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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  • Q2 2021 rental market update for the Greater Toronto Area

    The Greater Toronto Area builds a lot more condominiums than purpose-built rental units. This isn’t the case everywhere though. I was recently reading an article about Salt Lake City and how developers there don’t want to build condominiums. It’s mostly rental housing. There’s simply too much risk and liability with condominiums. I guess this is one of the reasons why real estate is often said to be a local business.

    In any event, because of this dynamic in Toronto, condominium rentals are often used to measure the health of the overall rental market. There are simply more recent comparables to point to when you’re trying to figure out what is “market.” The Toronto Regional Real Estate Board recently published its Q2-2021 rental market report and here is what they found when it comes to condominium apartment rental transactions in the Greater Toronto Area:

    Q2-2021 – 14,920 transactions

    Q1-2021 – 13,168 transactions

    Q2-2020 – 7,300 transactions

    What this report tells us is that rental demand is returning. Transactions and rents are up compared to the first quarter of this year and certainly compared to Q2 of last year (2020), which was the low point of this pandemic. We are not yet back to where we were in Q1-2020 when the city was firing on all cylinders, but I have no doubt that we will get there and ultimately surpass those figures.

    For the full rental market report, click here.

    Photo by Narciso Arellano on Unsplash

  • Should rooming houses be allowed across the city?

    One of the debates I came across on Twitter this week was about multi-tenant houses (also known as rooming houses) in Toronto. Currently, they are allowed in the former city of Toronto, parts of Etobicoke, and in York. But they are illegal everywhere else in the city.

    The reason why the rules differ is simply because they weren’t harmonized following amalgamation in 1998. And so right now we are debating whether or not things should be changed so that multi-tenant houses are permissible across the city.

    As you can probably guess, it’s a divisive issue.

    The more urban councillors believe that rooming houses are vital because of their relative affordability. The more suburban councillors are, on the other hand, speaking for their constituents and saying that homeowners really don’t want them in their communities. It’s about “protecting the integrity of single-family communities.”

    No surprise here.

    For this reason, a recent vote on the issue was deferred. It’s expected to come back to council in September. Maybe there will be more support at that time. Or maybe there won’t be. Either way, rooming houses will continue to exist all across the city. Some of them may just be illegal.

    If I had any say in the matter, I would vote “yes.”

  • Soho House went public this week

    So Soho House went public this week. It is now trading on the NYSE under the ticker $MCG. It renamed itself the Membership Collective Group Inc. for the IPO given the myriad of brands that the company now operates. The company went public at $14 a share and with a $2.8 billion valuation. It raised $420 million through the offering.

    My first reaction when I heard the news was that going public is maybe at odds with being a cool, urban, and exclusive membership club. We’re all about creatives; also, buy our stock. But maybe I’m wrong. This is just the company maturing. At 26 years old, the company now has some 119,000 members and has 30 Soho Houses around the world in 12 different countries.

    Full disclosure: I am a member and a big fan of Soho House.

    But now that the company is public, we also know that it has never turned a profit. And it hopes to do that by next year, as well as open some five to seven new Soho Houses each year while trying to remain “asset light”. As the company does this and pushes toward profitability, there is, of course, a very natural question about what that does to the experience and the overall brand.

    Does it get diluted at all?

    I don’t think that necessarily needs to be the case. But of course the company will end up evolving. On a related note, if anyone from Soho House / MCG is reading this post (unlikely), I would love to connect about an opportunity here in the Toronto area. I think it has the potential to become something truly remarkable — not to mention, much needed. I can be reached, here.

  • Marchetti’s Constant and why commuting actually has positive utility

    @OceanJangda shared a great article with me today about “the psychological benefits of commuting to work.” It is excellent, it cites a lot of psychological research, and I would encourage all of you to give it a read. While it is never fun getting on a packed subway in the morning, the argument is that there are psychological and other positive benefits to commuting. It turns out, we need breaks in our day.

    Here’s an excerpt from the article:

    But here’s the strange part. Many people liberated from the commute have experienced a void they can’t quite name. In it, all theaters of life collapse into one. There are no beginnings or endings. The hero’s journey never happens. The threshold goes uncrossed. The sack of Troy blurs with Telemachus’s math homework. And employers—even the ones that have provided the tools for remote work—see cause for alarm. “No commute may be hurting, not helping, remote worker productivity,” a Microsoft report warned last fall. After-hours chats were up 69 percent among users of the company’s messaging platform, and workers were less engaged and more exhausted.

