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: financial times

  • France’s rental ban on energy-inefficient homes

    One of the things that you’ll notice on real estate listings in France is an Energy Performance Diagnostics (EPD) rating. In French, it gets reversed, and so it’s a DPE (diagnostic de performance énergétique). What it tells you is how much energy the dwelling (or building) consumes and how much greenhouse gas it emits. And it is a requirement on all real estate listings and for all dwellings, except those that are occupied for less than 4 months per year. The output of this diagnostic is a rating from A (best) to G (worst).

    According to FT, this is how primary residences in France rank today:

    Less than 5% of homes are rated A and B (the most energy efficient). And many more are rated G and F. Beyond just being energy inefficient, this is potentially a problem because there are penalties and restrictions for the lowest rated homes, one of which is that you are not allowed to rent out the property. Right now and as of January 1 of this year, the upper consumption limit is 450 kWh per square meter per year. Go above this and the home becomes ineligible.

    This number is also planned to reduce over time:

    • January 1, 2023: Rental ban on properties with G+ energy label
    • January 1, 2025: Rental ban on all properties with G energy label
    • January 1, 2028: Rental ban on all properties with F energy label
    • January 1, 2034: Rental ban on all properties with E energy label

    Now here’s what this is thought to mean for overall rental supply:

    By 2028, 5.2mn homes rated F and G, or 17 per cent of total housing stock, will become ineligible for rental. By 2034, all E properties will also be excluded, amounting to about 40 per cent of homes.

    This raises an interesting question: Is it more important to have energy-efficient homes or to have greater overall supply? Now obviously the goal and ideal scenario is both; lots of affordable homes that are also energy efficient. And presumably, one of the objectives of this rental ban is to stick/carrot owners into investing in energy measures. But it’s not exactly obvious as to how many owners will be able to renovate their homes in time, and how many homes will become ineligible for rent. This will be an interesting policy to watch as it plays out.

  • Digitally twinning our cities

    Many of you have probably heard of the concept of a “digital twin.” Put simply, it is a digital representation of a physical thing. This could be a thing that already exists or, in the case of a new building, it could be a thing that you’re about to make exist.

    But there’s no reason to stop at the scale of a building. Right now, there are groups working on modeling entire cities. Sadly, in Ukraine, it is being done to document important buildings that could get destroyed. But in other places, it is being done in order to create a new kind of urban testing environment (via FT):

    “In the city, you don’t have a development environment; you only have one city. The laboratory is the place where the planners go to test. So test in a digital twin and then develop or implant in the city. That’s going to be the value.”

    The thinking is that if you combine a digital twin with good real-time urban data and AI, then you might actually be able to start testing new city building initiatives. For instance, maybe you could ask it: What would happen if we added a traffic lane, here? Would it actually help congestion or would it induce new demand?

    It’s hard to model this kind of stuff today, which is one of the reasons why there’s usually fierce debate about seemingly everything. But if we had accurate models that could tell us something close to reality, that feels like it would be a game changer for city builders.

  • Are shared e-scooters now dead?

    I first wrote about Bird, the electric scooter company, back in March 2018. At the time, they had just raised $115 million and their pitch was that they were going to solve the last-mile mobility problem. This is a real problem, and so lots of urbanist-type people, including myself, were excited. I then rode my first shared scooter in 2019 in Lisbon, and I had a ton of fun. I wrote: “Now I know what all the fuss is about.”

    But it wasn’t all puppy dogs and ice cream. People started getting annoyed by the clutter that dockless scooters were creating in our cities (see above photo). Safety also became a great concern, and so they started getting viewed as a nuisance. Toronto never allowed them (despite my insistent blog posts) and Paris — which had arguably become the scooter capital of the world — banned them in early 2023.

    Now there’s this: Bird announced this week that it has filed for bankruptcy. The once unicorn, which had its stock halted back in September because its market cap fell below $15 million for too long, needs cash. According to FT, they have about $3.25 million the bank, but they have an immediate need for $16.8 million to meet some “financial obligations” in January.

    This is maybe not unexpected. But I think the important question is: Is this an existential moment for micro-mobility and shared scooters (i.e. this is a fundamentally bad business), or is it more of a case that money used to be mostly kind of free, and now it’s not? Either way, I think there’s no question that the latter is going to cause further distress throughout 2024.

    But the question remains: Can shared scooters be a sustainable business?

    My day job is not to be a scooter analyst. But I do think that a number of things are true:

    These first and last points are important ones. I believe it’s always going to be easier to get people onto electric scooters and bikes than onto regular bikes; people will generally always choose what is easiest. At the same time, here is a company that has allegedly figured out how to offer this service profitably. Assuming these two things remain true, I think we’ll continue to find scooters in our cities.

