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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Tag: california

  • Building new cities

    On this blog, we often talk about city building in the context of doing things to help improve a city — whether that be a development project, a new public art mural, or an interesting local business. These interventions help to build a city. But even more specifically, the term has, for many, come to mean building up a city in a positive way.

    But there is another way to think about city building. You can think of it in terms of building actual new cities. We’ve spoken about some of these before, namely this one in California and this odd one in Saudi Arabia. But apparently it is becoming more common. According to The Economist, the world is now building more new cities than it has in the last 80 or so years:

    Egypt’s “New Administrative Capital” is part of a rush of city-building. Firms and governments are planning more settlements than at any time in the post-war period, with many already under construction. Ninety-one cities have been announced in the past decade, with 15 in the past year alone. In addition to its new capital in the north, Egypt is building five other cities, with plans for dozens more. India is considering eight urban hubs. Outside Baghdad, Iraq, workers have just broken ground on the first of five settlements.

    In some cases, it is being done as a solution to urban congestion. If this city is too expensive and unaffordable, just create a new one. This appears to be part of the idea with the above city outside of San Francisco. Of course, new cities can also be created for ideological reasons, or for political purposes, which was the case with Brazil’s capital city, Brasilia.

    Here, the idea was to move the federal capital away from the country’s populated southeast region to a more geographically neutral location in the middle of the country. It also turns out that seeding a new city with government institutions is a good way to get one of these started. Existing cities do, after all, benefit from network effects.

    History points to characteristics shared by successful projects. State institutions can help anchor cities, as Brasília (in Brazil) and Chandigarh (in India) showed in the 20th century. Although both have had problems, people in Brazil and India are voting with their feet. Brasília’s population is growing at 1.2% a year, more than double the national average. Chandigarh, a state capital, is now India’s fourth-richest region on a per-person basis.

    But putting money, ego, and ideology aside, when does it actually make sense to start a new city in lieu of just expanding (or addressing the problems in) the one(s) you’ve already got? Population size can’t be the only factor in determining whether a city is “full”, because Tokyo seems to do just fine as the largest metropolitan area in the world.

    If it hasn’t already been done, I think this would make for an interesting research project. Until then, there’s this (paywalled) Economist article.

  • San Francisco is highly proficient at making housing more expensive

    If you’re looking to block new development, drive up the cost of housing, and appear “progressive” all at the same time, one generally effective technique is to do it under the guise of historic preservation. San Francisco is really good at this, as are many other cities. And it works because, who doesn’t think that history is important?

    This exact thing just transpired in San Francisco, where earlier this year Supervisor Aaron Peskin passed an ordinance enacting new density controls for most development in the Northeast Waterfront Historic District, the Jackson Square Historic District, and the Jackson Square Historic District Extension (solid neighborhood names).

    Of course, sometimes you can run into resistance when you’re trying to push through new anti-housing policies. And in this case, San Francisco Mayor London Breed actually vetoed Peskin’s bill. In a letter dated March 14, 2024, she wrote:

    Restricting new housing runs counter to the goals of our Housing Element, which the Board of Supervisors unanimously approved just over a year ago. It also runs counter to what we need to do to make this City a place that creates opportunities for new homes for the people who need them today and for future generations growing up in San Francisco.

    This ordinance passes off anti-housing policy in the guise of historic protections. Existing rules already protect against impacts to historic resources. I believe we can add new homes while also supporting and improving the vibrancy of our unique neighborhoods. Many areas of San Francisco, including eastern neighborhoods like the South of Market, Potrero Hill, and the Mission, have also already removed density limits to encourage new housing.

    However, her veto was ultimately overridden by the Board of Supervisors and so, as far as I understand it, the above density controls stand.

