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.
The Financial Times published the following chart last night. It shows the cumulative number of COVID-19 cases around the world, across the number of days since the 100th case in that particular country. The message here is that most western countries appear to be on a similar trajectory. (The grey dotted line represents a 33% daily increase.) Whereas in Asia, and in particular Hong Kong and Singapore, they have seemingly managed to slow the spread.
Now, there are a number of possible explanations for the outliers; everything from stricter quarantine rules to more rigorous testing. There’s also an argument that Hong Kong and Singapore were better prepared as a result of the SARS outbreak in 2002. (More on these explanations, here.) But the other factor at play seems to be climate.
A recent study (by Jingyuan Wang, Ke Tang, Kai Feng, and Weifeng Lv) has concluded that, like the flu, the transmission of COVID-19 appears to be significantly impacted by both air temperature and relative humidity. In their research, they looked at the reproductive number (R), or the severity of infectiousness, for all Chinese cities with more than 40 cases between January 21 to 23, 2020. (Large-scale government interventions began on January 24, 2020 and would have therefore skewed the numbers.)
What they found was that for every one degree Celsius increase in temperature and every one degree Celsius increase in relative humidity, the reproductive numbers drop by 0.0383 and 0.0224, respectively. Air temperature, in other words, has more of a positive impact on containing spread than relative humidity — which feels right. That is also apparent when you look at the above charts. Take note of Korea, Iran, and Italy near the top left corner of the temperature chart.
If you’d like to download a full copy of the research paper, click here.
In 1956, Donald Horton and Richard Wohl coined the term parasocial interaction to describe the psychological relationship that people were starting to have with TV personalities. Though radio had already started this phenomenon, the television brought with it an entirely new dimension. People started to really feel as if they knew that person on TV. They had become a friend.
But as Christopher Mims points out in this recent article about loneliness during the coronavirus pandemic, the problem with parasocial interaction is that it’s entirely one-sided. It also isn’t real: “Sitting around the house watching television, parasocializing with our favorite news anchors or sitcom characters, didn’t confer the same benefits as socializing with real people.”
The internet has further enhanced the way we parasocialize. Similar to how TV built on radio, the internet has built on TV. Instead of just scripted television shows, we now have Instagram Stories, TikTok videos, inappropriate Snaps, and many other methods of communication, some of which are maybe a little less scripted.
Of course, we also see our real friends online and those people we know, but never actually spend time with, maintaining only a loose “relationship” via the occasional emoji reaction. Mims argues that this has created a new kind of “mental equivalence.” It has become harder for our minds to distinguish between our real friends and our parasocial friends.
Recently, we have all become familiar with terms like “flatten the curve” and “social distancing.” But what is clear as we all start isolating ourselves at home — whether mostly or entirely — is this: it sucks. Even with all of the tech and social media that we now have available to us, we cannot replace what it’s like to give someone a hung, look them in the eyes, and have a meaningful conversation.
That said, the Italians seem to have really mastered this whole self-isolation thing with their balcony orchestras and internet videos like this one here:
Yesterday I made a comment on Twitter about most people not understanding to what extent government bureaucracy inhibits the delivery of new housing in this city. It received a number of responses, including remarks about how development charges have also recently doubled and how this statement applies to pretty much every city out there. But there was also a comment about developers not being transparent and not properly explaining the impact to the public. In other words: please demystify the development pro forma. I thought that was a fair remark, and so this post is going to be a response to that comment.
Before I begin, it’s important to keep in mind that most developers have investors. These investors put up most of the money required for a project and in turn they take most of the profits. However, there is typically a “promote” in place, which is just an incentive structure that pays the developer more of the profits (disproportionate to the cash they invested in the project) if they perform and hit certain return benchmarks. All of this is to say that developers aren’t usually the ones holding all of the cash (which is what a lot of the public seems to think) and they are accountable to their investors to do what they said they would do.
Now let’s run through the costs that make up a “typical” development pro forma. For this example, I am going to assume that we’re talking about a 100,000 square foot mid-rise building; the kind that you might build and find along any one of Toronto’s Avenues. If we were doing this in real life, we would get more precise with the areas and consider gross construction area, gross floor area (city definition), and the net saleable/rentable areas. But to keep the math simple, we will ignore these differences. That’s the approach I’m going to take overall in the post. What you need to know, though, is that you have to pay to build the entire building, but you only get to collect revenue on a portion of it. That’s why the “efficiency” of a building matters.
