Tag: real estate development

• Is venture-based real estate development coming to the Bay Area?

  

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  Chamath
  Palihapitiya is a Sri Lanka born, Canada educated, venture capitalist in
  Silicon Valley, who made a boatload of money as one of the early employees of
  Facebook. He now runs a VC firm called Social +
  Capital and owns part of the Golden State Warriors.

  The other
  night he was interviewed at a StrictlyVC event in San Francisco and I think
  that many of his comments would also be of real interest to the Architect This City
  community. He’s super passionate in interviews and always fun to listen to.

  Below is what
  he had to say about the San Francisco startup scene. It really speaks volumes
  about what people will put up with in order to live in an awesome place/city that they love. All of his responses below are from this
  TechCrunch article.

  “The city has to be doing more, around
  transportation, around housing… You have to get rid of the nimbyism and you
  need to quadruple, if not quintuple, the amount of housing. You need to tell
  that engineer from the University of Michigan that he can live here on a salary
  of $80,000.

  [In the meantime], we look at our startups, and
  the minute that they start to spend more than 15 percent of their burn – good
  money that we give them – on rent, a huge red flag goes up. When they, on a
  per-head-count basis, are spending so much, we start looking at the
  productivity of the technical team. And if it’s good but not great and they’re
  spending this insane amount of money [versus] a different team in Redwood City,
  we start to ask ourselves: “Are you so convinced that success is going to
  happen in this city at 1.5x the cost?”

  Because for every dollar that someone in
  Mountain View or Redwood City is raising, you [in San Francisco] have to raise
  one-and-a-half to two times that just to get to the same point. So you’re cutting
  your half life in half. To prove that you can take an Uber from some fuckin’
  shitty bar to another shitty bar? Like, I don’t understand.”

  And here he
  talks about the possibility of his venture firm also getting into the real
  estate development business. I couldn’t resist blogging about this.

  “We made a big
  decision with our last fund to build an organization that looks really
  different than a venture firm, and that organization is going to be this
  hybrid, bastard stepchild of Berkshire Hathaway and Blackstone and BlackRock.

  What I mean by this is
  that we want to have a large permanent capital base and we want to make really
  long, discontinuous bets on companies and sectors and trends.

  And one of the things
  we talked about was having a real estate fund …[because] we owe it to our
  companies to alleviate some of these problems when no one else is going to. If
  we went and built one million square feet somewhere of mixed use, where you
  work and live, and we rethink what it means to have a modular living environment
  for a millennial cohort that wants to work at companies and doesn’t necessarily
  have kids, we can do that in a way and give that back to our CEOs as a benefit
  of working with us.

  And you can probably
  make the economics work. Because we only really care about the equity of the
  company anyways. And the equity in the real estate will take care of itself if
  you take the 30-year view. So we’re at the point now where we’re like, wow, we
  should raise a few billion dollars and get into the real estate business and
  solve this problem systematically for our companies. And maybe in that, it
  becomes a blueprint for how others should do it. We’re just basically going to
  act as our own city-state and decide how to do it ourselves.”

  It’s
  interesting to think about what the economics might look like if your primary goal is
  simply to provide space to your portfolio companies (entrepreneurs) so that
  they get more (financial) runway and, therefore, have a greater chance of success. I’d love to see that pro forma.

  2015.09.18

• Affordable housing and the economics behind developing new rental apartments

  

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  In most big cities around the world, there is a pressing need for more affordable housing. We know that inclusive cities make for better cities. But from San Francisco to Hong Kong, you always hear people talking about how expensive housing is.

  So why is this such a difficult problem to solve?

  Part of the problem, I think, is that many people don’t understand the economics behind building a new building. Oftentimes I hear people say that because developers make so much money, they should just build more affordable housing. Done. Simple.

  But things are not that simple.

  To illustrate my point, let’s walk through the thought process for developing a new rental apartment building.

  In its simplest form, developers are concerned with: revenue – costs = profit. And since many of the costs associated with building a new building just are what they are, it all starts with revenue, which in our case would be rents.

  To build a new rental tower in Toronto, your rents typically need to be at least in the high $2′s per square foot per month. Otherwise the economics don’t work. But to make the math simple, let’s say you need $3 per square foot in rent. That means a 1,000 sf apartment would rent for $3,000 per month.

  That’s not cheap. There are only so many people who can afford these kinds of rents and only so many areas where you can command these kinds of rents, which means there are only so many areas in Toronto where new rental apartments will be built by the private sector.

  If the rents instead happen to be $2 psf – meaning that same 1,000 sf apartment now rents for $2,000 per month – then for-profit developers will not build (barring any unique deal circumstances). Even at $2.50 psf / $2,500 per month, it would be difficult to make the numbers work here.