    What’s particularly frustrating about this outcome — sarcasm now firmly off — is that it so obviously reeks of NIMBY selfishness. Here’s an elaborate infographic created by Max Dubler explaining what many in San Francisco believe is the real reason behind this downzoning:

    Here is also a street view image from the area, along The Embarcadero:

    But like I said, San Francisco seems to be really adept at this sort of maneuvering.

  • Turquoise for autonomy

    One of the realities that we will have to face in, oh I don’t know, 5 or so years, is that there will be a mixture of different cars on the road. Some will operate with drivers. And some will operate with no drivers. Assuming that the cars with no drivers do well at their job, I would imagine that this will become the default. But in the interim, it’ll probably be useful to know which is which. And that’s why Mercedes-Benz (and probably others) has been working to establish a new internationally-accepted signal for computer-driven cars.

    The decision so far: turquoise lights.

    The company has just received permits from the states of California and Nevada for its Drive Pilot system, and as part of this, turquoise lights were earmarked for this exact purpose. Supposedly turquoise was chosen because it’s distinct and because there’s nothing else on the road that uses it. But I think the real reason is that it looks cool and kind of cyberpunk. So I hope this does become the standard way that we all visualize our shift toward autonomy. I can already imagine the long-exposure photography that will follow of our roads.

    Images: Mercedes Benz via The Drive

  • Silicon Valley wants to build a new city about 60 miles northeast of San Francisco

    We talk a lot about housing supply on this blog. And most of the time it is about creating more and better infill housing, In other words, housing that leverages existing infrastructure and uses previously developed land as efficiently possible.

    But I suppose there are other options. You could, for instance, form an anonymous holding company, raise hundreds of a millions of dollars from leading venture capitalists in the Bay Area, spend $800 million on cheap agricultural land, and then just build an entirely new city about 60 miles northeast of San Francisco.

    And apparently that is happening:

    In 2017, Michael Moritz, the billionaire venture capitalist, sent a note to a potential investor about what he described as an unusual opportunity: a chance to invest in the creation of a new California city. The site was in a corner of the San Francisco Bay Area where land was cheap. Mr. Moritz and others had dreams of transforming tens of thousands of acres into a bustling metropolis that, according to the pitch, could generate thousands of jobs and be as walkable as Paris or the West Village in New York.

    Here’s the area; it’s generally between Fairfield and Rio Vista in Solano County:

    The real estate opportunity is an obvious one. The majority of the land in Solano County, roughly 62% of it, is zoned for agricultural uses. So it was and is relatively cheap to acquire. In isolation, I would imagine that it would be pretty difficult, if not impossible, to rezone any of it for other uses. But if you buy enough of it and if you have the resources, then maybe you figure it out.

    And if you do, it’ll all be worth significantly more, which is why this group has been reportedly paying many multiples of market value over the last 5 years. Because here’s the thing, paying $6,000 per acre instead of $1,500 per acre is almost certainly not going to move the needle considering the broader strategy. More important is that you get enough contiguous land to execute on the vision of a new city.

    This will be an interesting one to watch. And from what I have read, it sounds like they’re just now coming out of stealth acquisition mode and preparing to engage the broader community.

  • Income migration across the US between 2020-2021

    Between 2020 and 2021, so right when the pandemic hit, Manhattan alone lost $16 billion of federally-taxable income, according to this recent study by Economic Innovation Group. And San Francisco saw net migration that reduced its federal income tax base by more than $8 billion. At the time, this represented about a 20% decline.

    Now, I don’t know to what extent this maybe changed, slowed, or reversed from 2021 to today, but the IRS tax data is pretty clear: the pandemic accelerated a longstanding trend of Americans moving out of older coastal cities toward newer, sunnier, and more sprawling cities in the sun belt and in the Mountain West region.

    Here is a map from EIG showing the difference in incomes between households moving in and moving out of each US county. A dark blue county means that the people who moved in were richer than the people who left. (For an interactive version, click through to their website.)

    To give two examples. Here is San Francisco County, which lost nearly 20,000 people with average incomes of around $240,000 per year.

