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 Hong Kong’s transit model exportable?

    Hong Kong’s MTR (Mass Transit Railway Company) is one of the most profitable transit systems in the world. Rider fares amount to roughly 186% of its operating costs.

    In comparison, Toronto recovers about 70% of its operating costs from fares and New York recovers 57%. This means that in the latter two cases, government subsidies are required to keep the systems in operation.

    On top of this, Hong Kong relies on a unique “rail plus property” model, meaning that they also use the profits from real estate development activities to fund transit expansion. Here’s more on how it works:

    “In a value capture scheme, MTR is granted low-cost land around its future stations [from the government]. It then develops the land and uses the profits to pay for system expansion. Through this system, MTR has managed to build subways and elevated rail lines throughout the islands that make up Hong Kong, largely paying its own way.”

    Overall, this seems to make a lot of sense. Which begs the question, could this model – specifically “rail plus property” – be exported to other cities?

    NextCity asked this question with respect to New York, but came up with 3 problems: first, New York has an operating shortfall, unlike Hong Kong; second, New York doesn’t have the same amount of government owned land; and third, construction costs are way higher in NYC.

    The first thing that comes to my mind is, why are Toronto and New York so bad at farebox recovery? Our infrastructure is not self sustaining; we’re reliant on government handouts.

    Looking at fare pricing, there’s a big difference between the cities. Hong Kong charges based on distance traveled, whereas Toronto and New York charge a flat rate. Intuitively, dynamic pricing makes sense, since you’re then able to capture shorter rides that would otherwise be replaced by walking (or other alternatives) and you capture more value during longer rides.

    The other big difference is the hyper density of Hong Kong, since we know there’s a correlation between urban density and transit ridership. I would assume that the demand for most of their rail lines is fairly high. And it’s for this exact reason that I’m opposed to the new Scarborough subway line here in Toronto. Building subways in areas of the city without the densities to support it will only exacerbate our farebox recovery problem.

    As for the other two points regarding government land and high construction costs, I have to believe that there’s a way to create a “rail plus property” model that circumvents these concerns.

    For one, why does it have to be government land? Could we not reward developers with additional density if they build a subway station in the basement of their new building or contribute to a transit fund? The city already allows additional density near subway stations. Why not do the same for locations where we simply want a station?

    Transit is too important not to get right. I hope Toronto will soon understand that.

  • Pay what you want

    In my pricing class this morning we looked at the strategy used by Radiohead with the release of its In Rainbows album. For those of you who aren’t fans, what they did was offer up the new album via their website on the basis that customers could pay whatever they want.

    At first blush this probably sounds ridiculous. But if you break it down, it turns out to be pure brilliance.

    First, it’s important to understand how pricing overall works in the music industry. In the olden days when people still bought CDs, an artist might make 15% of that sale price. So if you buy an album for $14.99, the artist’s royalties would be in and around the range of $2.25. The rest goes to the record label, their overhead and so on.

    With the advent of iTunes, artists still make around 15%. But now a typical album costs $9.99. This is because overhead costs are lower for an online-only store. Still, the artist now only makes $1.50 or so per album sale.

    In case the of Radiohead, their record label contract had expired and so they decided to self release In Rainbows. This obviously means that they were able to cut out a lot of overhead and other expenses. But would it not have been better to just sell the album for a fixed, but discounted, price?

    The thing is, when you give people the option of paying nothing, you maximize your potential distribution. This is good when you’re trying to sell concert tickets, merchandise and other revenue producing items in the future.

    But interestingly enough, when you give people the option you also maintain a business model. In this case, it turns out that, on average, people paid over $3 per album. This may sound irrational, but people do it for a number of reasons: because they’re big fans, because they want to support the artist, etc.

    Whatever the reason, Radiohead actually brought in more per album than if they had gone through a record label and/or sold through iTunes. In fact, In Rainbows netted the group over 8x more than their previous album Hail to the Thief – which was released through a record label. 

    This got me thinking.

    What other markets would be well served by a pricing model such as this? Could you make parking a pay what you want service? I know that Shakespeare in High Park uses the model. So does it only work for artistic markets where people feel an emotional connection? I certainly don’t think we could sell condos using this approach.

  • How much space do you need?

    Urban Capital has just unveiled its new Smart House condo project here in Toronto. With units starting at 289 square feet, the project is all about ultra-compact and ultra-smart living.

