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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  • What would you like to know about real estate development? (Also, inclusionary zoning)

    https://twitter.com/donnelly_b/status/1279410335770951680?s=20

    I asked this question on Twitter this morning because I am planning to write more development-related posts. It’s a topic that seems to be of interest to a lot of people. One question that I received was about the kind of profit margins that Toronto developers have been making over the past few decades. More specifically: How much have they increased? My response was that they haven’t increased. In fact, if anything, they’ve been compressing as a result of rising/additional costs. (I’ve touched on this before in posts like this one about cost-plus pricing.) I think a lot of developers are actually wondering how much elasticity is left in the market to continue absorbing these cost increases.

    Follow-up question to my response: Why then does this report by Steve Pomeroy claim that developers could still make a 15% margin even if they earmarked 30-40% of their units as affordable? Well, this was news to me so I went through the report and committed to responding on this blog. To be more precise, the report finds that there’s room in as-of-right developments to dedicate 10% affordable in medium-cost areas and 25% affordable in high-cost areas. For rezoned sites, the numbers are 30% affordable in high-cost areas and 15% affordable in medium-cost areas. These are a potentially dangerous set of takeaways for a few reasons.

    Very little mid-rise and high-rise development happens as-of-right in the City of Toronto. I don’t know what the exact percentage is, but I suspect it’s low. It would be very difficult to buy land if you were valuing it on this basis. And when you are valuing it — that is, running a development pro forma — it’s not enough to pull averages from a cost guide and run high-level numbers. You can start there, but ultimately you’re going to have to get more granular. Are you factoring the hundreds of thousands of dollars (more for bigger projects) that the City will charge you to occupy any public right-of-ways? What about your public contribution monies? This has historically been hard to estimate because the math that is used is akin to a secret recipe.

    In this particular report, they assume a 100-unit building with 88,750 square feet of gross floor area. Since GFA typically factors some allowable deductions, the gross construction area for the project is going to be greater. Let’s assume it’s 5% more — so about 93,190 square feet. This is how your construction manager will think about and do take-offs for the project. In the report, they peg total construction costs at $23,208,480. That works out to just shy of $250 per square foot (costs divided by above grade GCA). You cannot build a reinforced concrete residential building with below-grade parking for this number in Toronto. In today’s market, and at this small of a scale, you might be looking at $350 to 400 psf.

    On the low end of this range, that would mean your costs have just gone up by $9.4 million — which just so happens to be the expected developer/builder profit in this model. Except now you’re underwater and you won’t be able to finance and build your project. It’s probably time to look at your revenues and see if you can increase your projected rents at all. This is what I was getting at with cost-plus pricing. I would also add that I/we typically shy away from projects of this scale. There isn’t a lot of margin for error. One or two surprises and you might be cooked. So with or without inclusionary zoning, these can be challenging projects that many developers won’t even look at.

    My point with all of this is twofold: development pro formas are delicate and margins aren’t as generous and locked-in as most people seem to think. More often than not we end up passing on sites because we simply can’t make the numbers work. The land is just too expensive. Development happens on the margin. So talking about developers “absorbing” the costs of inclusionary zoning is perhaps the wrong way to frame this discussion. A more appropriate set of questions might be: Who is going to pay for the cost of inclusionary zoning? Are landowners going to suddenly drop their prices? Is the City going to reduce their development charges/impact fees? Or will developers wait until market prices and rents increase so that they can cover these new costs? This latter scenario is how it has worked so far.

    If you have other questions about development that you would like me to take a stab at answering, please leave a comment below or tweet at me.

  • Project Profile: Writer’s Shed

    Sometimes when you’re a writer, you just really need a quiet shed in which to work. This “writer’s shed” by Matt Gibson Architecture + Design out of Australia is remarkably simple — it’s 10 square meters — but also exceedingly cool. All photos by Shannon McGrath.

  • The many forces shaping our cities

    Richard Florida has a three-part essay over on Bloomberg CityLab about the forces that are currently shaping American cities. In part three, he argues that this pandemic will likely accelerate many of the trends that were already underway — families will continue to like the suburbs and young people and businesses will continue to cluster in dominant global cities. At the same time, he argues that we will see a kind of “urban reset.” A window of opportunity where we just might be able to rebuild our cities to be more affordable, more inclusive, and more productive. Could this be the moment where we commit to transforming our suburbs into more walkable mixed-use communities? Could this crisis actually strengthen our cities, as I have argued before on the blog? At this point in time, the only thing I really know for sure is that most of our predictions will be wrong.

