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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  • More on electronic road pricing

    We recently started a Lunch & Learn program at TAS. I did the first one on electronic road pricing and followed-up with the blog post below. Let me know what you think. It’s also cross-posted here on TAS’s website.

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    Last week at TAS I kicked started our new Lunch & Learn program with a talk on electronic road pricing. It was based on an HBS case that I had prepared for a pricing class I took at the Rotman School.

    The case is essentially about traffic congestion in Hong Kong and a decision to either build more road (a bypass road running adjacent to the harbour: The Central-Wan Chai Bypass) or implement an Electronic Road Pricing (ERP) system, similar to what was implemented in Singapore in the 70s and in London in 2003.

    My own view is that road pricing makes a lot of sense. And I’ve written extensively about it on my own personal blog. But to quickly summarize the economics behind it all, take a look at this graph:

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    What this graph plots is the marginal cost of products and services with a fixed capacity.  An example of a product or service with a fixed capacity would be a road. Roads can only handle a certain amount of drivers before it becomes unusable (gridlock). What this graph tells us is that once you reach that capacity—variable k in the graph—the marginal cost goes from zero to basically infinity.

    In laymen terms, it’s telling us that at 4am when nobody is on the road, the cost—to society, to productivity levels, and so on—of adding each one additional driver is basically zero. But, as soon as you hit capacity, at say 830am, and traffic is at a standstill, the cost shoots way, way up!

    So how do you solve this problem? Well, you price congestion. This invariably removes or forces drivers to other times of day and makes it so that demand for the road drops below the available supply. Then the road is able to function as it’s intended to. I don’t know about you, but this makes a ton of sense to me. What good are roads if they’re clogged with traffic?

    What I’d like to do now is bring the discussion back to Toronto. For those of you with an interest in transit, you’re probably aware that Metrolinx has a “Big Move” transit and infrastructure plan that’s going to cost the region $2 billion a year to implement. I view this as investment in our region and so I think it’s absolutely the right move.

    However, the billion dollar question is, where is the money going to come from? Earlier this year Metrolinx proposed 4 main revenue tools. They are:

    – A 1% sales tax (estimated to raise $1.3 billion annually)
    – A business parking levy (estimated to raise $350 million annually)
    – A $0.05 fuel and gasoline tax (estimated to raise $330 million annually)
    – And a 15% increase in development charges (estimated to raise $100 million annually)

    What I would suggest is that there should be a road pricing plan in this list in addition to—or instead of—some of the items listed above. Taxes are just taxes. And they discourage consumption depending on the elasticity of the demand for those items.

    However, I would argue that a well executed road pricing model should be considered not as a tax, but instead as an incredibly accurate way to price roads according to actual usage patterns and costs incurred. Think of it like time-of-use utility billing. Do you think of high-peak utility billing as a tax or as simply the price to use the service when demand is the highest?

    The benefits of a road pricing system would be numerous:

    – We’d get a consistent revenue stream for transit investment in the region (instead of having to rely on government hand outs)
    – We’d be helping to decouple transit building from the political process (because Metrolinx would now make its own money)
    – We’d eliminate traffic congestion (yes, it can be done)
    – We’d increase productivity levels across the region (people will actually be able to get around)
    And we’d be reducing our impact on the environment by encouraging alternate forms of transportation

    This is an incredible list of benefits. However, I think one of the challenges with implementing electronic road pricing is that it’s often misunderstood. People just view it as a tax. Hopefully by looking at the economics behind it all, it has become clearer that it’s actually a bit more nuanced than that.

  • Starting from the bottom in real estate and healthcare

    Earlier this week when I responded to a Globe and Mail article that was arguing condo rents were on the decline in Toronto, I talked about how imperfect and opaque I feel the real estate market is. Today I’d like expand on that.

    The reason I call the real estate industry imperfect is because of 2 main reasons: first, there’s a lot of friction when it comes to buying and selling as a result of high transaction costs (amongst other things); and, second, there are massive information asymmetries between marketplace participants. This could be buyers and sellers, purchasers and developers, clients and real estate agents, and so on.

    But it’s only a matter of time before these issues get resolved. And I think it’ll happen through better access to data and more transparency in the marketplace. The question, however, is: Where is this big data going to come from?

    I was reading Fred Wilson’s post this morning on Large Networks, Big Data, and Healthcare, and I was struck by a parallel. Here’s what stood out for me:

    “The question is who will control the input of the patient data, the aggregated data sets, and the results the data science produces. If the answer is the current healthcare system; the insurance companies, the hospitals, and the doctors, then we will have missed a big opportunity to reshape healthcare. If, on the other hand, the data is entered by patients, controlled by patients, and benefits patients, then we would have something new, different, and disruptive.”

    In both healthcare and real estate, we have large bureaucratic institutions and bodies that control the industry. And in both instances, we’ve seen that they’ve been slow to adapt to the changing times. Therefore, I think the billion dollar opportunity is the same in both: the data is going to have to come from the ground up via patients and real estate consumers. Only then will we have something truly innovative.