    Photo by Gemma Evans on Unsplash

  • Canada has an existential productivity problem

    Canada has a lot going for it:

    By land mass it is the second-largest country in the world, with the longest coastline. Bookended by the vast Pacific and Atlantic oceans it has enormous trading advantages, alongside access to the largely untapped Arctic to its north. It is a net energy exporter; it has the third-largest proven oil reserves and is the fifth-largest producer of natural gas — but it also boasts large deposits of critical minerals vital to the green energy transition. And, of course, it borders the world’s largest economy.

    And yet:

    By purchasing power parity, its economy is ranked 15th globally by size, behind the likes of Turkey, Italy and Mexico. The OECD has forecast Canadian per capita gross domestic product growth up to 2060 to be the lowest among advanced nations.

    The problem:

    Poor productivity is at the heart of the country’s growth challenges. In an hour a Canadian worker produces just over 70 per cent of what an American can — that’s below the euro area and even the UK based on 2022 data. Many would have expected the resource-rich economy to benefit as globalisation powered forward, but its relative labour productivity has actually slipped since 2000.

    The solution is probably a simple one: We need to innovate, invest more in R&D, and create stronger links between research and Canadian businesses. But executing on this has proven difficult:

    Enormous efforts have been made to understand why businesses in Canada invest so much less in R&D than their counterparts in the U.S., much of Western Europe, South Korea and Japan. Is it our reliance on the export of natural resources and agricultural products? Is it reduced incentives to innovate for our heavily regulated and profitable oligopolies in sectors such as banking and telecommunications? Is it our decades-old reliance on incentivizing industrial R&D through federal and provincial tax credits?

    It’s hard to imagine a more important topic affecting all Canadians. So I would encourage you to read this recent opinion piece by David Naylor (president emeritus of the University of Toronto) and Stephen J. Troops (president of the Canadian Institute for Advanced Research).

    It’s a balanced piece. Neither of them are arguing for “empty credentialism” or for research that remains in academia. What matters is what we do with the work that our smartest minds are doing. And the overarching point is that innovative research needs to find demand within Canadian businesses.

    Right now, we’re very bad at this. That needs to change.

    Chart: Globe and Mail

  • Why is housing viewed so differently?

    Here is a study by three researchers out of California that asked Americans to predict the impact of a supply shock on various things, such as durable goods, commodities, labor, trade, and yes, housing.

    For basically all of these items, people tended to answer correctly. Usually by a factor of at least two to one. In other words, when asked what reducing the supply of new cars would do to the prices of used cars, the majority of people responded saying that it would lead to an increase in prices.

    However, when asked about the impact of a 10% increase in housing supply, about 40% said that it would cause prices and rents to rise. Only about a third believed they would fall (the correct answer). This is fascinating because it shows that housing seems to be an outlier. Most people don’t have the same intuitive sense.

    Why is this? Well, one commonly held belief is that building market-rate housing leads to gentrification, and that this ultimately leads to the displacement of existing residents. This might have been why some people responded saying that new housing will cause an increase in prices and rents. It’ll lead to all housing going up.

    However, there’s research to support that this isn’t the case. The problem isn’t outward displacement following new market-rate housing. The greatest driver of gentrification is actually “exclusionary displacement”, which is the inability of people to move into areas because of a lack of housing. (This study was based on 2010-2014 housing data from the UK.)

    The thing about housing supply is that it relieves pressure across the entire market. Instead of a high-income person buying an old home to renovate (and causing outward displacement), they can instead choose to buy a new home (and not cause any outward displacement).

    By doing this, they also leave behind a home that can then be absorbed by lower earners. One US study found that for every 100 new market-rate homes that are built, somewhere between 45 and 70 people move out of a below-median income neighborhood.

    It is for reasons like these that, time and time again, increased housing supply has been shown to moderate home prices and rents (see above regarding Minneapolis and the Midwest as a whole). So if you’re worried about the cost of housing, the answer is to build more. And if you’re worried about gentrification, the answer is also to build more.

    Our intuitions are telling us that this is true for most things. But for whatever reason, housing feels different. It’s not, though.

    Source: The charts and studies in this post are from this great FT article by John Burn-Murdoch.

  • Cheap mortgages are something to hang onto

    If you really need a new home, then I guess this makes sense:

    We thought rising mortgage rates would crush the homebuilders, and bet against Pulte in the FT stockpicking contest. But the exact opposite happened: high rates froze the existing house market by giving homeowners a huge incentive not to move — their irreplaceable cheap mortgages. That left new homes as almost the only game in town for anyone who really needs to buy a home. Pulte has been one of the best- performing stocks in the S&P 500. Never pick stocks, even in a stupid stockpicking contest, on the basis of superficial research.

    And here’s a chart that supports this argument (new homes as a % of total single-family home inventory, including resales):

    It’s an interesting nuance.

    But it’s certainly a different story here in Toronto with new condominium sales. According to Urbanation, in the first half of this year, the Greater Toronto Area sold 6,727 new condominium homes. This is down 59% compared to 2022, and represents the slowest first six months in a decade.

    In this case, higher rates have dramatically slowed the market.