  • The problem of Erie Terrace (and why Craven Road has one really long fence)

    On the east side of Toronto is a north-south street called Craven Road. It runs from Queen Street in the south to Danforth Avenue in the north. It’s an odd street in that there are only homes on one side of it — the east side. The west side is fenced off. No garages. No laneway suites. Just one long fence separating Craven Road from the backyards belonging to the homes on neighboring Ashdale Avenue. Given that Craven Road is a real city street with things like services and a name, you might be wondering, as I did, why this condition exits. Surely the people on Ashdale Avenue would be better off if they took proper advantage of their “through lots.”

    What gives?

    Turns out there is a reason for this and it dates back to the beginning of the 20th century. Before 1923, Craven Road was actually called Erie Terrace. It began its life as a smaller laneway outside of the city and was initially home to a “shacktown.” The street was a kind of linear slum, housing new immigrants and providing a place for people to cheaply throw up whatever they could afford to build.

    For a variety of reasons, Erie Terrace eventually became a problem and the City decided that it would be best to widen the street from its varying 18 foot width to the then standard 33 feet. The widening work was authorized in 1911. But as is always the case, there were a few problems. Who would pay for it? The City would pay for a bit of it, but the expectation was that the residents along Erie Terrace would also chip in. And since Erie Terrace was technically a one-sided street, they were in effect being asked to pay double what was typical at the time. Usually the burden would get split across both sides of the street.

    There was also a socioeconomic question. The residents on Ashdale Avenue were thought to be wealthier than those on Erie Terrace and so they supposedly wanted the squalor out of their backyards. The City also had concerns that residents along Ashdale would use this double frontage to do wild and crazy things, such as build garages, sheds, and backyard cottages. Clearly there would be no room for such oddities after the widening.

    I’m not sure which problem proved to be the thorniest, but ultimately a solution was found. Erie Terrace would be widened, but the City would retain a small sliver of land on the west side of it and erect a wooden fence in perpetuity. This would keep both groups separate and ensure that the folks on Ashdale — who had contributed some of their land, but not any money — didn’t get use of the road. And it has remained this way for over a century.

    If you ask me, it seems silly to keep this fence up. This is an ideal street to infill with laneway suites and other missing middle-type housing. But I’m sure I’m not the first person to stumble upon this east end anachronism. For a more detailed history lesson on the Craven Road fence, click here.

  • Integral House sells for $18 million

    One of the most famous and important houses in Toronto, and in North America, just sold. It was reported last week in the Globe and Mail in an article called, “Integral House finds buyer amid wave of high-end Toronto deals.”

    Designed by Shim-Sutcliffe Architects, the 18,000 square foot Integral House was commissioned by mathematician and musician James Stewart. It was completed in 2009 at a cost that seems to vary widely depending on where I look online. But it did just sell for $18 million.

    For photos and drawings of the house, click here. The section is really interesting because of the way in which the house is built into the side of a ravine. The house is 5 storeys, but only 2 of these levels would be visible from the street.

    The article goes on to mention a bunch of other high-end transactions that were consummated during this pandemic, ranging from a $13 million home in Forest Hill to a $9 million condo in Yorkville. These are all positive signs for this pandemic market.

  • Reallocating urban space

    Back in March and April, the belief seemed to be that cities had lost their allure. Density had proven to be a bad thing and we were now all going to live in the country and spend our days working via Zoom. But as our cities begin to slowly reopen, something else seems to be taking place. In fact, the great irony of this pandemic is that it will probably strengthen our cities in the medium and long-term.

    We’re pedestrianizing our streets. (Above is a photo of King William Street in Hamilton that I took last week. London is similarly looking at pedestrianizing parts of Soho.) We’re encouraging restaurants to expand their patio footprints. We’re adding bicycle lanes faster than we ever have before here in Toronto. And we’re finally becoming a little less uptight about the public consumption of alcohol. This is among many other things.

    The reopening of our cities isn’t going to happen overnight. Some, if not all, will probably stumble as we find our way. But as unfortunate as this period of time is for most of us, it is forcing us to reconsider how life is lived in our cities and how we allocate urban space. Some of this will be temporary, but I suspect that a great deal of it will actually stick.