    It also turns out that there’s kind of a magic commute number. In the mid 1990s, Italian physicist Cesare Marchetti remarked that, all throughout history, humans have tended to cap their commute times at about 60 minutes per day. So a half hour each way. This was the case in ancient cities and it appears to be the case today (ignoring COVID).

    What this mean is that as new technologies became available — such as the automobile — we were able to further decentralize and still only consume about 60 minutes of our day. Apparently the average one-way commute time in America is indeed about 27 minutes. Some people, of course, have much longer commutes, but this is the average. Currently mine is about 12-15 minutes with a coffee stop. Yes, it’s luxurious.

    This 60-minute rule of thumb has become known as Marchetti’s Constant. And there are a number of possible explanations for why this has remained the case. Again, the obvious one is that it helps us detach from work, which is why so many of us have felt burnt out while working from home. We haven’t been shutting off and we need to.

    For more on this, click here.

  • Eight centuries of global real interest rates

    Levered assets, such as real estate, tend to have prices that are correlated with interest rates. Lower rates usually translate into higher asset prices. We are living through this kind of environment right now. And so it is generally valuable to have a view on where rates might go next.

    To do that, it can be helpful to look back at history. And a lot of the time, that look goes as far back as the second half of the 20th century. I wasn’t buying real estate in the 1970s and 1980s, but I am often reminded — by people older than me — that this was a period of high inflation and high interest rates.

    But what about an even longer period of time?

    Paul Schmelzing (visiting researcher at the Bank of England) has a pioneering working paper that was published last year which looks at global interest rates over a 707 year time horizon. His research spans the period of 1311 to 2018 and uses archives and many other sources to try and reconstruct annual rates across the world’s advanced economies.

    Below are two charts from the paper that I found interesting. The first represents the data that was used to weight long-term debt yields across the various advanced economies. My how things change when you take a long enough view. It also shows the share of advanced economy real GDP that is captured by the study (it’s about ~80% — the red line below).

    The second chart shows the headline global real rate from 1317 to 2018. And what Schmelzing discovers is that even when you look across many different monetary and fiscal regimes, real interest rates have never really ever been stable. In fact, when you look as far back as the 14th century, real interest rates have on average declined about 0.6 to 1.6 basis points per year.

    So part of his argument is that what we are seeing today maybe isn’t all that strange; it’s actually expected. For a copy of the full working paper, click here.

    Images: Bank of England

  • Risk and architecture

    Building things, as we all know, is a risky endeavor. I think of myself as an optimist, but the reality is that there are countless things that can go wrong. There’s approvals risk, political risk, market risk, construction risk, design risk, and many other kinds of risk, some/many of which will be entirely unforeseen. If you asked me two years ago, I wouldn’t have listed pandemic risk as being all that high up on the list.

    So one way to think about the process of building/developing is that it is an exercise in risk mitigation. This makes it sound a lot less sexy than “city building.” Given this, there can be a natural and understandable tendency to want to repeat what worked the last time around. Why make a change and introduce more risk into the system if you don’t have to, right? This is arguably one of the reasons why it is often said that the real state industry isn’t all that innovative. Too busy managing risk.

    To give a specific example, let’s say you’re really focused on managing design risk. In this case, you might make the decision to always work with the same architect. This way you can establish a set of typical approaches and a standard spec. You know how to work together and you know what you’re getting when it comes to working drawings. Rinse and repeat as best you can.

    There is also something to be said about a kind of product-driven or branded approach to development. In this case you want some consistency to help build a specific brand and experience. And just because you’re using the same firm, doesn’t necessarily mean you can’t innovate and be design forward. This is what great architects do. Think Foster + Partners and Apple. Their stores are powerful brand symbols but also wonderful and highly site specific.

    An alternative approach might be to continually use different (design) architects. And maybe partnering with an array of celebrated firms is part of your brand story. You introduce a certain degree of design risk because you’re now trying out and building new relationships, but you could perhaps argue that you’re mitigating other risks. Does using a brand name architect help to reduce market risk, for example? In some markets, it’s almost essential.

