comment 0

The Zillow postmortem

The postmortems surrounding Zillow’s exit from the algorithmic home-flipping business are starting to surface. Here’s an article from the WSJ and here’s Matt Levine’s take on it. The latter piece is very Levine-like and is called, “Zillow tried to make less money.”

The obvious story is that Zillow’s algorithms were not valuing homes correctly. But the story is more nuanced than this. In Q1 of this year, Zillow’s home flipping business was actually more profitable than it had initially expected. And that’s because its algorithms were consistently undervaluing homes. So when it did transact, it was doing so at favorable / low cost bases.

The problem was that the company was not transacting enough and there was a fear of losing ground to competitors like Opendoor. Apparently only about 10% of people who requested an offer from Zillow actually ended up accepting it. Margins were good, but volumes were too low.

So what Zillow did was tweak its algorithm to be more aggressive (see above chart from the WSJ). But this created the opposite problem: low/negative margins, higher volumes.

Once again, it shows you some of the challenges with bringing real estate online. The supply of homes is largely heterogenous and there are a lot of qualitative factors that play into what someone is willing to pay.

comment 0

A universal language for global trade

This article by Ryan Petersen is a good history lesson on how shipping containers came to be. Here is an excerpt:

The idea for containerization came from a trucker, not a shipper. Malcolm McLean started out hauling empty tobacco barrels with his family in North Carolina in 1935. At that time, entire trucks would drive onto ships, wasting both a ton of potential cargo space, plus a chassis that could be on the road moving goods. McLean developed plans to use the so-called trailerships for travel from North Carolina to New York, but U.S. regulations didn’t allow one person to own both a trucking and a shipping company at the same time. So McLean did what any innovation-minded entrepreneur would do: He dumped the trucking company, took out a $22 million loan, and, in January 1956, bought two World War II T-2 tankers. 

The magic of shipping containers is that they created a standard. Now all of a sudden you had standardized boxes that were intermodal. They could fit on ships, rail, and trucks. Ryan refers to containers as the “unsung hero of logistics.”

He also likens them to the HTTP standard that helped give us the internet that we know today. Before HTTP, computers could only communicate with each other if they were on the same local network. Now we are, of course, connected globally.

But while containers standardized a part of our physical infrastructure, there’s a lot that remains fragmented and manual:

The same way data passes between devices via the internet, goods pass between ocean ports, airports, warehouses, and other entities to reach their final destination. Without a logistics standard to act as a request-response protocol, all the players — suppliers, drayage, ports, warehouses, buyers — have to stitch their networks together manually. 

Information gets lost; layers of redundancy, designed as backups given low visibility, slow the exchange: connections end up being very brittle. Let’s say there’s a shipment scheduled to arrive in Long Beach on Tuesday. But which terminal exactly and what pier number? What time is pickup? How long before late charges are incurred? Finding these answers is labor-intensive and imprecise. Logistics managers end up consulting different sources on websites, via email, or in person. 

The dirty secret of the industry is that no one really knows where their stuff is.

I’ll be honest in that I was expecting the article to transition into talk of blockchains. But that’s okay. The underlying message remains the same. Better software and more standardization is needed to improve our physical world.

For some added context: Ryan Petersen is the founder of a company called Flexport.

comment 0

Grocery-anchored real estate as food logistics

Blair Welch, co-founder of Slate Asset Management, was recently on Institutional Real Estate’s podcast talking about grocery-anchored real estate. In it, he talks about the role that this asset class plays in last-mile food logistics, why ecommerce might actually be strengthening its importance, and why it needs to be considered as being distinct from other kinds of retailing. This is a topic that we have covered a few times before on the blog and I think many of you might find it interesting. To have a listen, click here.

comment 1

Rise of renewables in the US

Here are some fascinating figures (from Environment America) about the growth of renewables in the United States:

  • Between 2011 and 2020, renewable energy production (solar, wind, and geothermal) grew at an average rate of 15% per year. Assuming this same rate of growth, the US could be on target to meet all of its electricity needs with renewables by 2035.
  • The US produces 23x more solar power and 3x more wind power than it did in 2011.
  • The median efficiency for new residential solar panels increased by 37% from 2010 to 2019. At the same time, the cost of distributed solar photovoltaic systems fell by 71% and the cost of utility-scale systems fell by about 80% between 2010 and 2018.
  • During this same time period (2010-2018), the cost of land-based wind power fell by 66%.
  • The median range of new electric vehicles increased by more than 3x between 2011 and 2020. The median range is now more than 250 miles on a single charge. By the middle of this year, cumulative plug-in EV sales surpassed 2 million units.
  • Texas is the US state that currently produces the most renewable energy.

To download the full report by Environment America, click here.

Photo by Nuno Marques on Unsplash

comment 0

Toronto is missing out on one of the biggest economic development opportunities right now

Wired published a great article last week talking about “the 10,000 faces that launched an NFT revolution.” What they are of course talking about are the CryptoPunk NFTs that I think most people would agree are one of the “OGs” of NFT art. Initially minted in 2017, they are usually credited with starting the NFT craze that we are all living through today. CryptoPunk #7523, for example, sold for $11.75 million. I think this is the most expensive CryptoPunk in the world. Either way, it is one of the most expensive NFTs out there.

