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.
We are into the final push at Parkview Mountain House. The radiant tubes are in for the heated driveway and walkway (essential), and the concrete is scheduled to be poured later this week. The kitchen countertops were installed this morning, and the backsplash was templated, with install scheduled for this Wednesday. The finish carpenter is back this week, and then the painters will be coming next week. The appliances and hot tub are also on standby in their respective warehouses and will be delivered to site as soon as the team is ready. As always, things are frenetic. But we’re pushing to get occupancy this month. I’m also excited to announce that we just hired an excellent management company. We’re in the midst of that onboarding process, and we’re looking forward to starting bookings sometime this fall. If you haven’t yet added yourself to our list, drop your email over here. We’ll be offering a bunch of discounted bookings on a first-come, first-served basis to the people on this list.
If you hang around Park City long enough, you will come across things with the name Ontario. There’s Ontario Avenue. There’s the Ontario hiking trail at Deer Valley. And I’m sure there are other things.
As a Canadian, I couldn’t help but wonder why. So today I looked it up. And it turns out that the mining company that first put Park City on the map was the Ontario Silver Mining Company (see above stock certificate).
Established in 1872, it was a major contributor to Park City’s economy (when it was a mining town) and it is usually credited as the mine that generated the most consistent yield in Utah during the late 19th century.
Cool, so why was it called Ontario? Well, according to the Park City Museum, the mine was first discovered by prospectors from Canada (though they later sold off their claim to George Hearst for a handsome $30,000).
I can’t seem to find any info about these Canadians, but the province of Ontario did get its name in 1867, so at least the chronology check outs.
It is Neat B’s birthday this weekend and we are hanging out in Utah. Today, we hiked up to Cecret Lake, which is accessible from the Alta Ski Area in Albion Basin. Alta is a ski-only resort, so hiking is the only way that my kind — snowboarders — gets to see this area. The basin is known for its beautiful wildflowers and it didn’t disappoint. Cecret Lake is also a watershed area for Salt Lake City. So as you hike up, there are signs telling you not to swim in the lake or do things like bath your dog. Because what goes into the watershed will end up in the faucets of Salt Lake City within 24 hours (according to the signs). If you haven’t done this hike, I would highly recommend it. It’s easy/moderate, and a great way to work up an appetite for In-N-Out Burger, which is a real treat for us Torontonians.
I’ve told versions of this story before, but I was reminded of it again today.
When I was in grad school studying both architecture and real estate, I used to walk back and forth across campus and jump between two very different kinds of academic experiences. On the one side of campus, it was taboo to talk about money. And on the other end, the only important thing to talk about was money. (I am exaggerating in both cases, but I think only slightly.)
Given that I was studying and genuinely interested in both, this always felt like a weird false dichotomy. I mean, why not care about, you know, multiple things? But that’s generally not the way it was. Talking about money tainted the purity of design. And talking about things like design and beauty felt out of place and less serious in a room where cap rates were being debated and serious financial models were being honed.
This is not to say that nobody was thinking across disciplines. I was in a joint program, after all. I can also remember attending a lunch & learn where a student asked a seasoned real estate executive what he should study in addition to finance. The response he got was something along the lines of, “the furthest thing from finance. Study something that will give you a different perspective on real estate.”
I remember this really resonating with me — probably because I was searching for breadcrumbs to make me feel like less of an outsider at Wharton. Still, this came across as a unique perspective at the time.
Knowing how money stuff works is absolutely fundamental. (We need to teach more of it in schools to young people.) And as a developer, it all starts with managing risk, executing (i.e. doing what we said we would do), and being an honest steward of other people’s money. Don’t do this, and you likely won’t be a developer for very long.
But then, what else? What unique insights can we bring to the assumptions that feed a finely honed model? Fast forward to today and this is now the basis for how the Globizen team aims to look at real estate opportunities. We want to cover all ends of campus. And that means we are more than okay talking about unserious things like design and beauty.
Fascinatingly, buildings are always a product of their time.
Detroit’s Book Tower, for example, started construction in 1916. This is right around the time that Detroit became the 4th largest city in the US (after New York, Chicago, and Philadelphia). From 1910 to 1920, the city’s population grew by about 113% to nearly a million people (more people than the city has today).
