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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  • Is venture-based real estate development coming to the Bay Area?

    Golden Gate Bridge by Mariusz Blach on 500px.com

    https://500px.com/embed.js

    Chamath
    Palihapitiya     is a Sri Lanka born, Canada educated, venture capitalist in
    Silicon Valley, who made a boatload of money as one of the early employees of
    Facebook. He now runs a VC firm called Social +
    Capital     and owns part of the Golden State Warriors.

    The other
    night he was interviewed at a StrictlyVC event in San Francisco and I think
    that many of his comments would also be of real interest to the Architect This City
    community. He’s super passionate in interviews and always fun to listen to.

    Below is what
    he had to say about the San Francisco startup scene. It really speaks volumes
    about what people will put up with in order to live in an awesome place/city that they love. All of his responses below are from this
    TechCrunch article    .

    “The city has to be doing more, around
    transportation, around housing… You have to get rid of the nimbyism and you
    need to quadruple, if not quintuple, the amount of housing. You need to tell
    that engineer from the University of Michigan that he can live here on a salary
    of $80,000.

    [In the meantime], we look at our startups, and
    the minute that they start to spend more than 15 percent of their burn – good
    money that we give them – on rent, a huge red flag goes up. When they, on a
    per-head-count basis, are spending so much, we start looking at the
    productivity of the technical team. And if it’s good but not great and they’re
    spending this insane amount of money [versus] a different team in Redwood City,
    we start to ask ourselves: “Are you so convinced that success is going to
    happen in this city at 1.5x the cost?”

    Because for every dollar that someone in
    Mountain View or Redwood City is raising, you [in San Francisco] have to raise
    one-and-a-half to two times that just to get to the same point. So you’re cutting
    your half life in half. To prove that you can take an Uber from some fuckin’
    shitty bar to another shitty bar? Like, I don’t understand.”

    And here he
    talks about the possibility of his venture firm also getting into the real
    estate development business. I couldn’t resist blogging about this.

    “We made a big
    decision with our last fund to build an organization that looks really
    different than a venture firm, and that organization is going to be this
    hybrid, bastard stepchild of Berkshire Hathaway and Blackstone and BlackRock.

    What I mean by this is
    that we want to have a large permanent capital base and we want to make really
    long, discontinuous bets on companies and sectors and trends.

    And one of the things
    we talked about was having a real estate fund …[because] we owe it to our
    companies to alleviate some of these problems when no one else is going to. If
    we went and built one million square feet somewhere of mixed use, where you
    work and live, and we rethink what it means to have a modular living environment
    for a millennial cohort that wants to work at companies and doesn’t necessarily
    have kids, we can do that in a way and give that back to our CEOs as a benefit
    of working with us.

    And you can probably
    make the economics work. Because we only really care about the equity of the
    company anyways. And the equity in the real estate will take care of itself if
    you take the 30-year view. So we’re at the point now where we’re like, wow, we
    should raise a few billion dollars and get into the real estate business and
    solve this problem systematically for our companies. And maybe in that, it
    becomes a blueprint for how others should do it. We’re just basically going to
    act as our own city-state and decide how to do it ourselves.”

    It’s
    interesting to think about what the economics might look like if your primary goal is
    simply to provide space to your portfolio companies (entrepreneurs) so that
    they get more (financial) runway and, therefore, have a greater chance of success. I’d love to see that pro forma.

  • NXT City Night 2015

    I just got
    my tickets for NXT City Night,
    happening Thursday, September 24, 2015 at 6:30pm here in downtown Toronto.

    If you’re
    not familiar with NXT City Prize, it’s an annual urban design competition where
    young Canadians (35 years of age or younger) submit ideas to improve the built
    environment. The top submissions win a total of $9,000 in prize money and the winning idea
    gets paired up with the City of Toronto work on actually implementing it. That’s
    the best part.

    The 2015
    finalists have already been announced, here, but the top submissions
    will be announced at NXT City Night. The Chief Planner of Toronto, Jennifer
    Keesmaat    , will be there, along with the
    competition’s very impressive jury    .

    I think it’s
    important to keep in mind that a lot of what makes cities great often happens
    through citizen-led grassroots movements.

    The
    High Line in New York     – which today attracts over 5 million visitors a year
    and is believed to be responsible for over $2.2 billion in new economic
    activity – was really the work of 2 friends who thought that preserving and
    repurposing the High Line was a cool idea. Which is why in 1999 they founded a
    non-profit called Friends of the High line. Amazing things happen when people and
    passion get involved.

