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.

Subscribe

Tag: real estate

  • Toward more rental housing

    The Greater Toronto and Hamilton Area is expected to see 6,821 new rental homes completed this year. This is a “multi-decade high”, according to Urbanation’s latest rental report. Indeed, you need to go back to the 1970s to get rental supply figures of this magnitude.

    A big part of this has to do with the fact that we are now taxing rental housing less. Toward the end of last year, the federal government removed their portion of the HST on new rental housing and, then in November, the province of Ontario followed with theirs.

    This was “a big first step” for the industry, according to leading apartment developers like Fitzrovia.

    But there’s another reason that many developers are now looking to purpose-built rentals: fewer people are buying new condominiums. And if you can’t presell condos, well then you’re going to need to find another path forward for your land.

    However, flipping over to rental is not necessarily a panacea. The margins are generally razor thin (+/- 50 bps). It requires more and different capital (typically). And you need to believe in some fairly non-consensus assumptions (high rent growth, low cap rates, etc.).

    It’ll be interesting to see how many developers are able to successfully flip over to rental and how sustained this rental supply number will be.

  • Housing follows money

    One argument that you might be able to make is that home prices follow urban density. New York City, for example, is dense. And homes in New York City tend to be more expensive than those in, oh I don’t know, rural Canada. So with this, you might conclude that development and density are bad — it makes housing more expensive. But then there’s places like San Jose, California. It’s not very dense, and yet it has some of if not the most expensive housing in the US.

    Well, it turns out that housing density and median housing values don’t actually exhibit a particularly strong correlation. A better and much stronger relationship can be found in what Kasey Klimes explains, here, in this excellent post, which is that home prices more accurately follow incomes. In other words, the more high paying jobs that exist in a market, the more likely that housing will be expensive.

    Here is what that looks like for US metros over 1 million people:

    The above chart compares median home value to aggregate income per unit of housing. And here, Kasey discovers an r-value of 0.9, which suggests that “over 81% of median home values in large metros can be attributed to aggregate income per unit of housing.” This explains why San Jose, and San Francisco, are such outliers. They have very high incomes for every unit of available housing, despite the former being not all that dense.

    Okay, so now that we know this, how do we make housing more affordable? One option is to just make people poorer. If you reduce incomes per unit of housing, then home prices will, almost certainly, go down. And this is why poorer cities tend to have more affordable housing. But this is obviously suboptimal. The better option is to keep people wealthy and simply increase the denominator in “aggregate income per unit of housing.”

    Meaning: build more housing!

    Chart: Kasey Klimes

  • FYI, new home coming soon

    This is not a post about laneway housing. Okay, it sort of is. But there’s a broader point to discuss. Recently, a local Toronto newspaper ran this article talking about how a bunch of people are upset that their neighbor is building an as-of-right garden suite. Here’s an excerpt:

    “The members of the community know that they can’t stop the building of this ‘garden suite’. However, they want to change the bylaw to ensure that future ‘garden suites’ can’t be built without community consultation and an environmental assessment,” said a news release from a number of residents in the area that was sent to Toronto media outlets including Beach Metro Community News last week.

    This raises some interesting questions.

    For one, what would be the purpose of this community consultation? Is it just a “Hey, I’m going to be building a garden suite” and then homeowners go do it exactly how they want anyway? Or, would it be an extensive community engagement process where homeowners would be expected to gather feedback, submit a report to the city, and consider design changes?

    And, would this apply to all low-rise housing? In other words, would all homeowners need to consultant their neighbors and do an environmental assessment before pulling a building permit? What if someone just wants to build a small extension or a shed? Or, are we only talking about laneway and garden suites?

    I’m not really sure what the exact intentions are here — besides delaying new housing — but I can tell you that it’s a terrible idea.

    Laneway and garden suites should never require community consultation and/or an environmental assessment. I mean, this is the whole point of allowing them as-of-right. It’s so you don’t have to do these things and you can go straight to a building permit. This is way too small of a housing type to burden with obstacles.

    In fact, the same is true of larger housing types. In my opinion, conventional mid-rise buildings should not have to go through a full rezoning and they should not have to consult with the community. We already know what these buildings look like. We know that they make for great homes. And yet they’re our most expensive housing type to build.

    Removing barriers (and reducing project durations) is a sure-fire way to make them cheaper. Especially in a higher interest rate environment.

