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.
As further evidence that real estate is a local business, let’s take a look at the housing market in Japan today. It’s a very unique market.
According to this Freakonomics podcast, 50% of all single family houses in Japan are demolished by the time they reach 38 years old. That’s their half-life. By contrast, in the US, this number is 100 years.
The reason for this is rapid depreciation. Real property typically consists of two things: land and the building. Land doesn’t depreciate. But the structure sitting on the land does.
In Japan, the building or structure is thought to be fully depreciated (and therefore worth nothing) after about 30 years for a single-family home and after about 40 years for an apartment/condominium.
The result is that there’s virtually no resale housing market. When somebody buys a house, it is usually torn down and completely rebuilt. It’s a uniquely Japanese phenomenon.
So why does this happen?
The Freakonomics podcast presents a couple of hypothesis. Some believe that it’s caused by a Japanese fixation with newness. New is seen as pure and clean.
Others believe that it has to do with a building code that is constantly changing due to the high frequency of earthquakes in Japan. 20% of the world’s earthquakes with a magnitude of 6.0 or greater happen in Japan. And so there appears to be a belief that newer homes – with the latest seismic technologies – are the safest.
Whatever the case may be, the fact that there’s virtually no resale housing market in Japan, not surprisingly, produces some interesting outcomes. For one, maintenance and DIY home projects are uncommon. Why invest in your home when it’s not viewed as an asset, but as a disposable good?
At the same time, people worry very little about marketability when they are building new. And this is a big reason why Japan is so famous for its radically designed homes. When you’re building only for yourself, you just do what you want.
But most importantly, some (such as Richard Koo, who is interviewed in the podcast) believe that this approach to housing is a huge “obstacle to affluence.” Without a functioning resale market, the Japanese don’t get the opportunity to build wealth/equity in the same way that other countries do.
Real estate is a local business. And this weekend in Philadelphia really reminded me of that.
Here’s what I mean.
The real estate story in Toronto is condos. We’re buildings lots and lots of condos. When my friend from Chicago recently visited Toronto for the first time, he told me that it feels very similar to Chicago, except that we have modern glass condo towers going up everywhere and they don’t. That’s our story right now.
Low-rise housing in Toronto is becoming increasingly unaffordable (the average price of a detached home is well north of $1M) and so high-rise condos are now what many people can afford. When young people in Toronto talk about buying their first place, that now usually means a condo.
But that’s not the story in Philadelphia.
In Philadelphia, you can buy a 1,600 square foot, 2 storey, 2 bedroom rowhouse in a respectable neighborhood for sub US$400,000. And in speaking with my friends in Philly this weekend, that’s what young people are buying.
This doesn’t mean that Philadelphia isn’t building new high-rise condos and apartments. It is. Obviously nowhere near as many as Toronto. But it is building. Far more than when I lived there before the Great Recession.
However, the condo market is typically more upmarket. The target market isn’t so much first time buyers and the mass market; it’s more people who want full floor apartments in Rittenhouse Square. (I’m exaggerating only slightly.)
Philadelphia is also building more rental towers than condo towers. (Rental has only recently become fashionable again in Toronto.)
I’m guessing that a lot of this has to do with the fact that Philadelphia draws in a lot of transient students and academics each year. In fact, the most noticeably changed area from when I lived in Philly was University City. That’s the area that houses the University of Pennsylvania and Drexel University.
So there seems to be strong demand for new rental housing in the city. I’m told vacancies are very low. But when it comes time to buy, young people don’t look to condos like they do in Toronto. They are looking mostly to rowhouses.
This is interesting to me because it’s the exact opposite of Toronto. In Toronto, low-rise is expensive and so lots more people are buying high-rise. In Philadelphia, high-rise is expensive and so people are buying low-rise.
I guess that’s why they say real estate is a local business. What works in one city may not work in another.
Urbanist Aaron Renn recently published an interesting article in City Journal called “Libertarians of Convenience”. It talks about how today’s urban progressives are selectively favoring deregulation for the things that only matter to them – everything from urban housing to food trucks.
Here’s a snippet:
But it’s hard to avoid thinking, too, that some of the inconsistency reflects elite biases. The things that liberal-minded city residents like and want to do—eat from hip food trucks, smoke dope, and other “bourgeois bohemian” pursuits—should be left as free as possible, consequences be damned (raw-milk advocates downplay the nearly 1,000 cases of illnesses caused by it from 2007 through 2012). Those that they consider déclassé—Big Gulps, Marlboro Lights, McDonalds—should be restricted or even shut down. It’s regulation for thee but not for me.