    So I would
    encourage you to grab a ticket and join me at NXT City Night next week. Tickets are
    $25, but if you use the coupon code ATHISCITY,
    you’ll get $5 off your ticket 🙂

    The event is
    also taking place in a spectacular old warehouse building at 56 Maud Street
    (formerly St. Andrew’s Market Hall). That alone is reason enough to come. I’ve been inside before. Get your Instagram ready. But
    if that’s not enough, there’s also:

    • Open bar including Steam Whistle beer and Pillitteri Estate wine
    • Catering from Oyster Boy, Kanpai Snack Bar, Thoroughbred and many more
    • Art installations by Wayward Collective
    • Beats by Jesse Futerman and A Digital Needle
    • Local wares from GetFresh, Shopify, Spacing Store and Swipe

    I hope to see
    you there. Make sure to tweet at me
    if you’ll be there so we can connect in person.

  • In worship of the single-family residential zone

    Daniel Hertz of City Observatory recently published an interesting post talking about what makes American zoning unique compared to the rest of the world. It is based on the conclusions of a book published earlier this year called Zoned in the USA.

    Here are 2 snippets that I liked from his post:

    Hirt’s major claim is that what really sets American zoning apart is its orientation, explicit or implicit, to putting the single-family residential zone at the top of the hierarchy of urban land uses. Not only are single-family zones listed first in many zoning codes, but they make up significant pluralities, or even majorities, of total land area in most American cities. Interestingly, Hirt points out that this wasn’t necessarily true when zoning was first introduced: New York’s famous first zoning law didn’t even have a single-family zone at all.

    As Hirt points out, Americans appear to be unique in believing that there is something so special about single-family homes that they must be protected from all other kinds of buildings and uses—even other homes, if those homes happen to share a wall. The recent revolt in Seattle over a proposal to soften that city’s single-family districts, in other words, would not be possible anywhere else in the world, not least because very few people live in single-family districts to begin with.

    I don’t know if Canada is covered in the book, but we clearly share many similarities with that of the US.

    I would say more, but at this point in the day I should probably rest my eyes and stop looking at a computer screen. Hopefully we can continue this discussion in the comment section below.

  • How to save 8 minutes on Toronto’s highways

    City in Colour by Greg Patterson on 500px.com

    https://500px.com/embed.js

    Three months ago when Toronto City Council voted
    not to remove the Gardiner Expressway
    East (which in
    my view was a mistake    ), it did so with a commitment to look at tolling
    options for both the Gardiner Expressway and the Don Valley Parkway (which in
    my view is a positive thing    ).

    Last week a preliminary report was released
    discussing some of those tolling options. If reading dry city reports is your thing,
    you can do that here.

    The Coles Notes version (CliffNotes for you
    Americans) is that a $3 flat toll on both the Gardiner and the DVP – the same
    cost as riding transit in this city – would be expected to reduce vehicles on the highways by 9% and 12%, as well reduce end-to-end travel times by 3 minutes and 5
    minutes, respectively. There’s obviously a lot more in the report, but these
    figures stood out for me.

    Given how monumental the
    3 minute delay     was in the Gardiner East debates, it will be interesting to
    see whether people treat a 3 minute time savings in a similar way. I suspect
    they won’t. The cost will be the larger issue.

    I’ve been a
    vocal supporter of tolls and road pricing on this blog    . One of the main reasons
    for that is because I view the demand for highways as being largely inelastic
    and therefore a potentially great source of transit funding.

    The discouraging part of the above report is
    that its primary goal is to explore tolls for the purpose of “offsetting
    capital, operating, and maintenance costs.” The primary goal is not to come up
    with sustainable sources of transit funding.

    Having these costs paid for by user-fees as
    opposed to general taxes is still a good thing in my view. But an even better thing
    would be to help fund mobility solutions that we know will be far more
    effective at getting people around this region as millions more people move here
    in the coming decades.

    The other discouraging part of the report is
    that near the end it explains that while the City of Toronto Act of 2006 allows
    for toll highways, they cannot be implemented without the Province passing
    regulation.

    It’s a reminder that our governance structures do
    not reflect the current urban reality of this country.

  • The crisis of success

    I’m back and it feels great. I missed blogging the past 2 days. Though, there was something nice about not touching a computer all weekend.