  • What the NAR’s $418 million settlement could mean for the real estate industry

    The $418 million commissions lawsuit that was settled last week with the National Association of Realtors (NAR) is certainly a big deal. The NAR is trying to sound positive, but all signs point to this outcome being meaningful for the industry. TD Cowen Insights is forecasting that commissions paid in the US each year could fall by some $25 to $50 billion (from a total of ~$100 billion). And this is the headline you’ll see everywhere right now. But how might this actually happen?

    As we’ve talked about before, the status quo commissions set up is a good one for agents:

    • Sellers are typically the party who pays 100% of the commissions
    • But sellers don’t pay until the agent sells and they have fresh cash
    • Money being deducted from proceeds (a “take rate”) is a lot less noticeable and has a lot less friction than cash you just have to pay out of pocket
    • Buyers kind of don’t pay — or at least that’s how they’re supposed to feel

    This is “good” because it perpetuates the existing model. If buyers feel like they’re mostly not paying, they’re just going to go to the marketplace with the most supply of homes. And that marketplace is the Multiple Listing Service (MLS). However, this marketplace also does things like tell buyer agents how much commission they will make as part of each deal. And the belief is that practices like this are anticompetitive.

    So as part of the above settlement, the following new rules are expected to go into place by July 2024 in the US:

    • Seller agents will no longer be able to set compensation for buyer agents
    • All fields on MLS displaying broker compensation will need to be removed
    • Furthermore, agents will no longer even need to subscribe to an MLS in order to accept compensation
    • Buyers working with an agent will need to enter into their own buyer broker agreement and negotiate compensation separately
    • However, there’s nothing stopping buyers and sellers from negotiating whatever commission structure they want; the idea is simply that it will be more transparent and negotiated by each participant

    Why this is meaningful is that it decouples buyer agents and seller agents in a way that they aren’t today. Instead of everything originating from the sell side, each side of the transaction is now going to — theoretically at least — negotiate what they believe is fair compensation for their representation. At the same time, there’s no obligation to even subscribe to an MLS.

    This leads us to, at least, two important things to think about:

    1. What is fair compensation? Well, it should depend. If I’m a first-time buyer, I may want someone to walk me through the entire process. But if I’ve done it many times before, maybe I need very little. Or, if I’m an investor looking to renovate homes, maybe I want representation that is also an expert on construction. The point is that, in a truly open market, one should be able to find an agent and pay them based on the value that they’re creating. And this is presumably why everyone is expecting commissions to fall precipitously.
    2. If there’s no obligation to even subscribe to an MLS, does this then open the door for new and more open listing platforms? Right now, I don’t know how this will play out. I’d like to better understand more of the details around this settlement item and what it could mean for the landscape. But I do know that the way to spur the most amount of innovation would be to have the marketplace run on something like a blockchain, and then allow anyone to create their own listing platform on top of it. One day.

    This will be fascinating to watch play out. And I’m sure it’s only a matter of time before it spurs similar changes here in Canada. Expect further coverage of this topic on the blog.

    Photo by Tom Rumble on Unsplash

  • 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.

  • 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.

  • How to design a mountain house in the French Alps

    This is the chalet that our group has been staying in for the last week:

    • We’ve been calling it a tree house. It is 5 levels in total. And you circulate through the house using a spiral staircase in the center of it. It’s space efficient, but there are a lot of stairs.
    • The site is downhill from the road, which, as we have talked about before, creates a more challenging build than uphill from the road.
    • You enter the chalet on the third level, which itself houses 2 bedrooms. One floor below and one floor above also have 2 bedrooms, meaning there are 6 bedrooms in total. On the lowest floor is an indoor hot tub, a shared parking garage, and a shared ski/snowboard room.
    • Every mountain house needs, at a minimum, two things: a fireplace and a hot tub. Ideally the latter is outside.

    • As is typical in the mountains, the main living space is on the top floor (level 5 in this case). You want this for the views. If you’re building into a sloping site, the lowest floors are usually somewhat constrained.
    • We did the same thing with Parkview Mountain House. But it does mean that you circulate through the more “private” spaces within the house before reaching the more “public” ones. This is the opposite of what happens in most homes.

    • The underground parking garage is accessed by way of a small parking elevator that lowers you down two floors. Initially this seemed excessive, but it is a shared elevator/garage. The chalet is semi-detached chalet, if you will, and so this was probably the only way they could get enough parking on the site. Assuming our attached neighbor is of a similar size, that’s 12 bedrooms.
    • It also creates an important pathway so that people don’t need to bring their skis and snowboards through the house.

    Every site has its challenges and that is especially the case in the mountains.