Because this was the time, the tower was obviously grand. It totalled almost half a million square feet of office space (483,973 sf to be exact, according to Wikipedia). It had a large 3-story atrium with an ornate glass dome. And up until the 1970s, it seems that it remained a desirable office address on Washington Boulevard.
But as we all know, things changed for Detroit. Grand and ornate no longe made economic sense. And so the owners at the time, whoever they were, covered up the ornate dome, filled in the floors of the atrium, and presumably did whatever they could to eek out as much leasable square footage as possible. Necessity trumped grandeur.
Then in 2007, the then-landlord filed for Chapter 11 protection. And in 2009, the last tenant left the building, leaving it 100% vacant — or “unencumbered by tenants” as we like to say in the business.
Thankfully in 2015, Dan Gilbert of Bedrock came along to do what he does, and acquired the building for a reported $30 million. This works out to about $61 psf for what was once the tallest building in Detroit and one of its most prestigious office addresses. Things change.
But what Bedrock has done since is work to return the building to what architect Louis Kamper had originally created nearly a century ago. The atrium is back. The ornate glass dome is back. And there are now 229 apartments, 117 extended-stay hotel rooms, 3 food and beverage concepts, and about 40,000 sf of office space. Official website, here.
I’ve been having more coffee meetings over the last few weeks. And one of the things they are doing — besides making me jittery — is reminding me that at least two things happen during bear markets:
Conviction gets tested.
People get really creative.
Let’s start with number one. It’s easy to have conviction in something when it’s obviously working and lots of other people are doing it. But what about when that is no longer the case?
Take the example of Amazon. In this 2018 post by Fred Wilson, he reminds us that at the peak of the internet bubble in 1999, Amazing was trading at around $90 per share. Two years later it was somewhere around $6 per share. And it was not until 2007 that Amazon would start trading above its peak again.
In hindsight, holding on was very obviously the right thing to do. But to do that from 1999 to 2007, you would have needed patience. And to have patience, you would have needed a high degree of conviction in Amazon as a company and in the internet as the harbinger of an important societal shift. That wouldn’t have been easy — just like many things today are not easy.
At the same time, bear markets force people to get really creative — we’re now onto thing number two. In this case, it’s not a question of patience. It’s, “the thing I was doing before no longer works and I don’t know if/when it will work again, so I’m going to get creative and try something new.” Bear markets give you this wonderful opportunity because the opportunity cost of not doing the status quo disappears (or greatly reduces).
On some level, though, these are two contradictory things: are we sticking to our guns or are we trying something new? But in my mind, you want both. This is not about saying, “lots of people used to want to buy cryptocurrencies and condominiums, but now a lot of people don’t, so I’m going to move onto the next hot thing.” It’s something more calculated than this.
To return to Amazon, I think it’s akin to Jeff Bezos’ old mantra that you want to be stubborn on vision, but flexible on the details. Right now, lots of people are being forced to be flexible. But the vision part is what you still need conviction around. Otherwise, how will you get to where you want to go?
Here is another great video from About Here talking about how breaking certain rules could make for better apartment buildings.
The basis for the video is a design competition put on by Urbanarium, called Decoding Density, which asked participants to propose creative solutions for “six-story plus apartment forms in Metro Vancouver.”
More specifically, the competition asked: How might Vancouver intensify its single-family neighborhoods with small-scale wood-frame apartments?
The About Here video covers some of the common themes from the submissions and, not surprisingly, the first is single-stair buildings. Requiring only a single point of egress can really unlock small sites.
Some of the other ideas are, perhaps, a bit more adventurous; but these are valuable exercises. Many rules are dumb. So it’s important that we continually question them and search for better ways.
Over the weekend, we spoke about how the “GTA condo market is in a state of economic lockdown.” What this generally means is that the math isn’t making sense to build new condominiums. And so the market is necessarily pausing.
We spoke about what this will likely mean for supply in the coming years, but I think it’s also interesting to talk about this in the context of something else: unfunded inclusionary zoning.
As a reminder, inclusionary zoning is, in its most basic form, a requirement to build a certain amount of affordable housing as part of new housing developments. And what I mean by “unfunded” is that there are no subsidies or other incentives being provided to the project.
This means that the cost of providing this housing — and there is an additional cost — needs to be shouldered by the project, which ultimately means the market-rate units need to pay for it.