    This morning I got up extra early and listened to a brief conversation between Aaron M. Renn of The Urbanophile and urbanist Richard Florida. The topic is New York’s “Great Reset”, and the impetus was a recent report (of the same name) that was put out by New York University.

    The conversation starts by talking about the resilience of New York City and its ability to accept and then reinvent itself in the wake of “creative destruction.” Destruction such as the financial crisis of 2008/2009. 

    But they then go on to talk about the challenges that New York, as well as many other cities, are now facing. Challenges brought about, not by failure, but by their tremendous success. Challenges such as income inequality and the dwindling middle class.

    The overarching premise is that we are still in the early stages of a new urban and creative economy. And that there’s lots of work to be done in order to figure out how to make it an inclusive one.

    There’s even mention of former Toronto mayor, Rob Ford.

    You can listen to the talk below. If you can’t see the embedded play button, click here.

    [soundcloud url=”https://api.soundcloud.com/tracks/221338706″ params=”color=ff5500″ width=”100%” height=”166″ iframe=”true” /]

  • Resting my eyes

    Today I’m getting laser eye surgery. (If you’re reading this via email subscription, it already happened!)

    This is something I’ve been thinking about doing for many many years. My original plan was to get it done after I finished my MBA. But that time came and went, and so it was about time I took action.

    I’ve always been a bit nervous about doing it, which is why I’ve been procrastinating. I’m an early adopter when it comes to most things in life, but not when it comes to this. Not when it comes to my eyes.

    The major impetus for getting it done is sports. I love lifting weights. I love cycling. I love snowboarding. And I love swimming. All of these things are easier to do when you don’t have to fuss around with contacts. I’m quite nearsighted.

    In any case, I’m going to be taking the weekend off from blogging. I have never done that in the over 2 years that I’ve been writing Architect This City, but this time is different. I need to give my eyes a rest. Doctors orders.

    For this reason, yesterday’s post on affordable housing was a bit longer than usual. And if you’re looking for more to read, you can also check out this list of most popular posts.

    Regular scheduled programming will resume on Monday, which means that if you’re a daily email subscriber, you won’t receive another email from me until Tuesday morning at 6am Toronto time.

    I hope you have a great weekend. See you on Monday 🙂

  • Affordable housing and the economics behind developing new rental apartments

    light trail in concrete jungle by Tassapon Vongkittipong on 500px.com

    https://500px.com/embed.js

    In most big cities around the world, there is a pressing need for more affordable housing. We know that inclusive cities make for better cities. But from San Francisco to Hong Kong, you always hear people talking about how expensive housing is.

    So why is this such a difficult problem to solve?

    Part of the problem, I think, is that many people don’t understand the economics behind building a new building. Oftentimes I hear people say that because developers make so much money, they should just build more affordable housing. Done. Simple.

    But things are not that simple.

    To illustrate my point, let’s walk through the thought process for developing a new rental apartment building.

    In its simplest form, developers are concerned with: revenue – costs = profit. And since many of the costs associated with building a new building just are what they are, it all starts with revenue, which in our case would be rents.

    To build a new rental tower in Toronto, your rents typically need to be at least in the high $2′s per square foot per month. Otherwise the economics don’t work. But to make the math simple, let’s say you need $3 per square foot in rent. That means a 1,000 sf apartment would rent for $3,000 per month.

    That’s not cheap. There are only so many people who can afford these kinds of rents and only so many areas where you can command these kinds of rents, which means there are only so many areas in Toronto where new rental apartments will be built by the private sector.

    If the rents instead happen to be $2 psf – meaning that same 1,000 sf apartment now rents for $2,000 per month – then for-profit developers will not build (barring any unique deal circumstances). Even at $2.50 psf / $2,500 per month, it would be difficult to make the numbers work here.

    And by the numbers, I am talking about tight returns that really only start to make sense in our environment of record low interest rates. Which means that when interest rates start to rise (pushing cap rates up), it may not even make sense to build rental apartments when the rents are in the high $2′s per square foot. This is particularly true if you’re competing against condo developers to buy the land. They can afford to pay more. 

    In this scenario (of rising interest rates), many real estate firms might simply opt to buy existing assets instead of taking on the risk of building anything new. Now all of a sudden your supply of new market rate apartments (not to mention affordable apartments) has dried up. Remember, it’s been decades since Toronto built rental apartments at any sort of meaningful scale.

