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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  • Mirvish+Gehry and the story of 4 heritage buildings

    I am a real estate developer and I believe in progress. But I also fundamentally believe in balancing progress and preservation. I’ve said this before.

    This morning, Alex Bozikovic of the Globe and Mail, published a piece on the epic Mirvish + Gehry proposal for Toronto’s Entertainment District. It’s called, “Frank Gehry and David Mirvish’s tall order in Toronto.”

    Now, I’ve said before that I like this project. I don’t mind the height and I don’t buy the argument that there aren’t enough public spaces in the area. There’s David Pecaut Square directly to the south that could use a few more warm bodies in it.

    But as I also said before, I think the key concern here is one of heritage. There are 4 heritage designated buildings on the site dating back to as early as 1901. Here’s where they sit:

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    The Anderson Building (1915) is particularly unique. Here’s a larger photo (via blogTO):

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    So while I’m excited by the prospect of a real Gehry project in Toronto, I think we need to figure out a way to find a balance. Preserve the facades, build on top, or relocate them. Do something besides wipe the slate clean.

    As Bozikovic rightly points out in his article, “Toronto has a sophisticated culture of working with heritage buildings.” There are lots of great examples of how we managed to move forward as a city, without erasing our past.

    And in many ways, I see this ability to work with and build upon heritage buildings as an emerging Toronto vernacular. I mean, what could be more appropriate for the most diverse city on the planet than an architectural style—of our own—that blends and layers history with disparate design ideologies.

    I sense an opportunity.

    We could have Gehry’s white sinuous curves drape over the heritage buildings. Make them become a literal unveiling of Toronto’s past and a metaphor for the sophisticated way in which we build upon legacy.

    It’s too easy to just demolish everything. We’re better than that.

  • How different generations buy and sell real estate

    I just came across the following generational home buying data from the National Association of Realtors in the US (via Curbed SF):

    It was initially published in July 2013 and so I think the data represents what happened in 2012. The report isn’t exactly clear about the timing. In any event, what I found more interesting is how the various generations perceive the utility of agents. There are different use cases.

    Millenials feel the need to have an agent help them navigate the purchasing process. This makes sense, as many of them would be first time buyers. However, Millenials are also almost 4x more likely to engage agents for “a limited set of services as requested by the seller”, as opposed to just a conventional full service brokerage agreement.

    On the other hand, older buyers like to have an agent help them identify property deficiencies and sellers over 32 years old use a full service broker more than 80% of the time. I find this interesting because it starts to speak to potential changes in the marketplace.

    Looking at a more recent report from the NAR (2013 Profile of Buyers and Sellers), I found it surprising to learn that the share of buyers who used an agent went from 69% in 2001 to 88% in 2013. Even with the internet disrupting so many industries, realtor market share has actually grown over the last decade.

    Not surprisingly, the percentage of sellers who used an agent is also 88%. This is because the dual-agency model requires that both sides of the marketplace be represented.

    Finally, the percentage of sellers who sold their home without an agent is roughly 9%. And 46% said it was because they wanted to save on commission. I’m assuming that the reason the math doesn’t add up (9% for-sale-by-owner + 88% agent) is because of estate sales, auctions and so on.

    The real estate marketplace is an interesting one. What do you think we’ll see in the future?

  • Toronto’s schism is hurting the city

    Instead of talking about the latest Rob Ford scandal (honestly, how is he still mayor?), I’d like to focus on his abilities as a transportation strategist.

    Here’s an excerpt from a Toronto Star article published this morning that talks about the urban vs. suburban divide in this city and our inability to depoliticize transit planning. It’s called, “Suburban envy only makes things worse: James.”

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    In another committee room, councillors were debating the proposed downtown relief subway line — only, they were afraid to name it such. Downtown is a section of the city that dares not voice its name, for fear that aggrieved suburbanites will rise up and object.

    This is not hyperbole. Not long ago, the mayor indicated he is not interested in the relief line until there are subways on Sheppard East and on Finch West. Why? Because downtown “has enough subways.”

    Downtown has enough subways? Do you think Ford looked at population density, number of stops, ridership levels, and so on, in order to come up with this position? Or did he just look at where his voter base resides?

    We need to get past this downtown vs. suburban schism. We’re all in this together. In fact, the whole Golden Horseshoe region is in this together. And until we start acting as a unified entity, we’re not going to reach our full potential. 

  • Q&A on Toronto’s condo rental market

    Earlier this week I connected with a Ryerson student doing a piece on Toronto’s condo rental market. She emailed me and asked if I would mind answering a few questions. Here are my responses.

    Generally speaking, why is Toronto continuing to see such a rapid increase in the number of condos in development? 