    And here is Summit County, Utah (home of Parkview Mountain House in the Mountain West region), which saw 81 new tax returns and an average newcomer income of $395,000 per year.

    This is an important reminder that people — especially people of means — vote with their feet. If they stop liking a place, they will leave, along with their incomes, to somewhere else. Indeed, in the case of this IRS data, the income flows to these growth regions seem to have been largely driven by upper-income households.

  • California has a plan for 2 million new homes

    On July 1 of this year, a new California bill, called the “Affordable Housing and High Road Jobs Act of 2022”, will go into effect. And the goal of this legislation is to significantly increase the supply of new homes in the state by allowing multi-family construction on lands that are currently zoned for commercial uses.

    On some level, it is of course curious that there even needs to be this bill. Because what we are effectively saying is, “hey, we should allow people to build a mix of uses on our main streets and with high enough densities that we might actually be able to support transit.” Why was this not always the case? (Rhetorical question.)

    In the words of architect and planner Peter Calthorpe, who was recently interviewed here in ArchDaily, this is a “landmark piece of legislation” that has “received very little attention.” So that’s why we’re talking about it today.

    Calthorpe was actively involved in crafting this legislation, and his work apparently started with different scenario land-use models. The first experiment looked at a 43-mile stretch of El Camino running from San Francisco to San Jose (pictured below). And what they found was that this one strip alone could accommodate somewhere around 250,000 new infill homes.

    To put this into context, the state of California is currently building about 140,000 new homes each year, through a roughly equal (1:1) split of multi-family and low-rise single-family. Already this represents a shift, as supply used to be slanted (3:1) toward low-rise. (I don’t know when exactly this was the case, but Calthorpe mentions the figure in his interview.)

    Moving on from El Camino, Calthorpe and his team then ran a similar exercise for the five-county inner Bay area. And here they found that some 700 miles of commercial land could produce up to 1.3 million multi-family homes at “reasonable densities.” This was then expanded to the entire state of California and the number increased to 10 million new homes.

    Of course, as we have talked about before on this blog, not all of this land might actually be feasible for development. Sometimes the math doesn’t work even at a zero land cost; you might need a negative land cost in order to pencil a new development. Meaning, you might need to be paid, perhaps through some sort of subsidy.

    So what Calthorpe and the team did was use MapCraft to quickly run development feasibilities on the above sites. They had it run 6 different pro formas using local rents, construction costs, city fees, and so on. And what they determined was that this 10 million number drops down to 2 million when you apply the economic realities of the world.

    As a disclaimer, I’m not at all familiar with MapCraft. But I’m going to take this number at face value and say that this is still a lot of new homes. And this is what people are hoping for come July 1 of this year.

    Image: HDR / Peter Calthorpe

  • A place for everything

    Housing is expensive in California:

    In 2021, San Jose had the least affordable housing among the 92 major US housing markets, with a median multiple of 12.6. San Francisco had a median multiple of 11.8, Los Angeles was at 10.7, followed by San Diego, at 10.1).7 Housing was severely unaffordable even in the interior markets, with Riverside-San Bernardino at 7.4 and Sacramento at 6.7.

    And there are some explanations for why that is the case:

    Dartmouth economist William Fischel published an early seminal review 9 of housing affordability in California (1970 to the 1990s). Fischel suggested that regulatory research should look for major changes that “are adopted in some places but not in others.”

    Fischel examined the higher house price increases that occurred in California compared to the rest of the nation between the late 1960s and late 1980s. Fischel cites various possible causal factors. He found that the higher prices could not be explained by higher construction cost increases, demand, higher personal income growth, the quality of life, amenities, Proposition 13, land supply or water issues.

