to eliminate parking minimums

    https://twitter.com/donnelly_b/status/1457700400417619975?s=20

    For the last year or so the City of Toronto has been doing a review of parking requirements for new developments. This would include things like how much car and bike parking needs to be provided for each residential unit in a new building. More information on this work can be found here.

    City staff are now preparing to release their initial findings and, as I understand it, it is going to include the removal of most minimum parking standards across the city and the introduction of some maximum parking standards. What this should mean is that in most cases you can build as little parking as you want, but in some cases you’ll be stopped from building too much of it.

    There are lots of examples of other cities doing this. Buffalo is one example and I recently wrote (over here) about what happened to new developments once its minimums were eliminated. Among other things, it revealed where the previous parking requirements were overshooting what the market was actually demanding.

    Urban parking is heavily dilutive to new developments. It drives up the cost of new housing. It is also hypocritical to claim that we want to encourage alternative forms of mobility while at the same time mandating that we build a certain amount of car parking. Do we want people to drive or do we want people to do other things? Which is it?

    Some will bemoan this inevitable loss of parking (though it was already happening). But I think this is a great thing. It is Toronto growing up and continuing to realize that it’s pretty damn hard to build a big and well-functioning global city if everyone is driving around everywhere. Maybe one day we’ll even allow e-scooters.

  • The great reopening: Planet Fitness vs. Peloton

    I came across this chart in Charlie Bilello’s latest newsletter. It was under the heading “the great reopening in 2 charts.” The other chart was live nation (so concerts) vs. zoom. Both are showing returns over the last year. And both are showing a similar divergence between in-person and online activities.

    Now, I’m not a Peloton guy.

    But I know many people who swear (or swore) by them. Maybe it’s because I’ve never been a class guy. I prefer to self direct myself at the gym and I like doing lots of different things. So I have a hard time believing that connected at-home gym equipment can completely supplant traditional gyms. There’s also a social aspect to in-person workouts that I think a lot of people value. I personally find it more motivating to be working out around others.

    But this wasn’t the narrative last year. We were all going to move to the country, zoom into our meetings, and then switch to another sitting device and another screen so that we could connect with our trainers. For me, this chart is yet another reminder that 1) cities are resilient and 2) there are always opportunities in the midst of short-term market dislocations.

  • Largest US cities grew faster and became more diverse over the last decade

    The last decade has been pretty good for many cities. Recent 2020 Census data tells us that of the 50 largest cities in the US, 46 of them grew their population over the last 10 years. On average, these 50 cities grew by about 8.5%, compared to 5.6% for the decade between 2000-2010.

    As you might expect, the fastest growing cities tended to be in the south and the west. The top 3 fastest growing cities over the last decade were Fort Worth (24%), Austin (21.7%), and Seattle (21.1%). The cities with the biggest population declines were Detroit (-10.5%), Baltimore (-5.7%), Milwaukee (-3%).

    It’s important to keep in mind that city boundaries can skew these numbers depending on how they are drawn. A declining “city” population doesn’t necessarily mean that the broader urban area is losing people. Though it does still tell you something about the “city.”

    Another thing that happened over the last decade is that most of the largest US cities continued to become more diverse. In 2000, white populations were a majority (>50%) in 25 of the 50 largest cities. This dropped to 17 cities in 2010 and then 14 cities last year (2020). Meaning that 36 of the largest cities are now “white minority” cities.

    For more data check out this recent article from Brookings.

  • Weather test in Ireland

    A few of us are in Ireland right now visiting with the suppliers who will be providing the windows, sliding doors, louvers, and glass for One Delisle. Thank you for the hospitality Flynn, Duggan Systems, and Carey Glass.

    Below is a video showing a weather test that was done this morning. If any of you have been to the One Delisle Sales Gallery, you will probably recognize these sliding doors. They are fantastic.

    https://videopress.com/v/MSqkI5vJ?resizeToParent=true&cover=true&preloadContent=metadata

    Many of us probably don’t think about the supply chain that exists behind the products and services that we consume. But it is there and there are lots of smart people working “behind the scenes” to make everything happen.

    FYI, the doors passed.

  • 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.