  • The 2013 Anholt-GfK City Brands Index

    When most people think of brands, I suspect that they think of companies, products and services. But what about the brand of your city? As cities continue to compete for talent in the global economy, brand is becoming a hugely important differentiator.

    I just stumbled upon the Anholt-GfK City Brands Index and here’s their 2013 ranking:

    1. London
    2. Sydney
    3. Paris
    4. New York
    5. Rome
    6. Washington D.C.
    7. Los Angeles
    8. Toronto
    9. Vienna
    10. Melbourne

    The study looks at 6 key dimensions: presence, place, pre-requisites, people, pulse and potential.

    What do you think of the above list?

    Here’s a bit more information on how the index was prepared:

    “The Anholt-GfK Roper City Brands Index measures the image of 50 cities based on more than 50 questions related to perceptions of their Presence, Place, Pre-requisite, People, Pulse and Potential.  For the 2013 study, a total of 5,144 interviews were conducted in Australia, Brazil, China, France, Germany, India, Russia, South Korea, the United Kingdom and the United States.  Adults age 18 or over who are online are interviewed in each country.  Using the most up-to-date online population parameters, the achieved sample in each country has been weighted to reflect key demographic characteristics including age, gender, and education of the online population in that country.  Fieldwork was conducted from May 8th to May 23rd, 2013.”

  • Are condo rents really declining?

    Yesterday the Globe and Mail published an article titled, “Weakening rental picture latest condo market worry.” At first glance, this title seems worrisome. Particularly since Toronto’s condo rental market was supposed to be so robust, with vacancy rates hovering around historic lows.

    But as I read the article, I was reminded, once again, about how opaque the real estate marketplace is. To make this prediction, the research group quoted in the article mined craigslist postings. Granted, craigslist is probably the largest source for condo rental listings (even more so than MLS), but I don’t think it necessarily makes it a reliable source.

    Craigslist is a messy marketplace. You have expired listings; brokers posting listings in the owner section; brokers posting fake listings for the purpose of lead generation; and so on. It seems to me that there could be a huge margin of error if you tried to rely on this data. So I’m not so sure I would put a lot of weight on a supposed 1.6% rental rate decline.

    But what does worry me is how imperfect the real estate marketplace is. It’s incredibly hard to get good data and I think that this is bad for everybody involved in real estate. But network effects are a hard thing to overcome, which is why a messy and ugly marketplace such as craigslist can remain so dominant.

  • Thoughts on the OMB

    Last night I watched CBC’s the Condo Game documentary. This is what it’s about:

    “The Condo Game examines the forces at play behind the fastest moving condo market in North America – Toronto – and discovers that the glittering glass hides a sea of troubles.”

    If you haven’t seen it, you can watch it here at CBC’s Doc Zone. It’s about 45 minutes long.

    Generally, I found the piece to be overly sensationalized. (If you watched it and it left you worried about condos, contact me. I’d love to hear from you.) However, that’s not to say that the documentary doesn’t raise some important points. One that I absolutely think is worth discussing is the Ontario Municipal Board (OMB).

    Many developers like “the board” because it provides recourse. If the city fails to take action on a development application within 180 days, developers have the right to appeal to the board.

    While I do think it’s critical to have some sort of mechanism to unlock a gridlocked planning process, I also think that it’s fundamentally problematic to give the province ultimate decision making power over municipal planning decisions.

    Real estate development is very much a local business and these decisions should be happening at the local level. However, with the OMB looming overhead, it has left municipalities disempowered. “We’ll deal with it at the board” always remains an option. 

    But what if there wasn’t a board? What if municipalities and developers had to figure out a solution between the two of them? We’d certainly end up with less wasted money (on expensive lawyers), but I think we’d also end up with better design and planning outcomes.

    To do this though, the city needs to get their act together with respect to zoning. Almost nothing is zoned for what developers end up building. But I think this largely has to do with the fact that the city knows any dissenting decision will just get appealed. Again, they’re disempowered.

    So I think it’s time we empowered cities. This may seem scary to some developers at first, but there’s a lot to be gained.

  • Pier 27 and transparency in the real estate industry

    One of my favorite development projects going up in Toronto right now is the Pier 27 complex at the base of Yonge Street.

    What I love about it is that it’s trying something different. The two sky bridges that sit atop the two phases—currently under construction—are going to create a remarkable new focal point along the waterfront. It’s not just another condo.

    And as I watch the buildings go up, I’ve also been impressed by the materials used on the project. In particular the curtain wall (glazing) system used on the eastern most buildings. It’s a clear glass installation with white accent pieces. It’s beautiful. Here are a few photos.

    But as much as I love this project, it’s been slow moving. This project, like many others in the city, has been subject to a number of delays. They went to market in 2006-2007 and occupancy isn’t expected until next year—a good 7 years later.

    But more than the issue of time, my real concern is the lack of transparency. Why was it delayed? Were sales slow? Were there dewatering issues being on reclaimed land along the waterfront? Was the soil contaminated? As a consumer, it’s frustrating being in the dark.

    I do, however, acknowledge that this is a larger issue facing the real estate industry. We’re certainly not known for radical transparency. We’re a closed and insular industry. But over time I do believe that will change. It’s inevitable. And the best thing you can do today—as an organization or as an individual—is to embrace it.