    Instead Fischel cites stronger land use restrictions — There were two principal issues, the California Environmental Quality Act (CEQA) and local growth management restrictions.10

    We have discussed this issue many times before on the blog, but Wendell Cox’s article is helpful in pointing out that zoning in and of itself wasn’t the problem. The problem arose, at least according to Fischel’s research, when these policies went from “ordinary zoning” to something that became a tool to restrict growth.

    The illustrate what “ordinary zoning” means, Cox uses the idiom, “a place for everything, but everything in its place.” And I think this is an interesting way of putting it. Part of the reason why we have zoning is that it is a way to organize uses. It is a way of saying that sex shops and cannabis shops can’t go here, but they can go over there.

    But the key part of this idiom is its first part: a place for everything. What this implies is that the answer should never just be, “no, sorry, you can’t build this.” At most, it should be, “no, sorry, you can’t build this here, but you can over there.” There is a place for everything.

    Of course, this is much harder to do when you flip from sprawl development to infill development. Because now there are fewer places “over there.” You really have to figure out “here.”

  • California is set to ban gasoline cars by 2035

    According to this recent New York Times article, California is set to put into effect a new mandate that would require 100% of passenger vehicle sales in the state to be fully electric by 2035. Included within this mandate are also interim targets: 35% of all sales by 2026 and 68% of all sales by 2030.

    When I first read the article, my first thought was: “Isn’t 2035 kind of far away? Can’t we do this sooner?” And this is usually how my mind works when I see some date in the future. But then I remembered that EV sales last year in the US only totaled somewhere around 5% of all sales.

    So there is work to be done, and mandates like this will certainly help. As I understand it, this will be the first mandate of its kind in the US and also one of the strictest in the world. A lot of other countries have simply set targets, rather than all-out bans.

    This is what it means to lead. You do things before others.

  • Income vs. wealth in California’s housing market

    Here is a chart from MetroSight that compares housing tenure in California in 2000 and then between 2015-2019:

    Two things you might notice immediately are that the number of renter-occupied households has generally increased and that the number of owner-occupied households without a mortgage (i.e. they own their home free and clear) has also increased for every age category except for those 65 or older.

    MetroSight uses this data to argue that a new “wealth-related phenomenon is emerging” in California. Instead of the housing market being largely driven by income (that is, I make this much per year and I can afford this much house), it is being driven by accumulated wealth.

    The possible explanations for this are as follows:

    • The share of renter-occupied households is increasing because people increasingly can’t afford to buy
    • The share of owner-occupied houses with a mortgage is decreasing because less people can afford to buy given California’s price-to-income ratios
    • The share of owner-occupied houses without a mortgage is increasing because people are increasingly inheriting homes or getting gifted cash from their families

    Consider that the share of owner-occupied houses without a mortgage even increased for the 18-24 age category. Unless you’re the next Zuckerberg (who was a billionaire at age 23), this is pretty challenging to do without some kind of assistance, especially in a place like California.

    This outcome also provides a possible explanation for why the over 65 age category is the only segment that has seen a reduction in free and clear ownership. It is because they are transferring their wealth to the next generation so that they too can obtain homeownership.

    Chart: MetroSight

  • Artificially low property taxes

    A blog reader responded to yesterday’s post about rent controls (and inclusionary zoning) with an excellent point: If you’re against rent controls, then you must also be against artificially low property taxes for homeowners. And I would agree with this.

    One of the points I was trying to make yesterday was that if you’re in a situation where your revenue is capped but your operating expenses are free to grow based on the market, then you are likely heading down an unsustainable financial path.

    This is true if the revenue is in the form of rent and this is true if the revenue is in the form of property taxes. A good example of this is California’s Proposition 13, which is the principal thing that keeps property taxes artificially low over on that coast.

    Similar to what I argued yesterday with rent controls, it too creates a misallocation of housing. If you’re sitting on historic and artificially low property taxes, then you are now highly incentivized to stay put where you are. Why would you move only to have your taxes mark to market?

    So this line of thinking cuts both ways, whether we’re talking about renters or homeowners.