I like his angle, because we’re probably all – at least a little – guilty of subjectively wanting more of the things we like and less of the things we don’t like.
Laneway housing is becoming an incredibly popular topic here in Toronto. Lots of people seem to be interested in building, or least living in a compact ground-related laneway dwelling.
A big part of this, I think, has to do with affordability (or the perception of affordability). A lot of people want to live in a central urban neighborhood, but it has simply gotten both expensive and difficult to secure low-rise housing. Here’s an example of a young couple in Toronto who went door-to-door in their desperation to find a house.
I believe that laneway housing has the potential to be a more affordable low-rise housing solution in this city, as well as in many other cities around the world who have a similar urban condition. But today, at least here, it’s not that way.
Since the City of Toronto does not officially support laneway housing, it would be an uphill to get one approved and you need to be willing to put a significant amount of money at-risk in order to try. It’s unfortunate, but that’s the reality today.
I’m certain that will change. But it will take a bit more pioneering. The Laneway Project, which I advise, is working to change the way Toronto thinks about its laneways and I know that there are many other small entrepreneurs working on doing the same.
One of the first things that will need to happen is that we’re going to need to name our laneways. Some of them are already named, but many of them are not. And while this may not seem like a big deal, it is. For laneway housing to become a reality, they will need to have addresses and we will need to think of our laneways as legitimate streets.
Recently The Laneway Project published a how-to guide called: How to Name Your Laneway. So if you’re interested in laneways and laneway housing here in Toronto, I would encourage you to give it a read and then try and get your local laneway named.
Earlier this week I attended RealNet’s Q1 2015 market update webinar for the Greater Toronto Area. If you don’t already subscribe to RealNet, you should consider it. They’re one of the best sources for Canadian real estate market information.
During their webinars, they occasionally run interactive surveys where they ask the audience a question and participants respond using their web browser. On this particular webinar, they asked the following question, which I thought was interesting:
What is the likely housing moving by Millennials in raising their families?
A) Move Up – Embrace urban high-rise housing forms
B) Move Out – Accept extended commutes (including the Greater Golden Horseshoe and Hamilton Area) to find affordable ground oriented housing
C) Move In – Cohabitate parental homes
It’s an interesting question because it’s one that I’ve asked myself a number of times. Sure, Millennials are rushing back to cities and living in high density and walkable communities, today, but what are they going to do and where are they going to move when they start having children?
As a Millennial myself, I know that I’ve always told myself that I want to stay urban for as long as I can (i.e. Move Up). But I’m only one data point. And given the seemingly endless demand for low-rise housing in Toronto, I always felt like I was in the minority. I figured that the majority of people, at least here in this city, still want a ground-related home when it comes time to raise a family.
Putting aside economics, I still think that may be the case for a lot of home buyers. But the majority of people on this week’s RealNet webinar (which would be almost exclusively folks from the real estate industry) either think that preference is going to change (or already has) or that consumers won’t have a choice due to affordability.
50% of the people on the call answered A – move up and embrace urban high-rise housing forms. The balance was about 44% for B and 6% for C.
That’s not the outcome I expected to see. So today I’d like to re-ask this question to the Architect This City Community. Where do you think Millennials are going to move once they start having children? Please let us know in the comment section below.
Earlier this week the Globe and Mail reported that the average price of a house in Toronto has risen to $613,933 and that the average price of a detached house has risen to $1,042,405. Those are a big numbers.
Low interest rates are a big part of this story. But there’s also a supply story at play here. The low-rise housing market in this city is heavily supply constrained and so we have an environment where people with more money simply outbid those with less money.
The high-rise side of the market, on the other hand, is creating lots of new supply. And in my opinion that’s why its price growth has been more moderate in recent years and why the pricing spread between low-rise and high-rise housing continues to widen.
Assuming these trends continue, one of the things I’ve thought about and written about in the past is whether we’ll eventually seeing a point where high-rise housing actually becomes a more affordable option for families. Because right now, if you’re in the market for a 3 bedroom home, a low-rise house is likely your most affordable option.
Here’s a quick comparison that I did up this morning between a detached house and a high-rise condo:
For the detached house, I assumed 1,800 square feet at a price of $1,042,405. That’s the average price mentioned above.
For the condo, I assumed a 1,500 square foot 3 bedroom home. I priced it at $650 per square foot (which would be above average for the city) and then added $40,000 for a parking spot. Here you have a slightly smaller condo, but it’s also priced slightly less.