    I don’t think there’s a right or wrong approach here. Use the same firm, or don’t. Use international starchitects, or don’t. The point is simply that development is fraught with risks that need to be managed. Design is one of many. How you choose to do that depends on what you’re trying to do and what you’re after.

  • High-rise apartment pavilion turned Japanese izakaya in Zurich

    This past spring a new restaurant called Ooki Pavillon opened in the Sihlfeld neighborhood of Zurich. It’s an izakaya-style Japanese restaurant that is housed in a seven-sided pavilion that was initially constructed in the 1950s. The place looks great (see above), but what you may also find interesting is that the pavilion was initially built as an amenity space (leisure room) for one of Zurich’s first high-rise apartment blocks. Check it on street view, here. Supposedly there are only a handful of these sorts of pavilions remaining in the city. And so it is nice to see this one get repurposed (I don’t know what it was prior to Ooki). It is also a good reminder that, while many of our post-war apartment blocks aren’t the most urban in their approach, rethinking the ground plane can go a long way.

    Images: Ooki Pavillon

  • US downtowns by use and square footage

    This is an interesting chart from the New York Times showing the breakdown of (real estate) uses across the largest downtowns/CBDs in the US. It was put together using satellite data and data from CoStar, including their boundary definitions for each downtown/CBD. The point of the chart is to show that some US downtowns are heavily dominated by office square footage. But if you look a bit closer, there are other interesting takeaways. Look at retail in Honolulu, hotels in Austin, and how much residential many US cities have in their CBDs.

  • A look at “tree equity” across the United States

    American Forests, which is a US non-profit conservation organization, publishes something that they call a Tree Equity Score. What it effectively does is map tree cover across US cities. You can explore what that looks like, here. The score considers things like tree canopy, population density, income, race, as well as many other factors, and then produces a single score from 0 to 100. A score of 100 means that a neighborhood has achieved “Tree Equity.”

    There is seemingly a lot that you can glean from this score. For one, American Forests have found that income and race tend to correlate with tree canopy. Lower income neighborhoods tend to have less of it and rich neighborhoods tend to have more of it. You can start to see what that looks like in the Instagram post embedded at the top of this post. If it isn’t showing up, click here.

    But the other thing that is clear from these images is that rich people tend to consume more space. The richer tree-canopied neighborhoods appear to be less dense. The lots are bigger. And there are instances where the homes look to be adjacent to some large contiguous green spaces. This, of course, is a natural market outcome.

    The Tree Equity Score tries to correct for this in its methodology. If a neighborhood’s population density is very low (less than 2,000 people per km2), then it gets a higher tree canopy adjustment factor. It should have more trees. Conversely, if a neighborhood’s population density is high (over 8,000 people per km2), then it’s acceptable for there to be less trees (lower adjustment factor).

    That said, it would be interesting to see a direct comparison of two neighborhoods — one rich and one poor — that have the exact same population densities and overall built form. I think that would speak volumes about tree inequity. I am also very curious about the global relationship between density and household incomes.

    If any of you have a good source, please share it in the comment section below.

  • Shinjuku east exit cat — a new trompe-l’œil in Tokyo

    https://twitter.com/nytimes/status/1413167259988774915?s=20

    Last month, a giant 4K digital cat was installed on a billboard near Shinjuku station in Tokyo. See above tweet. It was created using a 26 x 62 foot LED display, and the resulting effect is very much a trompe-l’œil. The cat looks like it’s sitting on a ledge that is carved into the side of a building.

    The cat doesn’t have a name. But the New York Times has reported that locals have started to call it “Shinjuku east exit cat” because of where it is situated relative to the station. I am going to assume that this name sounds a little more endearing in Japanese.

    Having spent a fair bit of time in Asia in my twenties — mainly Taipei, Tokyo, and Hong Kong — I’ve always been impressed by how playful Asian cities are with their buildings, billboards, signage, and lighting. It can make us feel overly conservative. A trip to Tokyo can be like a trip to the future.

    I appreciate that most people don’t want their cities to be overrun with advertising, and that’s what billboards are usually for. It can get tacky. I get it. But sometimes it just makes sense to stick a massive 3D cat on the side of your building. It’s fun and it captures people’s attention.