  And by the numbers, I am talking about tight returns that really only start to make sense in our environment of record low interest rates. Which means that when interest rates start to rise (pushing cap rates up), it may not even make sense to build rental apartments when the rents are in the high $2′s per square foot. This is particularly true if you’re competing against condo developers to buy the land. They can afford to pay more. 

  In this scenario (of rising interest rates), many real estate firms might simply opt to buy existing assets instead of taking on the risk of building anything new. Now all of a sudden your supply of new market rate apartments (not to mention affordable apartments) has dried up. Remember, it’s been decades since Toronto built rental apartments at any sort of meaningful scale.

  It’s for reasons like this that Vancouver launched a program called Rental 100. In a nutshell, it helps to reduce the “costs” variable in the equation mentioned above so that developers are able to meet minimum project returns and build more rental buildings. They do that through things such as reduced parking requirements, additional density, development charge waivers, and so on.

  In some ways, these items are subsidies. The city is giving up revenue that it could have otherwise collected from a developer building, say, a condo. But in other ways, they are freebies. The city could be unlocking development sites that may have otherwise not been developed. In which case it’s not really forgone revenue.

  Vancouver’s Rental 100 program is a market rental housing policy. But there’s no reason that similar thinking couldn’t be applied to create an affordable rental housing policy. It has been done and is being done in many cities.

  2015.09.10

• Where will we live?

  

  This evening I participated in a roundtable discussion at WORKshop here in Toronto. It was part of an exhibition that they currently have on called, Toronto 2020: Where Will We Live? They are located in the concourse level of 80 Bloor Street West, so go check them out.

  The discussion this evening was all about the dramatic change in Toronto’s urban form over the last decade. In other words, the condo boom. We covered everything from the life cycle of buildings and urban design to demographics and policy. It was a lot of fun and I am certain the group could have continued talking all night.

  But one thing that I was reminded of this evening is how important it is for great city building to be cross-disciplinary.

  Take, for example, architects and (real estate) developers. 

  The stereotypical developer is greedy and only concerned with money. They don’t care about the impact that their buildings have on the built environment. On the other hand, the stereotypical architect is only concerned with design and not with the economic feasibility of projects. (I’m exaggerating here for effect.)

  The point is that neither of these participants in isolation could build a great city. A beautiful design doesn’t have much value if it can’t be financed and built. And a highly financeable project could end up contributing nothing to the city. In some cases it could actually detract from the built environment.

  So if we really want to build truly great cities, I believe it needs to be a collaborative effort. We need to bridge the divides in thinking and leverage each other’s strengths. 

  I have felt very strongly about this since I first started studying architecture as an undergraduate student, which is how I ended up taking business and real estate classes. I felt and continue to feel that the greatest opportunities exist at the intersection of different ways of thinking.

  2015.09.10

• Towards a post privacy world — what the Ashley Madison hack could mean for cities

  

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  Ashley Madison is a website that helps married people have affairs. 

  Recently the website was hacked and over 33 million accounts were exposed. This included full names, email addresses, mailing addresses, and so on. Not surprisingly, this has gotten a lot of press. The site was/is marketed as being private and secure. And clearly that is not what it is right now.

  But there are people in the tech community, such as venture capitalist Albert Wenger, who believe that is merely a glimpse into the future – a “post privacy future.” He even argues on his blog that we as a society should be more accepting of the leak and that the release of this data could lead to a “more measured view of affairs.” (There are many who argue that humans are not intended to be monogamous.)

  For many, or probably most of you, I’m sure this position seems pretty radical. After all, this leak will likely destroy many marriages.

  But Wenger’s position on privacy is a fascinating one and he’s written a lot on the topic. The tension he sees is one between individual privacy vs. collective intelligence. In this part of the world, our society values the former over the latter. But he believes that we are headed towards a world where almost everything, yes everything, will eventually become public. Again, radical position. But consider how much we publicly share about our personal lives today versus 10 or even 5 years ago.

  What’s perhaps more relevant to the Architect This City audience though is what this could mean for many other industries beyond tech.

  I often think about what a “post privacy future” could mean for city building. Imagine if every architect, real estate developer, engineer, and other participant made public all of their work. This would mean that all designs, financial models, sales data, and so on were made widely available to anyone who wanted to see them.

  The thought probably scares many of you in the industry, but consider what it would mean for our collective intelligence. There’s a strong argument to be made that we would all be better off and that the process of building would become far more efficient. In fact, if truly everything were public, it could in theory eliminate most of the market’s concerns about overbuilding, a condo bubble, and all the other stuff that gets talked about.

  The reason people speculate on these market factors is because we don’t have all the data. We don’t actually know what’s going to happen. We have no idea. I know I certainly can’t predict the real estate market.

  So why aren’t we quickly becoming more public?