    It’s for reasons like this that Vancouver launched a program called Rental 100. In a nutshell, it helps to reduce the “costs” variable in the equation mentioned above so that developers are able to meet minimum project returns and build more rental buildings. They do that through things such as reduced parking requirements, additional density, development charge waivers, and so on.

    In some ways, these items are subsidies. The city is giving up revenue that it could have otherwise collected from a developer building, say, a condo. But in other ways, they are freebies. The city could be unlocking development sites that may have otherwise not been developed. In which case it’s not really forgone revenue.

    Vancouver’s Rental 100 program is a market rental housing policy. But there’s no reason that similar thinking couldn’t be applied to create an affordable rental housing policy. It has been done and is being done in many cities.

  • Where will we live?

    image

    This evening I participated in a roundtable discussion at WORKshop here in Toronto. It was part of an exhibition that they currently have on called, Toronto 2020: Where Will We Live? They are located in the concourse level of 80 Bloor Street West, so go check them out.

    The discussion this evening was all about the dramatic change in Toronto’s urban form over the last decade. In other words, the condo boom. We covered everything from the life cycle of buildings and urban design to demographics and policy. It was a lot of fun and I am certain the group could have continued talking all night.

    But one thing that I was reminded of this evening is how important it is for great city building to be cross-disciplinary.

    Take, for example, architects and (real estate) developers. 

    The stereotypical developer is greedy and only concerned with money. They don’t care about the impact that their buildings have on the built environment. On the other hand, the stereotypical architect is only concerned with design and not with the economic feasibility of projects. (I’m exaggerating here for effect.)

    The point is that neither of these participants in isolation could build a great city. A beautiful design doesn’t have much value if it can’t be financed and built. And a highly financeable project could end up contributing nothing to the city. In some cases it could actually detract from the built environment.

    So if we really want to build truly great cities, I believe it needs to be a collaborative effort. We need to bridge the divides in thinking and leverage each other’s strengths. 

    I have felt very strongly about this since I first started studying architecture as an undergraduate student, which is how I ended up taking business and real estate classes. I felt and continue to feel that the greatest opportunities exist at the intersection of different ways of thinking.

  • Life after fishing on Fogo Island

    Fogo Island is a small remote island off the coast of Newfoundland in Canada. As of 2011, the population was roughly 2,400 people.

    For centuries the island was a thriving fishing community, particularly for cod. At its peak, Canadian fisherman alone were bringing in 266,000 tons of cod every year.

    But in 1992 the Canadian government put in place a moratorium on fishing North Atlantic cod. And it decimated the local economy. (Should we still be calling it a moratorium after all this time?)

    However, thanks to people like Zita Cobb and her Shorefast Foundation, Fogo Island is in the midst of an entrepreneurial and cultural renaissance. Take a look at the Fogo Island Inn. It’s on my list of places to visit.

    Back in 2013, Monocle Magazine published a two-part video series outlining what is happening on the island. You can watch part 1 of that series by clicking here and part 2 by clicking here. Each video is under 10 minutes long.

  • The evolution of unions

    Today is Labo(u)r Day in Canada and the United States.

    It is the official end of summer for a lot of people, which is always a bit sad. (Unlike a lot of people I know, I’m not a huge fan of fall.) But primarily, today is a day to celebrate the labor union movement.

    Fred Wilson wrote an excellent post on his blog this morning about this topic. I agree with him and he put it far better than I could this morning. So here are a few snippets:

    When one looks back over the history of the development of the modern economy from the agricultural age, to the industrial age, to the information age, the development of a strong labor movement has to be one of the signature events. Capitalism, taken to its excesses, does not allocate economic value fairly to all participants in the economic system.

    I am a fan of the idea that labor needs a mechanism to obtain market power as a counterbalance to the excesses of markets and capitalism. I think we can look back and see all the good that has come from a strong labor movement in the US over the past 150 years.

    However, like all bureaucratic institutions, the “Union” mechanism appears anachronistic sitting here in the second decade of the 21st century. We are witnessing the sustained unwinding of 19th and 20th century institutions that were built at a time when transaction and communications costs were high and the overhead of bureaucracy and institutional inertia were costs that were unavoidable.

    Click here for the full post.

    On that note, I am in the market for new – ideally daily – blogs to read. Blogs such as this one, which generally focus on a particular topic but are written by one person and are a bit personal in nature. I find those are where the best online communities develop.

    If you know of any, please leave the link in the comment section below. A lot of readers have also asked me for similar recommendations, so I am sure they would appreciate the suggestions.

    Happy long weekend 🙂