I then compared operating/maintenance costs. For the condo, I assumed a maintenance fee of $0.59 per square foot (which I think is reasonable) and then added $100 per month for electricity. Typically electricity is billed outside of maintenance fees.
For the detached house, I tried to create a similar living situation. I assumed that the owner wouldn’t be cutting their own grass or shovelling their own snow. I assumed that money would be put away each month as a capital reserve for future house expenses (similar to the reserve fund in a condo). And I assumed a gym membership since most condos have a gym. I ignored property taxes and insurance.
The detached house still works out to be a less expensive to operate in this scenario, but not by much. Overall, the two appear quite comparable. Which is why I wouldn’t be surprised if we see a tipping point in the future where all of a sudden families start finally adopting the mythical 3 bedroom condo.
A few days I retweeted the above home from Dwell Magazine. Then yesterday I was driving through midtown Toronto and I stumbled upon it. And that got me thinking more about this kind of project.
The house is a triplex with, presumably, one unit in the basement, one unit on the main floor, and one unit across the 2nd and 3rd floor. The existing detached house was only 2 storeys and so a third floor was added to create what is likely the “owner’s suite.”
It’s not uncommon for many of the houses in central areas of Toronto to be converted into duplexes and triplexes or to flip back into single family homes after being subdivided for rentals. It goes to show how adaptable the single family house can be.
But it’s not everyday that you see such a high end triplex being built as, what seems to be, a permanent residence and kind of dream home for the owners. Historically, when people built their dream home it has meant a single family home.
Part of this I’m sure has to do with rising housing costs. But I think it also has to do with valuing location over raw space and with an acceptance of urban density.
I don’t know about you, but I would have no concerns with permanently laying down roots in a house like this. It’s beautiful.
Urbanists generally don’t like to talk about cities like Houston. It sprawls. It’s car oriented. It’s over air-conditioned. In other words, it’s the antithesis of the dense and walkable cities that urbanists today like to tout as being exemplary.
But despite all this, Houston is one of, if not the, fastest growing city in America. According to The Economist, the population of the Houston metro area grew faster than any other city in America between 2000 and 2010. And between 2009 and 2013, its real GDP grew by 22%.
So why is that? Here’s a snippet from that same Economist article (“Life in the sprawl”):
Paradoxically, perhaps the city’s biggest strength is its sprawl. Unlike most other big cities in America, Houston has no zoning code, so it is quick to respond to demand for housing and office space. Last year authorities in the Houston metropolitan area, with a population of 6.2m, issued permits to build 64,000 homes. The entire state of California, with a population of 39m, issued just 83,000. Houston’s reliance on the car and air-conditioning is environmentally destructive and unattractive to well-off singletons. But for families on moderate incomes, it is a place to live well cheaply.
So while Houston may not check off all of Jane Jacobs’ boxes, it does provide one important thing: cheap housing. And that’s clearly valuable for a huge number of people.
But the other interesting thing about the snippet above, is that it starts to illustrate how frequently supply constrained markets operate with housing deficits.
The fact that the entire state of California issued only about 30% more building permits than the Houston metro – which you could easily argue is closer to a “perfect market” – tells me that there’s probably a lot of people bidding for the same housing in California.
The headline immediately caught my attention because conventional economic wisdom would suggest that supply constraints – whether natural or artificially created – generally have a negative effect on housing affordability.
To be clear though, I support Ontario’s greenbelt. I think an urban growth boundary is the right thing to have if we want to build sustainable, walkable, and transit-oriented communities. But I’m also not blind to some of the potential (negative) externalities.
However, Keesmaat’s article got me wondering just how prevalent those externalities might be and to what extent our greenbelt is actually impacting housing affordability in Toronto. In her article she cites a recent report by the Pembina Institute that very clearly argues the following:
“There is no shortage of land throughout the GTA [Greater Toronto Area] to build single-family homes for decades to come, but this land is predominantly located far from the City of Toronto and other established centres of employment in the GTA.”
More specifically, the report found that of all the land available for development in the region (within our growth boundary), 81% of it is projected to still be unused by 2031. This got me thinking: it’s not that there isn’t land still available in the region; it’s that there isn’t land in the areas where demand is the greatest.
Put differently, young families aren’t clamoring for single family homes in High Park and Leslieville because the greenbelt has restricted their ability to find new housing. They’re doing so because they want to live in neighborhoods like High Park and Leslieville.
If you dive into the data, the report shows that in 2004 the average price of a detached home in Toronto was about $117,000 more than the rest of the Greater Toronto Area. As of 2013, that spread had grown to about $200,000. And indeed the data shows that it’s the core of the city where home prices seem to be appreciating the fastest.