    While micro-apartments are trending right now, they’re not a new idea. Architects have been fascinated by modular, adaptable and compact living for ages. Here’s an example of 100 square foot living capsules built in Tokyo in the 1970s.

    Tokyo, of course, is a unique example. There you have the entire population of Canada living in one city. But that doesn’t mean that Toronto isn’t feeling the pressures of urban intensification. Apartments are getting smaller.

    But the interesting thing about space is that it’s a relative thing. I personally live in 650 square feet and find it more than enough space. Though I also place a huge value on my time and try to minimize the amount of traveling I need to do.

    And this is really the trade off you make with space. As you move further away from a city (and housing costs drop), you’re effectively shifting those housing costs to transportation costs. Which includes real costs like gas and time, as well as more intangible costs like quality of life.

    However, I know many people that are willing to make that trade off for more space. But I wonder sometimes how much of that incremental space is necessity versus perceived necessity.

    How much space do you need?

  • Why was Lafayette Park so successful?

    One of the places I had to visit during my trip to Detroit last weekend was Lafayette Park. Designed by famed German-American architect Mies van der Rohe, it’s the largest collection of his buildings and one of the most successful examples of urban renewal in America.

    Still today it remains one of the most economically and racially diverse neighbourhoods in the city and a bastion of stability within Detroit’s eroding urban fabric. But from a planning standpoint, it shares many of the same characteristics as other tower-in-a-park renewal plans. 

    It was built at a lower density than the neighbourhood it replaced (the unfortunately named Black Bottom slum) and it was far more insular in terms of its relationship to the greater city. From cul-de-sacs to expansive green space areas, it’s an island in the middle of Detroit.

    This recipe has created many spectacular urban failures all across the world. So why not in Detroit? One would think that Detroit of all places would suffer the same fate.

    I have 3 hypotheses.

    First, the fact that it’s a Mies community matters.  I’m sure it attracted and continues to attract residents simply because of who designed it. The entire neighbourhood is on the National Register of Historic Places.

    Second, the community doesn’t have the same monoculture that many other master planned communities had. From the beginning, the intent was to develop a self sustaining mixed-income neighbourhood with shops, restaurants, schools and so on.

    Third, I think the fact that the neighbourhood was more insular actually helped it. As the rest of the city’s fabric crumbled, Lafayette Park remained this kind of curated semi-urban space in the core of the city.

    These are just some of my initial thoughts.

    There has, of course, been a lot of rigorous academic thought on this topic by the likes of Charles Waldheim, the late Detlef Mertins, and others. 

  • The Social Venture Exchange

    MaRS has just launched a Social Venture Exchange (SVX) here in Toronto in collaboration with the TMX Group. And I’m proud to announce that TAS is a founding venture member.

    Here’s the mission of the SVX:

    “The SVX is a local, impact first platform connecting impact ventures, funds, and investors in order to catalyze new debt and equity investment capital for local ventures that have demonstrable social and/or environmental impact, including nonprofits, co-operatives, and for-profit corporations.”

    The focus of the SVX Is on triple bottom line accounting. So it’s very well aligned with the philosophy of TAS. However, I like to think of our “four pillars” as a kind of quadruple bottom line framework. In addition to measuring social, environmental and economic impact, we also care about cultural impact.

  • Shopping: offline vs. online

    According to Sequoia Capital, Americans spent $4 trillion on retail shopping last year – 95% of which was still done in traditional brick-and-mortar stores. I’m actually a bit surprised by how high this number is. I would have thought that a larger percentage of people would be shopping online.

    For me personally, I’d say that my split might be close to 50/50. From furniture to clothes, to even a new bicycle, I buy a lot online, come to think of it. Part of the reason is convenience, but the other reason is that I like having easy access to a broader selection.

    About the only thing I really prefer buying in person is groceries. However even there I’ve been exploring ways to regularize shipments of the items I typically buy. I can’t recall where I read it, but I remember seeing something about less than 1% of groceries in America being bought online.

    Intuitively, the percentage of online sales is only going to rise, particularly given the shift to mobile. Consumers can now shop anytime, anywhere. Real estate companies and retailers certainly need to pay attention.

    But just like the internet didn’t make cities irrelevant, I don’t think it’ll make shopping in person completely extinct. As Sequoia Capital points out in its article, mobile phones are creating new opportunities at the intersection of online and real world shopping.