    We’ll then wonder, “why didn’t we do this sooner?”

    Photo: King William Street, Hamilton

  • Three-legged stool

    A good friend of mine, who is also in the industry, once described real estate development as a three-legged stool. In order to develop, you really need three things: expertise, capital, and a site (i.e. land). This probably seems fairly obvious. I mean, you need to know what you’re doing, you need the money to do it, and then you actually need a place to build. But as simple and as obvious as this may seem, there are barriers to entry. Real estate is a capital intensive industry. And despite what the general public seems to believe about the pockets of developers, most are raising outside capital.

    The thing about this three-legged stool is that you don’t necessarily need to have all of the legs at once, and in many cases you won’t. If you have two of them in place, it’s usually feasible to figure out and get the last one. For example, if you know what you’re doing (expertise) and you have a site (owned or “under control”), then presumably you have a development pro forma that makes some economic sense. And with those things, you generally should be able to find the capital that you need to execute on your project.

    I’ve also met people who have managed to build this three-legged stool starting with only one leg. They didn’t have much development experience or capital connections, but they learned enough to figure out how to value development land. They then went out and started knocking on doors, eventually putting together a development assembly. They then took this assembly to developers (people with expertise) and the stool eventually got built. Starting with only one leg just means you’re going to have to work harder to fill in the others.

    A one or two-legged stool won’t stay upright on its own. But hustle will hold it up temporarily while you figure out a creative way to attach the missing leg(s).

    Photo by John Boatile on Unsplash

  • How honest do buildings really need to be?

    What is the right way to do heritage preservation? How should you approach an addition to an existing building? I was reminded of this topic this week, which then reminded me of a post I wrote last summer when this issued flared up in Ottawa because of the “Chateau Laurier battle.” The takeaway from last year’s post was this: “We cannot recreate the past, only parody it.” Indeed, the Province of Ontario maintains that “legibility” is an important principle in the conservation of built heritage properties. People should be able to distinguish the new from the old. Don’t blur the distinction.

    I will also say that in architecture school they instil in you the ideas that buildings should be honest, they should reflect the current milieu, and that materials should be truthful. What this loosely means is that you want to use materials where they are most appropriate and you want to reveal their true nature. Don’t pretend that things are something they are not. i.e. Don’t be fake. At the same time, I very early on learned that most people don’t give a shit about the kind of nuanced and theoretical discussions that happen within architecture schools. They like what they like.

    And there’s a big segment of the market that wants buildings to look as they did a long time ago. They want tradition. They want historic. Or they at least want some sort of “transitional” style that sits somewhere between old and kind of new. They want architects like Robert A.M. Stern and Richard Wengle, both of which are extremely popular and talented. So really, who am I to judge? As most of you will know, I’m a modernist. I am more interested in the future than I am in the past. But I recognize that the past is important and should not be forgotten. How best to do that is up for debate.

  • Views from the Junction

    Shot on DJI Mavic Mini

  • The value of Champagne

    Westmount Gaurantee hosted a Champagne tasting event for its clients this evening. Obviously it took place over Zoom. It was a great event and I learned a few things about Champagne. As most of you will know, sparkling wine cannot be called Champagne unless it’s from Champagne, France — a region that, as of 2008, included about 76,000 acres of vineyards and 319 villages. But as I started thinking about this acreage, the developer in me couldn’t help but wonder: “How was the boundary for the Champagne region established? Is it based on unique soil conditions that can’t be found anywhere else in France and the world, or is this a way to artificially control the supply of Champagne and fix prices?”

    As you might imagine, the answer is complicated. (See the Champagne Riots of 1910-1911.) The viticultural boundaries of Champagne were legally defined in 1927. And the entire area is compromised of five wine-producing districts. But there have been revisions to this boundary. In 2008, the production zone was increased from 319 communes to 357. (I’m sure this was highly controversial.) And since the value of land is dependent on what you can do with it, this would have had a dramatic and overnight impact on land values. Yesterday you couldn’t apply a Champagne label, but today you can. According to this article from 2008, we are talking €5,000 a hectare to €1 million per hectare because of a simple boundary change. That is the value of “Champagne.”

    Photo by Lomig on Unsplash