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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  • Wonderful real estate

    At the highest level, I agree with the premise of this tweet from The Real Estate God. The overarching argument is that one’s main criteria for selecting a real estate market in which to enter should be “the place with the least competition.” And the reason for this is that less competition equals less price discovery, which then equals more mispriced assets and more opportunities to generate outsized returns.

    Going even further, the argument here is that you’re actually taking on less risk by buying mispriced assets in less competitive markets because you can model reality (things like in-place cash flows and market rents) as opposed to betting on the future (things like rental growth and/or cap rate compression). Said in a different way, it’s easier to find deals and “make money on the buy”; and, once again, I would mostly agree with this.

    But in my mind there’s a very important caveat. And it’s akin to the advice that the late Charlie Munger supposedly gave to Warren Buffet: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.” While it is true that you might find wonderful pricing in less competitive markets, there remains the question of whether you’re also buying wonderful real estate.

    And I think that’s an important consideration.

  • New York City’s vacancy rate is the lowest since 1968

    Some four years ago, people were talking about the possibility of New York City being dead. But of course that was nonsense. Last week, New York City published the initial findings of its housing and vacancy survey and the key takeaway is that the city’s vacancy rate dropped to 1.41% last year (2023). This is a drop from 4.54% just two years ago and the lowest measurement since 1968. It’s also even worse at more affordable rent levels:

    The problem, as described by the city, is a supply-demand imbalance. Over the last two years, the city’s net housing stock grew by about 60,000 homes (~2%). This is, apparently, pretty good compared to recent years/decades; but it wasn’t nearly enough given that the city added 275,000 new households. This is the opposite of dead, and it’s not going to be addressed by just doing things like restricting short-term rentals.

    We have a structural delivery problem and New York City is not alone in facing it.

  • Closing risk

    Urbanation is forecasting that approximately 27,000 condominium suites will finish construction and be ready for occupancy this year in the Greater Toronto Area. This is some sort of a record, and is naturally the result of record pre-construction sales over the last cycle.

    This number is going to come down given that construction starts are declining, but before that, these suites will need to get absorbed into the market. And that’s why I think that one of the biggest risks for our industry this year is going to be closing risk.

    In other words, you’ve got the pre-sales, but will the purchasers actually show up and close on their homes?

    It is for this exact reason that most/all construction lenders want to see pre-construction purchasers pay at least 10% in deposits before they’ll advance their loan. It is also why the most risk-averse developers won’t start construction until they have even more than 10% sitting in trust. The more hard money a purchaser has paid, the more likely they are to close.

    It can be easy to forget this when the market is on fire and you’re more preoccupied with holding back inventory because you think that sale prices will be higher in the future. But it’s prudent to remember these times. They are a naturally occurring part of real estate cycles.

    The most risk adverse execution strategies will likely leave some money on the table in the best of times. You won’t be profit maximizing. However, they’ll leave you more protected in the worst of times. That’s how risk and reward work.

  • The effect of front-end vehicle height on pedestrian death probability

    We have spoken a lot about pedestrian fatalities over the years (here, here, and here are a few posts), and, if there is a general rule of thumb, it is that pedestrians are safer in dense urban environments where there are a lot of other people walking around.

    But another important factor might be average vehicle size. Here is a recent study by Justin Tyndall that combined US pedestrian crash data with car sizes to come up with the effect of front-end vehicle height on pedestrian death probability. This is an important metric because larger/higher front-ends are more likely to fatally hit someone in their chest and/or head.

    What was ultimately found was that a 10 cm increase in front-end height — which is really not a lot — causes a 22% increase in pedestrian fatality risk! Meaning that something as simple as reducing front-end heights could reduce pedestrian fatalities. By his estimation, a 1.25 m height cap would reduce US pedestrian deaths by about 509 people each year.

    This is pretty interesting, especially considering that average car sizes seem to keep going up.

  • The Enchanting Village

    The story of Avoriaz 1800 starts in the 1960s.

    Downhill skier Jean Vuarnet, whose name is today found on cool sunglasses, had just become an Olympic Champion at Squaw Valley in California. He returned to his home in Morzine, France (located in Haute-Savoie) and was asked to help build a new resort on the empty plateau above the town.

    So he, and whoever else, raised some money, got the necessary approvals, and managed to successfully get the first lifts operational. But the resort quickly ran into financial difficulties and, apparently, bankruptcy became a possibility.

    The turning point came when he met Paris-based developer Robert Brémond. He had the capital and the experience, and so Vuarnet eventually ceded the project to him in 1962. In 1964, Robert then asked his son, Gérard, who was only 27 at the time, to lead the project. Supposedly he said to him, “the mountains are for the younger generation.”

    Gérard then went out and hired a young architect named Jacques Labro. He was also in his 20s at the time; 26 to be exact. The mandate he gave Labro was clear: design the ideal recreational resort. At the same time, he was asked to build upon Vuarnet’s original vision for Avoriaz. The result was an audacious masterplan designed around three guiding principles.

    First, it was to be a completely car-free resort, which was/is a big deal and an accomplishment that remains true today. To access Avoriaz by car you either need to park below in Morzine and take a gondola up, or park at the entrance to the resort.

    Two, it was to be an ideal place for skiing (snowboarding didn’t exist just yet). This meant that the entire resort had to be sloped correctly so that everything would be ski in and ski out.

    Finally, it was to have decidedly modern architecture that fit sensitively within the landscape. They didn’t want it to look like some ideal Swiss mountain village. What they wanted was bold, different, and highly sustainable. The result is some of the most unique mountain architecture to be found anywhere.

    For a preview of the village’s architecture, check out these photos by Alastair Philip Wiper. They were part of an exhibition called “Avoriaz: The Enchanting Village.” Along with this story, they will probably make you want to visit the place. That’s certainly the case for me.