Land
The value of development land is a function of what you can build and the revenue you can ultimately collect. So location matters a great deal. Based on the latest high-density land report from Bullpen and Batory, the average price of an unzoned mid-rise site in the City of Toronto is about $231 psf. So let’s assume a land cost for our project of $23.1 million. Assuming we can get land financing at 60% of the value of the land (loan-to-value), that would mean we’re putting up $9.24 million of cash (plus a loan guarantee!) and borrowing $13.86 million to start our project. At 5.25% per annum (interest-only loan), our annual interest charges would be about $727,650. From now on forward, we’re going to pay ~$60k in additional interest charges for every month that our project is delayed. Buckle up.
You should now begin to see why time is so valuable and why government bureaucracy can be so frustrating. As a developer, you’re heavily incentivized to move things forward, whereas it can often feel like everyone around you is trying to deliberately erect roadblocks in order to slow you down and make your project more expensive to build. Oftentimes, it is because it is less risky for them to punt things down the road and not make a decision. That is not the case for us and our project.
Hard Costs
Onto construction (or hard) costs. As many of you know, these have risen dramatically over the last 4 to 5 years. On some of our projects, we have added over $100 psf in hard costs alone. Part of this has to do with a busy construction market and part of this has to do with new building requirements: watertight undergrounds, new Green Standards, and so on. For our project, which is on the small side, let’s assume $360 psf for a total of $36 million. This would include our direct construction costs and our construction manager’s overhead (general conditions). We should also prepare for some of the trades to decline to bid on our project because it is too small and not worth their time.
Soft Costs
Soft costs include everything from consultant costs and interest charges to government levies and management fees. Like everything in your pro forma, these absolutely need to be broken out line by line. Don’t be lazy here. But for the purposes of this simplistic example, we’re going to use 75% of hard costs, which works out to be $27 million (or $270 psf). When I first started out in the development business, the rule of thumb was closer to 25% of hard costs. But times have changed. Government fees, alone, can make up about 1/4 of the price of a new condo in Toronto.
Adding up all of these costs, we’re at $861 psf or $86.1 million in costs. It’s now time to consider the revenue side. $1,000 psf seems like a nice round number, so let’s start there and assume we’re going to sell our condos for that. Typically in Toronto, the price you pay is inclusive of HST, so that liability will need to be deducted from our revenue line. It’s not a straight 13% because of the new home rebate, but the rebate also hasn’t been properly indexed since it was introduced and so the liability could still be upwards of 10%. (This is worthy of a separate blog post.) The result is $900 psf in revenue and a margin on costs that is less than 5%. No sensible developer would want to do this project. One misstep (or development charge increase) and you’re dead.
So let’s increase our condo prices to $1,100 psf. Maybe that will work. In doing that, we get to a margin on costs that is nearly 15%. Okay, now we’re in the range. But let’s say we just got delayed by 6 months (boom, interest charges) and our hard costs turned out to be off by $15. They’re actually working out to be $375 psf because of some new tariff and because the formworkers in the city are all tied up on bigger projects and couldn’t give a shit about our cute little infill project. Now we’re offside again in terms of our margin on costs. No problem, let’s try and push condo prices a bit more. Is $1,150 achievable? Perhaps. But ideally, given the above, we would want to be at $1,200 psf just to be safe.
This is an overly simplistic example of the math that goes into a development pro forma. But hopefully it begins to show you (1) just how many moving parts there are in a development project and (2) the kind of pricing that is required in today’s cost environment. Developers are reacting to the costs that they are being thrown and it is creating upward pressure on home prices. (See related post: Cost-plus pricing.) So far there has been enough elasticity in the market to absorb these price increases, but that may not always be the case. If you have questions about this post or disagree with any of my assumptions, feel free to leave a searing comment below.
I am working from home today, like many of you, I’m sure. The patio door is open and the news is on in the background talking about some sort of nasty bug that’s going around. It’s not half bad, except I prefer working in an office and being around other humans.