But as I was reading through the article I was reminded of something. Toronto is doing an awful job celebrating the fact that an immense out of crypto innovation has and continues to come out of Toronto. CryptoPunks, which is Larva Labs, was started by two guys from Toronto who met at the University of Toronto. I know that it is still early days for crypto and web3, but why are we not telling this story to the rest of the world and using it to continue to attract the smartest and most ambitious people to our great city?

This is a missed economic development opportunity. And the door won’t be open forever. If any of our city leaders are reading this post (which is unlikely), I would encourage you to give this some serious thought and take action.

On a related note, the above article is great evidence for Chris Dixon’s argument that, “what the smartest people do on the weekend is what everyone else will do during the week in ten years.” Larva Labs was started by two software developers who worked during the day and used their evenings and weekends for new passion projects. CryptoPunks wasn’t their first initiative, but it has obviously come to define them. Smart people need room to play and experiment. Often that happens after hours.

comment 0

The future of parking is a lot less of it — at least here in Toronto

I was having a conversation this week with a few friends in the industry about the future of parking. We were specifically talking about Toronto, but I would imagine that much of this holds true for many other cities around the world.

Here in Toronto, it’s not uncommon to see new parking spaces in central locations selling for upwards of $200k. For those that are not in the industry and not seeing the work and immense costs that go into building parking, this often comes as a surprise.

But as I have said many times before on the blog, parking is often a significant loss leader for new developments. Even at relatively high prices, most developers aren’t covering their costs. So developers naturally aren’t racing out to build more of it. They’re trying to build just what is absolutely necessary for the market.

Given the strong incentives to build less parking, it’s no surprise that parking ratios continue to decline. But consider some of the other parking headwinds:

  • Parking minimums are (hopefully) set to be removed
  • Push toward watertight undergrounds across the city (higher costs)
  • Tipping fees for disposing of contaminated soil (higher costs)
  • Increasing development charges / levies (higher costs)
  • Introduction of inclusionary zoning (higher costs)
  • Inflationary construction cost environment (again, higher costs)

There is a lag between changing cost structures and what the end consumer sees and feels. Junction House, for example, is fully tendered from a construction standpoint and so we are building with a kind of historic cost structure that would be impossible to replicate today. When the next project comes around, they’ll have higher costs and will have to price their homes accordingly.

As rising costs and new policies (like the ones I mention above) begin to work their way through the system, I think it’s fairly obvious that parking ratios will continue to be one of the first things that gets looked at and ultimately chopped down. This will make parking even more scarce in the city and surely far more expensive.

(Back in 2018, Hong Kong had the record for the most expensive parking spot in the world. I wouldn’t be surprised if it still holds this title.)

But as I have argued before, I am of the opinion that building around the car is not the way to build big and well-functioning global cities. Many of us recognize that we need to focus on alternative forms of transport — everything from public transit to new micro-mobility solutions. And given where costs are going, I don’t think we’ll have much choice.

Photo by Sven Mieke on Unsplash

comment 0

San Francisco’s “Monster on Sixth Street” rejected by Board of Supervisors

So, this seems dumb.

San Francisco’s Board of Supervisors recently voted 8-3 in favor of rejecting a new 495-unit residential project at 469 Stevenson Street in SoMa. The property is currently a parking lot used by Nordstrom.

Of the project’s 495 units, 73 were to be offered at affordable rents (about 14% of the project). In addition, the developer was prepared to donate a nearby parcel for additional off-site affordable housing. This would have brought the total count up to 118 units (or about 1/4 of the project).

Apparently gentrification was a serious concern with this project:

“It’s very clear to me that this will have a very significant displacement and social-economic impact on the Sixth Street corridor, on the Filipino community, and the broader low-income community here,” said District 10 Supervisor Shamann Walton.

The mayor seems to get it though:

“This project met all the criteria for approval, and it would have created 500 new homes on what is currently a parking lot surrounded by tall buildings, located near transit,” Breed told the Chronicle. “We can’t keep rejecting new housing and then wondering why rents keep rising.”

comment 0

Workplace occupancy-sensor company raises $125 million funding round

Density, which is a company that provides occupancy-tracking sensors, announced this week that it has just completed a $125 million funding round at a ~$1 billion valuation. This is their Series D. Official announcements, here and here.

On a practical level, the company provides workplace space analytics. They offer sensors that allow companies to anonymously measure how people are using their offices.

How long people are at their desks for (possibly weird), which conference rooms are most used, where people socialize, and so on. With the idea being that if you measure it, you can then optimize it. It’s about how to best use your real estate.

But their overarching mission is “to measure and improve out footprint on the world.” Their ambitions seem to go beyond just office space. It’s about how we occupy our cities, and using analytics to more efficiently design and build them going forward. And that’s pretty interesting.

I’m not intimately familiar with the company, but I thought I would share the news with all of you in case you’d also like to check them out.

comment 0

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.

comment 0

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.