  • An overview of rental housing in France

    Rental housing in France is both heavily regulated and supported through dedicated public funds. Here’s a high-level overview of what that means (via this 2021 Brookings case study by Arthur Acolin):

    • Homeownership rates in France went from 35% in 1954 to 56% in 2001
    • As of 2018, 58% of French households own, 40% rent, and the remaining 2% supposedly get free housing from either their employer or a family member
    • Not surprisingly, younger households are most likely to rent (the figure is > 60% for people aged 18-29)
    • Household size seems to play a major factor in how likely people are to live in public housing
    • France has some 4.5 million public housing units and 17% of all households live in them (which represents about 43% of all renter households)
    • Within the unsubsidized rental market, 93.5% of households live in homes owned by individual investors (this is as of 2013) and only about 3.5% live in homes owned by institutional investors
    • This is pretty typical of Europe, where multi-family isn’t an established real estate asset class like it is in North America; so for those of you who like to hate on individual condo investors, check out France
    • In the decade between 2010 and 2020, 28 metro regions in France adopted some form of rent control and, in a few markets, like Paris and Lille, there are also maximum rents that can be charged for specific housing types

    If you’re interested in rental housing, Brookings also has articles covering the US, Germany, Spain, Japan, and the UK. They can be found here.

  • Condominiums — affordable or luxury?

    It is disappointing to me that we often vilify all condominiums as being “luxury condos.” I think the rhetoric is disingenuous and I think it distracts us from finding more productive solutions. As Mike Moffatt points out in this thread, if you look at virtually all major cities in Canada, the most affordable housing options are going to be condominiums and not low-rise freehold houses.

    In his case, he looked at current for sale listings in London, Ontario, and found that for homes under $400k, about 81% of them were condominiums, and for homes over $1,200,000, only 4% of them were condominiums. Again: the real “luxury homes” are the low-rise houses that not the condos.

    Now to be fair, John Pasalis is not wrong in responding to the thread and saying that on a per pound basis, or a per square foot basis, condominiums are actually more expensive. I’ve been saying this for years on the blog. When measured this way, mid-rise buildings are one of if not the most expensive housing typologies.

    So John’s argument is that, while condominiums may be the more affordable option for 1-2 person households, if you’re a family in need of more space, low-rise housing is likely going to be more affordable for you on a per square foot basis. And I would agree with this statement.

    The problem with this approach in the real world, though, is that people don’t buy and afford homes based on this metric. You can’t go to a bank and say, “I want to buy this house for $1.7 million dollars because it’s only $680 per square foot when I include the basement, and that’s better value than this 700 square foot condominium selling for $1,400 psf.”

    Sorry, the bank is going to tell you what total price you can afford based on your income. And that’s why condominiums in our market have tended to serve as a critical entry point for first-time buyers. They’re the most affordable option in terms of their total sale price.

    So in my view, labelling all condominiums as “luxury” is not exactly productive. It ignores their role in providing more affordable homes; it overlooks the supply constraint that low-rise houses represent in most of our cities; and it’s a distraction from the more systemic issue at hand: how do we make housing more affordable for everyone, including families?

    Photo by Marcos Paulo Prado on Unsplash

  • Rent-controlled apartment

    It is estimated that about 1% of the total housing stock in New York City is rent controlled (2019 figure), which is something different than rent stabilized.

    Generally the way the former works is that you have to have been living continuously in the home since July 1, 1971, and the building itself needs to have been constructed before 1947. If this is the case, then in theory, you should have seen relatively minor rent increases over the years.

    This was the case for the late real estate agent, Alice Mason, who died at the beginning of this year at the age of 100:

    She never left the rent-stabilized [controlled?] apartment where she held her storied dinners, in a century-old building on East 72nd Street. (In Manhattan real estate parlance, it was a classic eight, a gracious prewar layout that included three bedrooms and two maid’s rooms.) In 2011, the developer Harry Macklowe bought the building for a reported $70 million and began to turn the units into condos, buying out the tenants to do so. But Ms. Mason refused to give up her apartment. When she moved there in 1962, the rent was $400 a month. At her death, it was $2,476. The apartment below her, in the same line, was recently on the market for just under $10 million.

    Green, Penelope. “Alice Mason, Real Estate Fixer and Hostess to the Elite, Dies at 100.” The New York Times, 13 Jan. 2024, www.nytimes.com/2024/01/11/style/alice-mason-dead.html.

    For better or for worse, this is an obviously awesome deal, and reason enough to never move and have family members move in with you before you die so that you can try and pass down this asset for generations to come.