But never mind that, this recent article from the WSJ has me wondering where I can buy a 2,700 square foot loft for €1 and end up with the following renovation for under US$450,000 (photo by Rene de Wit):
A former school in Rotterdam, the city sold off the building as 7 residences. The loft you see here was the gym. Major foundation work was required (costing about US$565,000), but that got split up across all of the buyers/residences and factors into the number I threw around above.
At 2,700 sf, it’s not your typical urban residence. But it is interesting to see how they designed the space to be suitable for a family. There’s a separate children’s “suite” hidden behind the millwork next to the dining area. Look closely and you’ll be able to see the door.
For floor plans and more photos, including some before shots, click here. It’s worth seeing more of this place. Two storeys in the city is such a luxury.
LSE Cities has just published a new report called, Living in a denser London: How residents see their homes. The goal of the research project was to better understand how modern housing projects are working (or not working) for Londoners. And so they connected with over 500 residents from 14 completed housing projects and got their feedback on everything from built form to community engagement. Most of the housing projects were completed in the last ten years, but they also surveyed projects from 1980, 1947, and 1902. If you don’t feel like going through the full report, there is also this website and this short film.
I came across this interview with Warren Buffet over the weekend. It’s not new. But he does say some interesting things about how to negotiate. We all have to negotiate things in life. And we all have different approaches. Warren’s approach is both simple and consistent:
“I say what I’ll do.”
“And I don’t do anything else.”
What I love about this approach is that it’s expedient. And I value speed over most other things. But for it to work, you need to be consistent at it. People need to know you’re for real. And you also need a counterpart that is motivated to make things happen. That’s not often the case.
Fewer games. More action. That’s what I like about it.
When the financial crisis hit in 2008, I was living in the United States. At that time I remember developers and other people saying that it was going to take at least 20 years before the country would build another commercial office building. It felt that bad.
Job opportunities had certainly dried up — especially for Canadians like me who were focused on real estate development. But of course, things eventually got better. New office buildings got built well inside of two decades, and the US went on to see its longest ever economic expansion.
This past Monday we saw the financial markets suffer one of, if not the, biggest selloffs since the financial crisis. If you haven’t yet checked your portfolio and/or retirement savings, I suggest you hold off until the Fed “prints” some more money. The time to sell is not right now. (Not actual financial advice.)
Now is, of course, the time to remain rational and disciplined, and focus on the relationship between price and value. Fred Wilson’s recent blog post on “market meltdowns” is a good reminder of this. So here are a couple of excerpts that I really liked:
I’ve seen this movie before. I had just started working in the venture capital business in 1987 when the stock market crashed 23% on “black monday.” There was the Internet stock meltdown in 2000 when the internet sector went down something like 80% over that bear market. And then there was the financial crisis in 2008.
Capital markets sometimes put out the for sale sign and if you are patient and wait for bargains to emerge, they will do that.
But I do know that good companies with resilient businesses and strong balance sheets will survive these occasional crises and that they can be bought with confidence at the right time.
In the fall of 2016, Lucas Manuel (Partner at Slate) and I traveled to Chicago in order to meet with Jeanne Gang and the rest of the studio. Our objective was simple: We were looking to find an architecture firm that we could partner with and do something very special with at Yonge + St. Clair. We wanted to start from first principles and rethink what a tall building could be in Toronto.
During our meeting and studio tour, Jeanne and her team asked a number of poignant questions about our vision for the area, our goals for the project, and our commitment to sustainable design. So much so that when Lucas and I left the meeting we both looked at each other and said: “That wasn’t us interviewing them. That was them interviewing us.”
It was obvious that they were committed to high quality architecture, environmental sustainability, and overall community building. And it was equally obvious that if we, Slate, weren’t committed to the same, then we weren’t the client and partner for them.
It has turned out to be a great partnership. Over the last three plus years, the team has remained committed to living up to the promises we made to each other in that first meeting in Chicago. And on many occasions, that has meant taking the more difficult path and fighting for what we believe is great design and great city building.
Since 2016, we have held and/or participated in multiple community visioning sessions with Councillor Josh Matlow and key stakeholders from the community. Two pre-application meetings with City Planning. Two big and public community meetings. A design charrette for the Yonge + St. Clair area. And five meetings with a local “community working group” that was formed following the bigger community meetings. Our application was also before the City of Toronto’s Design Review Panel (DRP) at the end of 2018, where it was unanimously supported (though with some constructive feedback).