    Photo by Rémi Bertogliati on Unsplash

  • The value of cheap and undesirable

    I love seeing these kind of small and creative infill projects.

    In this case, this, is a conversion of an old TV and radio repair shop into a new 4,800 square foot gallery and workspace (there also looks to be a single residential suite based on the photos). These are the kinds of projects that can really make and/or transform an area. However, they are often few and far between.

    Here’s something that I think about a lot:

    In Toronto’s red hot market, it wasn’t easy finding a building large enough to do all of these things; that Mr. Low-Beer had been out of the city for two decades only added to the shock: “I wasn’t fully cognizant of the fact that every square inch was going to be priced out as a condo; I thought you could get an old garage or some place on a highway that was undesirable.”

    Having cheap and undesirable spaces in a city can be a huge benefit, because they lower the barriers to entry and allow for new ideas. And at the end of the day, it is new ideas that usually make cities so exciting. Jane Jacobs was on to someting here.

    But over the last real estate cycle, this has been a challenge because of how frenetic the market has been. It has been a challenge for people wanting to convert TV repair shops into new creative spaces, and it has even been a challenge for new/smaller developers wanting to, yes, build things like condos.

    However, all of this started changing about a year and a half ago. And I would argue that right now is the best time in the last 15 years to be a new entrant. Two years ago, it was hard to buy development sites, and it was mostly impossible to negotiate favorable deal terms (such as structure).

    This current reset has changed that. And it is creating opportunities for those who can be creative.

  • Converting to residential

    This week, a 1913 Beaux-Arts office building at 69 Yonge Street (here in Toronto) was conditionally approved for conversion to residential. The proposal entails preserving the existing 15-storey building, adding 6 storeys on top, and creating a total of 127 new condominium suites (14 studios, 65 one-beds, 27 two-beds, 21 three-beds, and exactly zero parking spaces).

    This is noteworthy for at least 3 reasons.

    One, it’s a beautiful old building and PARTISANS does great work.

    Two, there’s no parking. This isn’t novel for Toronto, but it’s a good reminder that you don’t need parking in urban centers (so stop mandating it). It’s also something that you often have to accept with office conversions. If the parking doesn’t already exist, you’re probably not going to build it.

    Finally, this approval demonstrates a reversal in the city’s view on office replacement. Years ago, this sort of project wouldn’t have been feasible, because the developer would have been forced to replace any demolished office space. But obviously that’s no longer the case today. And in my opinion, that’s a good thing.

  • So what floor do you live on?

    Tonight was a “housewarming” party for the residents of Junction House. It was hosted in the co-working space that I wrote about, here, which was a lot of fun to see in action.

    As part of the event, we opened up the doors to our model suite and to the penthouse suite that sits under the Junction placemaking sign.

    And in the penthouse, we set up a little gallery displaying historic photos of the Junction — from the 80s — taken by photographer Avard Woolaver.

    They’re awesome photos, and eventually they’ll make their way down to the lobby. But for now, it’s a penthouse gallery.

    However, the most important component of the evening was that it was an opportunity for residents to meet each other. And that’s why the question of the night quickly became, “so what floor do you live on?”

    I sometimes hear people say that there can be a lack of community in multi-family buildings. But I can honestly tell you that I felt the exact opposite of that this evening.

    It was nice to meet so many lovely people from the building.

  • Utah needs to secure 24,000 hotel rooms to host the Winter Olympics

    Sometime before the Paris 2024 Olympics this summer, the International Olympic Committee (IOC) is expected to announce who will host the 2030 and 2034 Winter Games. Right now, the two frontrunners are thought to be the French Alps and Salt Lake City/Park City — I think respectively.

    Obviously these are two fantastic winter locations. But one of the things that the local committees need to do before they can secure the games is show the IOC that they have enough hotel rooms on hand. More specifically, they need 24,000 rooms reserved for 33 nights. This covers 17 nights during the games, 14 nights before, and 2 nights after.

    Most of these rooms, about 10,000 or so, will go to journalists.

    I didn’t fully appreciate — or I just didn’t think about it — that this was something that needed to be done 6-10 years out. Because right now there is a human running around try to lock up these rooms in advance of the decision this summer.

    According to the Salt Lake Tribune, they’re already at 85% of the requisite 24,000 rooms. Though some of these rooms have yet to be built and some of them reach into neighboring Wyoming, which apparently isn’t an atypical distance when it comes to meeting this accommodation requirement.

    For obvious reasons, I’m rooting for Utah here. I really want them to get the Winter Games.

  • Why are construction starts down?

    Last year in the Greater Toronto Area, condominium construction starts fell to a 9-year low of 15,891 homes. And this year, condominium construction starts are forecasted to fall to a 15-year low of 11,500 homes (though new sales are expected to rebound). Both of these figures are from Urbanation’s Q4-2023 market data.

    One possible explanation for this drop in construction starts could be that developers are somehow colluding to keep supply low and prices high. Another one could be that more developers are right now independently speculating that prices will be higher in the future, and so they think it’s better to just wait. But both of these explanations would be wrong.

    The correct answer is that more developers are unable to start construction because the market isn’t there. In the case of Toronto’s condominium market, this means that the pre-sales aren’t there. This might seem obvious, but there seems to always be a contingent of people who believe that developers can choose to build whenever they want.

    It is for this same reason that some people think that zoning approvals should have an expiry date. Call it a use-it-or-lose-it approach. But as I think we can see in the above numbers, developers don’t control the market. And so I would never want to be in a position where I need to start construction by a certain date, or else.

    That’s not entirely within my control. In fact, sometimes it’s completely out of my control.