    So while I don’t know what the future online/offline split might be, I suspect that the two worlds will continue to blur together. I might buy a bicycle online, but when it comes time to service it, I’d like to be able to bring it into a store.

  • Subways – except the downtown relief line

    Politics rewards consistency. Even if you’re wrong, it’s better to be consistently wrong than come across as wavering – however noble and rational the intentions may be. And that’s exactly what happened with Rob Ford and his commitment to subways, subways and subways.

    John Lorinc of Spacing wrote an interesting piece yesterday on how, despite all the debating that went on, Ford is delivering what he said he was going to deliver: a subway. It doesn’t matter that all technical and financial considerations were thrown out the window, he got it funded.

    As I said earlier this week, I think the Scarborough line is the wrong subway to be building and that the downtown relief line is infinitely more important for the region. However, Lorinc makes a good case in his article for why this line will not be funded despite the current focus on subways, subways and subways:

    “Fourth, it’s important to recognize that there will be one notably perverse exception to the foregoing, which is the [Insert Euphemism Here] Relief Line. I do admire Josh Matlow’s advocacy on this front. But Ford will never take up the DRL cause because (i) he doesn’t get the purpose of said extension; and (ii) because the project doesn’t butter his bread, electorally speaking. I’m guessing it will be years before someone with the mayor’s block-headed tenacity emerges to champion a line with a politically inconvenient name and an eye-bulging price tag.

    In fact, the sheer heft of the relief line will allow marginally useful yet politically supported subway projects — extensions in the west end to Sherway Gardens or up Yonge to Richmond Hill – to continue to elbow their way to the front of the line, just exactly as the Scarborough subway project did. Indeed, because we no longer care, at any level of government, about subjecting our transit investment choices to a rational policy framework, the most crucial project in the GTA will always lose out in the funding lottery because it has the most diffuse constituency and the most conceptually complicated purpose.”

    The disparaging thing about these two paragraphs is that it’s a sad reality.

  • Nothing stops Detroit

    When I told my friends that I had booked a weekend getaway to Detroit, I got responses like: “By accident?” and “Why on earth would you want to go there?” But that’s exactly what I did last weekend. I went to Detroit.

    I wanted to see first hand what was going on the city. I wanted to see if it really was the lost cause that the media makes it out to be or if it had the potential to come back. I had been following Dan Gilbert’s efforts to seemingly buy up every building in downtown Detroit and I wanted to see if those efforts were working. I’m an optimist, so I wanted to believe that they were.

    I also have friends who live in the city and a friend who’s working on a number of urban renewal initiatives in the midtown area. It was a great opportunity for me to get a local point of view and also learn about what’s coming in the development pipeline. So I met my friend Alex – pronounced Ay-lex in Michigan – and I got the run down on Detroit.

    Detroit is an absolutely fascinating city. As I mentioned before, it’s like visiting the ruins of a former empire, but one that’s recent enough to remind you of how ephemeral success can be. Whether it’s the death of Blackberry or the decline of Detroit, the mighty fall all the time. But it’s precisely this rich history that makes the city so interesting. When you walk inside some of the buildings built during the first half of the 20th century, you can’t help but be reminded of how important of a city Detroit was for America. Detroit was filthy rich.

    But even beyond the showpieces like the Guardian Building and Fisher Building, the Detroit landscape is littered with office and industrial buildings that would make any developer want to line up. One neighbourhood in particular that stood out for me was Rivertown. Running along the water just east of downtown, the area is filled with old brick buildings and the right street scale for a magnificent neighbourhood.

    However, I was told that this neighbourhood doesn’t really have a lot of momentum behind it. Most efforts are focused on the downtown and midtown areas. Still, I couldn’t help but imagine the area as a thriving mixed-use community. In the shorter term, I also thought the area could be really cool as an entertainment and nightlife district similar to Kuntspark in Munich, which was also a former industrial zone.

    Downtown and midtown are where it’s most evident that change is underway though. “Opportunity Detroit” is the slogan of Dan Gilbert’s real estate company, called Bedrock, and you see it plastered up in all of the windows downtown. Offices buildings are now leasing up and new retailers are moving in. I was told that five years ago none of this was happening. Woodward Ave was empty.