  Wenger raises the game theory principle known as the prisoner’s dilemma:

  “So one way to think about secrecy is that it leads to lots of prisoner’s dilemma style situations. Individuals (or companies) would be worse off if they were the only ones disclosing, but if everyone disclosed (or at least the majority), then everyone would be much better off. In the language of game theory, we are in a bad equilibrium.”

  In other words, if only one real estate developer disclosed her project’s financial information to the public, then she would probably be worse off against her competitors. But if every developer in the city did it, then the market as a whole would be better off because everyone would then benefit from collective intelligence.

  Using the example of infidelity, if one person is caught having an affair, then that person is more than likely worse off. But if over 33 million people are caught having an affair and it reinforces the statistic that between 30-60% of married people in the United States will have an affair at one point in their lives, then maybe it forces us as a society to rethink what marriage means today. And maybe that makes us all better off.

  This is a pretty far out there argument, though the city building example is probably more palatable than the Ashley Madison one. Regardless, I would love to hear your thoughts in the comment section below. 

  Are we heading towards a post privacy world?

  2015.09.03

• The importance of having your own beliefs

  On Monday I watched the movie Moneyball for the first time. I really enjoy movies, but I unfortunately don’t watch a lot of them, which is why I am only now watching Moneyball. It was released in 2011.

  The movie is based on a 2003 book of the same name that many people believe changed the game of baseball. It emphasizes rigorous statistical analysis (known as sabermetrics) over gut feeling, instinct, and traditional metrics when it comes to assembling winning baseball teams.

  I don’t know a lot about sabermetrics, but I am now excited to read the book. Still, the dichotomy between the New York Yankees and the Oakland Athletics is incredibly interesting to me. And it reminded me of a post I wrote a few months ago ago called: When everyone thinks you’re wrong.

  In the movie, Billy Beane, the GM of the Athletics, realizes that he cannot compete with the Yankees dollar for dollar. The Athletics are a small market team and the Yankees, with their large payroll, will always be able to pay more for players. So he decides that he will need to think about the problem differently to win.

  What’s interesting about this is that it’s exactly the framework I talk about in my post when it comes to buying (real estate) development sites:

  “…you can really only win development sites in one of two ways. Either you’re willing to spend the most money or you see something and have a vision that nobody else sees.”

  Of course, lots of baseball teams today are now employing sabermetrics. But at the time, everyone thought Billy Beane was nuts. It’s hard to try something new and be different. Many of us just want to do what is least likely to fail.

  But there’s so much value in having conviction and being right about something that everyone else thinks is wrong. You won’t always get it right. And that’s okay. But when you do get it right, it’ll be magic.

  2015.09.02

• America really is building very few condominiums

  On my way back from Philadelphia
  this past weekend I wrote a post called, The
  Philadelphia (real estate) story. It was about how opposite the market is
  in Philly compared to Toronto.

  After writing that post and
  because of a discussion in the comment section, I started thinking about condo
  vs. rental apartment development across the US. Because unlike cities such as
  Toronto and Vancouver, it struck me that – outside of maybe New York and Miami
  – most U.S. cities are really not building a lot of for sale condos. And if
  you’re from Toronto or Vancouver, I bet that feels odd to you.

  But what exactly is that number?

  As of the first quarter of 2015, condos as a percentage of all new
  multifamily (apartment) construction in the US was only 5.5%. That’s a tiny number and is down from
  over 50% before the Great Recession, which means most
  cities in the US really are building mostly rental. Last year the US built 264,000
  multifamily units across 11,000 buildings.

  

  So why is that happening?

  There appears to be a number of
  factors, according to a
  recent article in the Wall Street Journal.

  There’s a supply side
  constraint:

  Another obstacle cited by developers: construction loans. Matt
  Allen, chief
  operating officer of the Related Group, a developer based in Miami, said he can
  get a construction loan for roughly 75% of the cost of building an apartment
  complex. But lenders will cover only 50%, on average, of a condo complex’s cost
  because of the greater risk, he said.

  There’s a demand side
  constraint:

  As a result, the Federal Housing Administration, which
  backs mortgages made to low-wealth buyers, tightened its lending standards in a
  series of moves from 2008 to 2012. Under the new rules, in order for the FHA to
  insure mortgages in a given condo complex, at least half of the units must be
  owner-occupied and no more than half can be FHA-insured, among other
  requirements. For condo projects under development, at least 30% of units must
  be under contract for sale before the FHA will start backing mortgages there.
  Mortgage giants Fannie Mae and Freddie Mac tightened
  their standards as well.

  And there are macroeconomic
  factors:

  On the entry-level end, tepid job growth early in the
  recovery and the younger generation’s affinity for flexibility have fueled
  demand for rentals. Apartment rents are up nearly 16% since 2010, according to Reis Inc.

  Notwithstanding
  the above, could this be a post-recession policy pendulum that has swung
  too far in one direction?

  2015.08.20

• The Philadelphia (real estate) story

  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.