  • Toward the childless city

    There is a common narrative that, when it comes time to start a family and have kids, you should probably consider moving to the suburbs. Sure, you’ll have a painful commute, but you’ll get more space for your money, and maybe you’ll end up with better kids.

    I don’t know, obviously not everyone agrees with this. I certainly don’t.

    But it is something that commonly happens and, in many cities, it is now happening more often. Here is a map from the Centre for London showing the change in the proportion of households with at least one dependent child from 2001 to 2021:

    A darker borough means that it lost households with at least one child. And a lighter borough means that it gained more kids. Why this is concerning is that it means the trendline is toward more, and not less, childless cities. Here’s an excerpt from a recent FT article:

    A future with dwindling numbers of children is one many cities, including San Francisco, Seattle and Washington DC, are grappling with. In Hong Kong, for every adult over 65 there are, to put it crudely, 0.7 children, and in Tokyo it is even fewer (0.5).

    Of course, this is not a new phenomenon. And we know the main drivers:

    Randal Cremer is one of several planned primary school closures and mergers in inner London triggered by low birth rates, families moving away because of expensive childcare, Brexit, and parents re-evaluating their lives during the pandemic. The biggest factor, says Riley, is that “housing is just becoming unaffordable”. Philip Glanville, mayor of Hackney, calls it “the acute affordability crisis”.

    So how do we start to solve this? Here are a few ideas that we recently talked about on the blog, but it is by no means an exhaustive list. In my opinion, this is a problematic trend that deserves a lot more attention. Because cities are at their best when they work for everyone — from the young to the old.

  • Writing into an abyss

    Sometimes I stop and think to myself, “my god, I’ve been writing my daily blog for over 9 years. That’s a huge commitment. Should I stop? Is it really worth it?”

    But of course I do think it is worth it, mostly because I enjoy writing, I enjoy thinking about things, and I enjoy connecting with people through this blog. I don’t want to stop. It’s perhaps also important for me to keep in mind that 9 years maybe isn’t all that long.

    I read this FT article today about investor Howard Marks. Marks is co-founder of Oaktree Capital Management, a person with billions of dollars, and the author of a popular investing memo (200,000+ subscribers) that I generally never miss. And after reading about his backstory, I now feel very much like a blogging baby:

    He began writing the memos in 1990, initially sending them by post to Oaktree’s 50 or so clients. For the first 10 years, “I never had one response,” he says. And then, on January 2 2000, Marks distributed a memo called “bubble.com”, in which he made the “overwhelming” case for “an overheated, speculative market in technology, internet and telecommunications stocks”, similar to past manias such as the 18th-century South Sea Bubble. The memo “had two virtues”, says Marks. “It was right and it was right quickly.” The technology-heavy Nasdaq index slumped four-fifths from peak to trough between March 2000 and October 2002. “After 10 years, I became an overnight success.”

    I have no particular end goal in mind for this blog. I have no need to become an overnight success. My plan is to just continue writing as an adjunct to all of the other things I do. However, I am attracted to the value of discipline, compounding consistency, and long-term thinking.

    It’s not easy doing something for a decade and having nobody respond. At least with this blog, I get the occasional heckler telling me that I’m a greedy developer out to destroy our cities.

    P.S.: If you’re into longish memos about investing, I would encourage you to check out Marks’ latest memo about what really matters. In it, he talks about why short-term events — such as, interest rates might do this — are by far the least important thing to focus on.

  • Miami is the top US city for foreign businesses

    The Financial Times and Nikkei have just published their inaugural Investing in America report, which looks at the best US cities for foreign multinationals to invest in and do business in.

    To come up with this, they used about three dozen different metrics — everything from openness to quality of life. From what I can tell though, it doesn’t appear that climate risk factored much into this ranking. It should.

    There’s a lot of Florida on this list and Miami comes out on top, largely because, last year, it had the most foreign direct investment per capita of any US city. It also has a well-connected airport, two of the largest shipping ports in the US, and an international population.

    Lots of people and companies are going long Miami right now.

  • Super-prime home sales in New York and London

    Here’s what I can tell you this morning: Real estate development is a bit more fun when you don’t have to constantly worry about supply-chain issues, access to labor, high inflation, and regularly increasing interest rates. That said, if you just want to buy a super-prime property in one of the world’s preeminent global cities, things seem to be just fine:

    According to FT, both New York and London have continued to see a rise in super-prime sales this year and both have seen more of these sales in the first 8 months of 2022 compared to all of 2019 (before the pandemic). Note: These charts are showing home sales greater than US$10 million and greater than £5 million, respectively.

    On top of this, many or most of these buyers are, apparently, still able to access financing at LTVs of 100% (i.e. no money down). For what it’s worth, there is a London mortgage broker quoted in the article saying that he has arranged more 100% mortgages this year than in his entire 20-year career. Turns out that the best way to ensure access to debt is to not need it in the first place.

    Charts: FT