    As you move north towards midtown, you then discover a Michigan first: an urban depressed freeway. Detroit was the first city in America to build these and it’s certainly going to work in its favour as its city centre is reborn. I can only imagine how much more divided the city would be today had the freeways that wrap the core been built as elevated overpasses.

    But that’s not the case. Downtown and midtown are decently connected, albeit different in feel. In midtown, the buildings are more midrise in scale, the streets are broader, and the retail appears further along. There’s a Whole Foods that just opened up and fantastic new coffee shop called Great Lakes Coffee. It was busy when I was there on Sunday morning and I was told that it’s really the first place in Detroit where people could go to hang out and work.

    As you leave the core of the city things really fall off though. This is where Detroit becomes a prairie city and you see the one house on a block condition that the media likes to capture. It’s here where it becomes apparent that Detroit is simply too big, geographically, for its current population. You have infrastructure in place for 2 million people and yet a tax base of 700,000 people. No wonder it went bankrupt.

    So like many others have suggested before, I think Detroit needs to figure out a way to shrink in order to eventually grow. Just like a company going through restructuring, Detroit has to rid itself of some its liabilities. It’s going to have to take that write-down.

    At the same time, the population needs to be somehow consolidated and something needs to be done with all its excess land (urban agriculture is one idea). Jane Jacobs taught us that towers in a park don’t create urban vibrancy and the same can be said for houses in fields. Detroit is fragmented and divided. More so than dangerous, most of the city just feels eerily deserted.

    However, despite these challenges, two things really stood out for me during my visit.

    The first is that Detroit still very much has an ethos of production. It likes building and making things, and it’s visible in the emergence of brands like Shinola who are producing bikes, watches and leather goods right in the city.

    The second is that there’s a palatable sense of possibility. Detroit hasn’t lost that entrepreneurial spirit that made it a leader in manufacturing, music and sports. A great example of this is the Green Garage in midtown, which is a former Model T showroom turned sustainable coworking lab for Detroit entrepreneurs.

    But perhaps the best way to sum up this spirit is through a line I saw on a neon sign downtown on Woodward Ave. 

    It read: “Nothing stops Detroit.”

  • Wrong subway

    It was announced this morning that the feds will be contributing $660M towards Toronto’s new Scarborough subway line. While transit investment of any kind is generally a good thing, it’s a shame that we can’t get our priorities straight. Decisions are being made based on politics rather than rational thought.

    Here’s what TTC CEO Andy Byford said:

    “We all know that Toronto has a congestion problem, so it can only be good that we get more funding,” Andy Byford told reporters after the announcement. “I’ve said since the day I got here that the downtown relief line remains a priority for the TTC. I reiterate that point. But I think that, with the time scales available, it’s possible we can do more than one thing at a time.”

    This is Byford being diplomatic.

    The downtown relief line is absolutely the most important (planned) subway line in Toronto. For one, the Yonge & Bloor subway interchange is at capacity. Until these pressures are relieved, any extension of existing lines will only exacerbate the problem.

    At the same time, the density levels are way higher in the core, meaning that ridership levels will be higher and the required government subsidies will be lower. Not surprisingly, subway lines make more fiscal sense when you build them where demand is greatest.

    So the irony is that our Mayor – who ran on a campaign to “stop the gravy train” – is pushing to build a rail line that will ultimately cost taxpayers more money.

    Oh, politics.

  • Globe and Mail moving to the east side of downtown

    This past Wednesday the Globe & Mail newspaper announced that they signed a 15-year lease to be the lead tenant in a new office tower now under construction at 351 King Street East (just west of Parliament Street). This means that the newspaper will be leaving its current digs on the west side of downtown at Front & Spadina.

    I have to admit that I was pretty excited when I read the news. The design looks incredibly promising and, as some of you might know, I’m bullish on the east side of downtown.

    One of my favourite areas of the city is the Distillery District. But today it still feels very much like an island. And it’s because the city hasn’t really caught up to it. It’s a destination.

    However, between the West Don Lands and major office projects such as this one (it’s 500,000 sf), I think the east side of downtown is about to hit its stride.

    It’s continuing to “fill in” and this will make more and more people realize how central it actually is to the core – especially in comparison to west side neighbourhoods like Liberty Village.

    Amongst my excitement, I did however stop to think about the fact that a newspaper company was taking top spot in a new office tower. Will newspapers even be around for another 15 years?