    Full disclosure: I have a vested interest in this project and I’m currently having a fight with the developer over a small amendment I would like to make to the agreement of purchase and sale. They have been unwilling to cooperate.

  • The Toronto font

    Susan Kare was the screen graphics and font designer for the original Apple Macintosh computer in the 1980s. Being from Philadelphia’s affluent Main Line, she initially proposed that the various fonts be named after the railroad stops along it.

    However, when Steve Jobs asked where the names had came from, he contested that, if the fonts were to be named after cities, they should be named after “world-class cities”, rather than small ones that nobody had ever heard of.

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    And since that’s what Jobs wanted, that’s what Jobs got. The fonts were renamed: Venice, London, Athens, Toronto, Chicago, New York and Geneva. Some of these font names you’ll probably still recognize but some, including Toronto, were eventually abandoned. 

    The Toronto font was removed from System 6 onwards. So from 1988 onwards.

  • Car or smartphone?

    I was browsing my Tumblr feed this morning and I found a link to an interview with Marc Andreessen posted by Fred Wilson.

    I liked Marc’s response to a question relating to people’s love of cars and so I decided to post it to Facebook. I then received an email notification from Fred Wilson’s AVC blog titled “The New Freedom.” Turns out that he liked the quote as well. With so much love for this quote, I figured it was worth reposting here.

    The interviewer started a question to Marc with, “But people love their cars.” This is his response:

    “Ask a kid. Take teenagers 20 years ago and ask them would they rather have a car or a computer? And the answer would have been 100% of the time they’d rather have a car, because a car represents freedom, right?

    Today, ask kids if they’d rather have a smartphone or a car if they had to pick and 100% would say smartphones. Because smartphones represent freedom. There’s a huge social behavior reorientation that’s already happening. And you can see it through that. And I’m not saying nobody can own cars. If people want to own cars, they can own cars. But there is a new generation coming where freedom is defined by “I can do anything I want, whenever I want. If I want a ride, I get a ride, but I don’t have to worry. I don’t have to make car payments. I don’t have to worry about insurance. I have complete flexibility.” That is freedom too.”

    This ties in well with the return to city centers and downtowns. When people live in walkable neighbourhoods, cars can be more of a liability (car payments, insurance, parking, and so on). In fact, I think of them as a liability all around. Banks think of them as an asset, but I like my assets to increase in value.

    The other interesting point that Marc makes about cars is that supply and demand are not very well matched using the current model. If you only use your car to drive to and from work, it sits idle 90% of the time. This is where the sharing economy comes into play: How can people better optimize that 90%?

    My smartphone certainly doesn’t sit idle 90% of the time.

  • The return of the city-state

    I’ve written before on how Toronto needs more autonomy and how I think there’s a huge opportunity to create a Third Coast Megaregion spanning from Chicago all the way to Quebec City—a region that could compete with the rising urban agglomerations of Asia and elsewhere.

    The central theme around these arguments is that there’s clear evidence in support of a return to city-states.

    Today, the 388 metro areas in the United States make up 84 percent of the nation’s population and an astonishing 91 percent of gross domestic product. The top 100 metro areas alone total two-thirds of the U.S. population and three-quarters of GDP.

    And the reason why I say “return” is because, if you think about it, this is largely how the world used to operate before the shift towards nation-states. 

    Ironically, given the nature of our high-tech, super-connected age, the future will look more and more like the city-states that ruled the world for millennia, from the days of Athens, Sparta, Carthage, and Rome, and that were last dominant 500 years ago, in such places as Venice and Florence, before the formation of most modern nation-states. Today, the shining example is Singapore, the city-state of 5.2 million people that, all by itself, has become an Asian tiger. The city-state of the future will not be sovereign, of course, but instead will act largely independently. “What we are experiencing is a metro-centered driving force of change. This is the center of the economic universe,” says James Brooks, program director of the National League of Cities. “The United States is not one national economy but a series of smaller metropolitan economies.”

    If you’re interested in this topic, here’s the article by Michael Hirsh from which the above excerpts are taken. It’s called, “The Nations’s Future Depends on Its Cities, Not on Washington.”

  • Who knew Gherkins were so aerodynamic

    Lately I’ve been learning a lot about wind and how certain building forms can create dramatically different microclimates.

    In light of this, I’ve gained a new appreciation for the 30 St Mary Axe tower in London (colloquially known as “the Gherkin”). I’ve always been a fan and I was well aware of its sustainability initiatives, but I didn’t fully grasp how much wind played a role in its design.

    Because of its cylindrical shape and the fact that the tower tapers as you move towards the top, the bulk of the wind hitting the building either flows around it or gets pushed upwards, towards the sky. This is in contrast to a typical square or rectangular building where the bulk of the wind often gets pushed down towards street level.

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    The benefit of this is that it obviously creates a more pleasant environment for pedestrians at street level. However, in addition to this, it also means that the wind loads against the building were brought down to a minimum and so the structure of the building could also be reduced. 

    This is the kind of architecture I love: architecture that performs.