Which is why if you look at most policy studies, you’ll often find recognition that, because of this economic reality, IZ tends to work better in areas where home prices/rents are higher. And again, that’s because the market-rate homes need to shoulder the cost.
We have questioned, many times, on this blog, whether this is the right approach to delivering affordable housing, but I think this question becomes even more critical in our current market environment.
If the entire market is, for the most part, in a state of economic lockdown, should we really be layering on additional costs and making it broadly more difficult to build any sort of new housing? It seems counterintuitive.
Since the modern Olympic Games were revived in 1896, no city has ever hosted swimming events in an urban river. Too poopy. But Paris, as we talked about, hopes to be the first. Starting on July 30, the Seine is scheduled to host the swimming portion of the triathlon competitions.
Except, it will depend on water quality. Today’s training sessions (scheduled for Sunday, July 28) were cancelled because water tests showed that the Seine is currently below acceptable standards. This is due to heavy rain over the last few days, which I guess overloaded the city’s storm network.
So what is clear is that — 36 years after then-Mayor Jacques Chirac first promised to clean up the river — the city has only been able to successfully achieve this, sometimes. It’s not an easy task.
According to Bloomberg, the clean-up efforts have already cost €1.4 billion. This was spent on doing things like constructing a 50,000 m3 holding basin (about the size of 12 Olympic-sized pools) under the Gare D’Austerlitz. This now holds storm overflow during heavy rain events, in lieu of it going into the Seine.
But this doesn’t provide any guarantees as evidenced by today’s cancelled training sessions. Presumably, it just makes it less likely for overflow stormwater to get dumped into the Seine. So a cynic might ask: Why bother with all of this?
Well, for one thing, swimming in a river in the middle of a major global city is just plain cool. Look at how the Swiss do it. But another reason could be that you want to create one of the greenest cities on the planet. And if that’s the case, then seeing athletes swimming in the Seine is a pretty powerful image.
The GTA condo market is in a state of economic lockdown. The math doesn’t make economic sense from both the demand side (investors) and the supply side (developers), leaving the market at a standstill.
The above excerpt is from a recent CIBC Capital Markets article by Benjamin Tal (CIBC) and Shawn Hildebrant (Urbanation). And what it ultimately means is that the supply of new condominiums in the GTA is falling and will continue to fall for the foreseeable future. Below are two charts, from the same article, that show that.
Because of this, I actually think that, if you need or want a place to live, right now is a near ideal time to buy a condominium, especially if it’s from developer inventory (in an already completed project) or it’s a resale. Of course, most people won’t want to do this because they’d rather buy when most other people in the market want to buy. This is how markets tend to go.
It has been a while since the GTA has gone through one of these real estate cycles, but it is typical: developers are prone to both over-building and under-building. It simply takes too long to build a building, and so it is natural for there to be moments when supply and demand don’t exactly line up.
Pre-selling condominiums is — in theory only — supposed to protect against too much overbuilding. But as we have spoken about many times before, it can be challenging for end users to buy a new home so far in advance. And so the new condominium market has come to rely on investors who want to buy early and then either sell later or rent later.
According to the above article (and MLS data), the share of newly completed condominiums used as rentals reached a peak of 34% in 2023. So a third of new condos. My gut tells me that the actual number is much higher. Many rentals never reach MLS. Overall, I think it’s very safe to assume that the majority of new condominiums are owned by investors.
But right now, fewer investors want to own condominiums, which is why the number of resale listings has spiked this year:
This is, again, why I think right now is an excellent time to buy a condo. You know, be greedy when others… Regardless, this inventory will need to get absorbed and that will ultimately happen. Some of it will go to end users and some of it will go to investors who can make sense of the rental math and/or want to take a long view on Toronto. But if more goes to the former, we will be losing a lot of new rental housing.
At the same time, while all of this is going on, construction starts are likely going to remain depressed (chart 3 above). It’s impossible to know how long this lasts, but at some point we will reach a moment in the cycle where we are under-building new housing. Maybe we’re already there. Development simply can’t turn on fast enough when demand spikes. There will almost always be a lag.
So, since the majority of new condominiums have been serving as new rental housing, there’s a strong case to be made that at some point we will run into a potentially severe shortage of rentals. Condo investors are sometimes vilified in the media, but we will soon find out what happens when you take a big chunk of them out of the housing market.