It has been a long road working to create Studio Gang’s first project in Canada. One that I like to think started in a jazz bar in downtown Chicago (it actually started much earlier). And so I am thrilled to announce that City Planning, City of Toronto, are now recommending approval of One Delisle! Their report is public and the project will be considered by Toronto and East York Community Council this Thursday, March 12, 2020.
If you would like to speak at or submit a comment to Community Council — ideally in support of the project — please email the City Clerk at teycc@toronto.ca. Myself and the team hope to see many of you at City Hall this Thursday morning at 10:00AM.
For those of you who aren’t familiar with the project, here is a summary from City Planning:
This application proposes to amend the Official Plan and Zoning By-law to permit a 44-storey (143 metres plus a 7-metre mechanical penthouse) mixed use building with 293 dwelling units and 159 parking spaces within a 4-level below ground garage at 1-11 Delisle Avenue and 1496-1510 Yonge Street. A 2,506 square metre public park will be secured off-site on the rear portions of 30 and 40 St. Clair Avenue West. The Official Plan Amendment also redesignates a portion of the subject site from Apartment Neighbourhoods to Mixed Use Areas.
The proposed development is consistent with the Provincial Policy Statement (2014), conforms with the Growth Plan for the Greater Golden Horseshoe (2019), conforms with the applicable policies of the Official Plan and the Yonge-St. Clair Secondary Plan, and is consistent with the Yonge-St. Clair Planning Framework and Tall Building Guidelines. The proposal also meets a number of significant public realm and built form objectives, some of which are outlined in the Yonge-St. Clair Planning Framework, including: securing a 2,506 square metre public park in close proximity to the Yonge-St. Clair intersection; wider sidewalks along both Yonge Street and Delisle Avenue; enhanced street landscaping; restoration and relocation of an existing Art Deco façade; a pedestrian scale base building in keeping with the main street character of Yonge Street; a north/south midblock connection between St. Clair Avenue West and Delisle Avenue; high quality architecture; and consolidated access and servicing for the block.
This report reviews and recommends approval of the application to amend the Official Plan and Zoning By-law.
Images: Design by Studio Gang. Renderings by Norm Li.
Despite COVID-19, I am still going to work and going to the gym. (Zoom and Peleton are up 23% and 6%, respectively, from February 21 to March 5, presumably because there’s a belief we’re all going to start doing less of these two things.)
On my walk home from the gym today I noticed that some new wayfinding had just been installed at the corner of Church and Wellington. I’m not sure how long it has been up, but I am fairly certain it is new. Here is a photo.
The wayfinding is part of the City of Toronto’s TO360 project, which was launched in 2011 and includes everything from transit shelter maps to finger posts like the one you see here. (Don’t worry, I am confident that detailed shadow studies were conducted before this thing was erected.)
The “Astral” street furniture that we still have kicking around this city can’t be removed fast enough and so wayfinding like this is a significant improvement. I like the designs.
But I also think the project is important from a placemaking standpoint. Signage like this helps to brand the city and the places with in it. It also signals a certain degree of internationalism, because wayfinding is most useful for visitors.
This past week, San Francisco’s Proposition E was approved by 55% of voters. The measure works by limiting new office development if (or when) the city falls short of its affordable housing target for the year.
If the city only builds 25% of its housing target (currently set at 2,042 affordable units per year), then only 25% of its annual allocation of office space can be built the following year. (I just learned that large scale office development in San Francisco has been limited to 875,000 sf per year as a result of a Proposition dating back to 1986.)
So at the moment, San Francisco looks destined to start building a lot less office space. And considering that new office space actually helps to fund affordable housing, I am struggling to understand why the goal seems to be to constrain job growth.
California State Senator Scott Wiener called Prop E a dumpster fire:
Prop E’s passage is perhaps the worst institutional political failure I’ve seen in my 23 years in SF.
Prop E is a dumpster fire.
It‘ll reduce $ for affordable housing/transit, cost SF’s general fund billions, push out start-ups/nonprofits & fuel office sprawl (w increased VMT). https://t.co/97p2RZNAPO
— Senator Scott Wiener (@Scott_Wiener) March 4, 2020
Call me old fashioned, but I tend to think that if the goal is to build more affordable housing, you should do things that, you know, encourage the actual construction of affordable housing.