  2015.08.17

• 1 bedroom condo for sale

  

  I’m hijacking Architect This City today to help my mother out and try something new.

  She is looking to sell her 1 bedroom condo in the Radiocity Condominiums, located at 285 Mutual Street in Toronto. It’s called Radiocity, not because the developers thought New York was cool (my pet peeve), but because the site used to be the headquarters of the Canadian Broadcasting Corporation (CBC) way back when.

  The 2-tower complex is located north of Carlton Street, between Church Street and Jarvis Street, and is adjacent to Canada’s National Ballet School (designed by KPMB Architects). It’s close to College Park and Yonge & College.

  It was completed/registered in 2005 and won a number of design awards, including one from the Royal Architectural Institute of Canada. Notable about the design is the way it integrates townhouses at the base, a public courtyard (with public art) between both towers, and the Ballet School. (A deal struck with the developer and the CBC allowed the school to buy their portion of the land for $1). 

  The buildings were developed by Context Development and designed by architectsAlliance, which is actually the same developer-architect duo behind the building I currently live and own in. I’m clearly a big fan.

  The suite is about 560 square feet. It has 9’ exposed concrete ceilings. It has one full bathroom (tub), with a stacked washer and dryer. The bedroom is about 10’ x 10’ and is setback from the outside windows and enclosed with 3 x translucent sliding doors from C-Living. (I had them installed myself and they’re much better quality than the sliding doors you’ll find in most new builds.) The kitchen and living area is open concept, and there’s a north facing balcony that overlooks a quiet private courtyard. You basically get a view of trees, greenery, and the city. The suite is located on the 7th floor.

  Here’s the floor plan:

  

  And here are a few photos. They are all the right proportions and haven’t been stretched to make the space look bigger 🙂

  

  The building has 24-hour concierge, visitor parking, and 3 floors of amenities. The amenities include a gym, aerobics room, party room, saunas, media room, boardroom, multiple lounges, 2 x guest suites, a party room, and a billiard room. 

  College subway station is a 7 minute walk (600m).

  

  The Loblaws grocery store at Maple Leaf Gardens (which is awesome and also includes an LCBO) is a 5 minute walk (400m). Though I’m fairly certain you could do it in 4 minutes.

  

  And you’re a 6 minute walk to Ryerson University (500m).

  

  The asking price is C$349,900. The maintenance fee is $426.64 per month and the property taxes are $2,039.19 per year.

  It’s a private sale, but she is willing to cooperate with buyer’s agents (2.5% commission). It’s currently furnished, but you can have it either way you want (unfurnished or furnished).

  If you have any questions or would like to book a viewing, please send her or me an email. If you’re an agent just looking for a listing, please don’t. Thanks for reading. Regularly scheduled programming will resume tomorrow.

  Image at the top of this post is from architectsAlliance.

  2015.08.10

• BIG coming to Toronto’s King West

  

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  Earlier this week a press release went out announcing that Allied Properties REIT (TSX:AP.UN) had established a joint venture with Westbank to redevelop 489 – 539 King Street West here in Toronto.

  “What is so exciting here is that Allied has over time assembled 620 feet of frontage on what is fast becoming one of the most interesting streets in Toronto,” said Ian Gillespie of Westbank. “With this scale, we have a unique opportunity for world-class city building.”

  Westbank is relatively new to the Toronto market. Their first project was the Shangri-La Toronto in 2012. But since then they’ve entered the city in a big way with high profile projects like the redevelopment of Honest Ed’s at Bloor and Bathurst.

  But what excites me the most about this King Street project is that they’ve selected Bjarke Ingels Group as the design architect. I’ve written about BIG a few times before and I’m a huge fan of their/his work. So I’m pumped to see what gets proposed here. It will not be typical.

  There are a few heritage buildings on the site. And it looks like some (but not all?) will be preserved. 

  Based on this post and discussion on UrbanToronto.ca, it’s not clear whether 489 King Street West will be preserved and incorporated into the new build (as was the case with a previous design). I sure hope it is though.

  2015.08.08

• CAPREIT announces first joint venture development

  

  Yesterday CAPREIT announced that we have entered into our first joint venture development agreement for a mixed-use project at 1100 King Street West in Toronto’s Liberty Village neighborhood. 

  The agreement is to acquire a 1/3 undivided interest in the residential component of the project for $60.3M. The residential component will consist of 3 towers and 506 apartment suites (sitting on top of a roughly 160,000 square foot commercial/retail podium that will not be owned by CAPREIT).

  Here’s what Thomas Schwartz, President and CEO of CAPREIT had to say:

  “We expect our interest in the property, combined with the property management fees we will receive, will be accretive to our cash flow and set the stage for similar partnerships, along with our own new rental developments in the future.”

  As a member of the development team at CAPREIT, it feels great to get this one out there.

  Click here for the full public press release.

  2015.07.30