So when it comes to housing affordability and supply, the greenbelt may actually be a red herring. Releasing it would not increase the supply of housing in areas where demand is already high, which is probably why this same report also found that – with or without an urban growth boundary – most Canadian cities are seeing similar increases in home prices.
So what should we be doing?
I think we should do two things: (1) focus on accommodating more growth in the areas that people already want to live in, and (2) figure out ways to transform the less desirable areas into more desirable ones. This second one will be the hardest, because it’s likely going to mean changing car dependent areas into transit-oriented ones, which is no easy task.
The good news though is that we are already doing these things. There’s more that I would like to see happen, but we’re headed in the right direction.
If your city has a greenbelt or you have experience with greenfield development in the Toronto region, I’d love to hear your thoughts in the comments. This is an area of development that I’ve never really been involved with.
Really enjoyed reading this post about being a real estate developer. I was just wondering if you could do a write up on the various jobs and functions in a typical real estate development company so that people like me, who intend to work for a developer can roughly know what kind of skills are required or demanded in order to work there.
It’s a great question and so I will try and answer it today. The first thing I should say though is that real estate developers are typically very lean on people. I’ve worked for big publicly traded real estate companies and small boutique ones, and the development teams are always fairly small.
It’s that way because development projects can be messy and intermittent. The industry itself is also prone to regular market cycles and so the strategy is generally to remain fairly lean and outsource a lot of the work. You ramp up consultants and suppliers on a per project basis – as you need them.
With that said, let’s talk about the typical development process and some of the key skill sets required. A simplified process might look like this:
Buy development site (Acquisitions)
Design a project (Consultant Coordination)
Make sure project is feasible (Finance)
Obtain approvals for said project (Planning & Approvals)
Sell/lease space (Sales, Leasing & Marketing)
Build project (Construction)
Make money (The goal)
Depending on the size of the firm, one person may be responsible for managing many if not all of these steps, or they may be split up into different departments. So you could end up with a department list like this:
Acquisitions
Development/Project Management
Finance
Sales, Leasing & Marketing
Construction
From my experience as a developer, you’re going to be involved in all aspects. And that’s part of what makes development so exciting. But let’s talk about some of the key areas:
Planning & Approvals
After tying up a winning development site, securing your approvals (commonly referred to as “entitlements” in the US) is usually the first major step. The reason this step exists is because oftentimes what you want or hope to build isn’t what you’re actually allowed to build as-of-right.
So you have to go through a process to make that happen. It can take years depending on where you might be doing business, but there’s typically a significant amount of value creation at this stage. Some developers only focus on this stage and don’t actually build.
City planning is a good background for this function. You need to understand the local planning policies and frameworks.
Consultant Coordination
As I mentioned before, development teams are often small. And that’s because all developers rely on outside consultants to make a project happen (architects, engineers, and so on). So a big part of being a strong developer is just being a strong project manager. The expression often thrown around the industry is that development is like herding cats.
Having some sort of a technical background helps for this function. You end up dealing with a lot of technical details (which I find super interesting), and so it helps to have a bit of a background or an interest. If you’re not inclined in this way, you might find this area boring.
Financial Modeling
Building project pro formas and managing budgets is obviously a key component of the development process. From the moment you first look at a site up until project completion, you’ll be building financial models and constantly refining them as you get more information. The first version might be on the back of a napkin and the last version might be a complex Excel spreadsheet.
Banking and finance is obviously a good background for this function. But you also need to understand the real estate business. Models are only as good as the information you feed it, so your assumptions have to be sound.
Sales, Leasing & Marketing
I cannot over emphasize the importance of this function. If you are not selling units or leasing space, then you do not have a project. So no matter how amazing you might be at all the other functions (even fundraising from investors), if your firm is not bringing in money from your customers (purchasers or tenants), then you are dead.
When I was at Penn, a lot of the real estate professors used to tell us that leasing is the best way to get started in the industry. And I don’t disagree with that – even though I didn’t start there. This is often handled by a separate department and/or outside team, but you’ll need to be intimately involved.
Construction
If you’re at this stage, that’s usually a good sign. It usually means you’ve managed to sell a bunch of units and/or lease a bunch of space. Some developers (with enough scale) will have a construction team in-house, but many others will just outsource it to a 3rd party. Regardless of the setup, it once again helps to have a technical background.
If I missed anything or you want to add more detail, please let me know in the comment section below. I’m always happy to receive questions and post ideas, so feel free to tweet or email me. Tweets will almost always get a faster response.