    A lot of what we’re seeing is policy driven. It stems from the Places to Grow Act and the continued push towards intensification. It actually mirrors a similar boom we saw in the 70s. In both cases, it was policy driven and the market responded.

    The other factor is a growing consumer preference for more walkable and urban neighborhoods. People are sick of long commutes and so we’re seeing a return to city centers and downtowns. This is happening across all demographic segments, though Millennials and Baby Boomers seem like particularly strong ones.

    Is that boom, and the consequent rush by developers to create new units for rapid sale, affecting the quality of design and accessibility in new condo developments in Toronto?

    When you have a hot market, you’re going to get lots of people rushing in and trying to make money. Whether it’s real estate, tech or some other industry, it’s to be expected. And I’m sure it impacted some projects negatively. But that market is gone in Toronto.

    And regardless of the pace of development, there will always be varying degrees of quality across builders. The unfortunate thing for consumers is that it’s not always easy to tell which is which.

    One of the things we’re trying to do (at TAS) is integrate consumer education more into our sales and marketing programs. Mechanical equipment, as one example, isn’t the most exciting thing to to talk about, but we want consumers to know what they’re buying into.

    Prices are rising (you could buy a house outside the city for the price of some of Toronto’s tiny bachelor units, if I’m not mistaken…) – So what is making condo ownership so desirable in spite of the high cost relative to space? 

    Again, it’s being driven a lot by lifestyle. People want walkable communities, they want to be close to amenities and they want to drive less. And they’re willing to give up space for that. 

    When considering and comparing the cost of a home, I think it’s important to consider some of the indirect costs, such as transportation costs, travel times, quality life and so on.

    Sure a home in the suburbs may be a lot cheaper, but what’s my total, all-in, cost? If you need to own 2 cars and you spend 2 hours commuting everyday, there’s a real cost to that. If you place a big value on your time (as I do), the cost equation isn’t so skewed all of a sudden.

    Are more people choosing to live in rental condos instead of buying, because of the inaccessible cost? If so – why are we still seeing so many new ‘rental condo units’ being built, rather than purpose-built apartment units?

    Condos are being built because, in most cases, it’s the highest-and-best use for the land. It’s the most profitable. And investors have been more than willing to step up and fill the rental needs of the market. But with the condo market now coming down from record levels, I wouldn’t be surprised if we start seeing more purpose-built apartments.

    Would you say that the majority of condo rentals on the market are owned by foreign investors who depend on building management to liaise with renters? If so, why are they choosing to buy units in Toronto?

    I have no idea. It’s even hard to tell how many units are just investor owned, let alone local versus foreign. Because there are tax implications if you don’t owner occupy a unit, buyers have an incentive not to disclose. Overall, I find it problematic that the marketplace is so opaque. I wish there was a way to bring perfect information.

    With respect to why they choose to buy in Toronto, there are a bunch of reasons. Real estate has been a phenomenal investment in Toronto over the past decade and that’s attracted a lot of investor attention. There are also segments that just want capital preservation in a safe and stable country. Even without great returns, that’s a valuable proposition for some foreigners. And of course, Toronto is a great city. Talent wants to live here and that’s important.

    Generally speaking, is there a certain LOCAL demographic (ie, boomers, post-boomers) that are investing in condos for the purposes of renting them out? What makes that investment so desirable?

    Again, there isn’t great data on this. 

    What I will add to the investor topic is that, despite the fact that investors often get a lot of flack, they do serve two important needs in the marketplace for both developers and consumers. The first one we’ve already talked about. Investors provide rental housing in Toronto at a time when few, new, purpose-built rental apartments are being constructed.

    The second one is that investors help to get projects under construction and built. I’ve heard one developer refer to them as providing a kind of short-term financing. Because consumers don’t always want to commit to a unit that might be built 4-5 years out, developers rely on investors to buy pre-sale units so that the project can get underway. Once construction is complete, these units then often get sold to end users who are now ready to commit and move in.

  • Taking the bus

    According to Salvador Dalí and Margaret Thatcher I’m a loser and a failure. I came across these quotes on Tumblr (via goingurban) this morning:

    “A man of forty who still rides the metro is a loser.” -Salvador Dalí

    “A man who, beyond the age of twenty-six, finds himself on a bus can count himself as a failure.” -Margaret Thatcher

    Now as much as I like dislike buses (and prefer the train varietal), I’ve made it pretty clear that I’m a believer in mass transit.

    If anything, I think these quotes show how much the world has changed, although perhaps only in certain geographies. Depending on where you live (I’m thinking Los Angeles or, maybe, Oklahoma City), it probably still sucks not to have a car.

    That’s too bad.

  • 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.