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.
China Evergrande Group has been in the news lately for being one of the most indebted property companies in the world. The company is now looking to raise some $5 billion by selling a stake in one of its business lines. That seems like a lot of money, but apparently it has upwards of $300 billion in liabilities. As I was reading about the company (in this WSJ article) I was surprised by some other stats about China’s housing market. According to some sources, nearly a third of the country’s GDP can now be tied back to real estate-related activities (see above chart). On top of this, about 21% of homes in urban China were thought to be vacant as of 2017. This equated to about 65 million empty homes. I don’t know what the exact numbers look like today, but these are staggering figures that speak to overbuilding.
Neat B and I are off to France for the next two weeks. We optimistically booked this trip at the beginning of the year and assumed that the world would be fairly normal and well-vaccinated by now. While there remains uncertainty, things are at least better than they were last winter when we were all caved at home.
Regular readers of this blog will know that I aim to post 365 days a year, regardless of what may be going on in my life. And that will remain the case for the next two weeks. But I have decided to challenge myself and try something new.
I’m going to exercise my photography passion a little and instead post a single photo each day. On some days it may have a caption or a short description, but on other days there may be no accompanying text at all. The plan is to shoot entirely on my Fujifilm X-T3. Or at least that’s the thinking right now.
I’m sure that there will end up being some great content for those of you who are interested in the built environment (architecture, design, planning, real estate). But if travel and beautiful photos aren’t your thing, feel free to check back in two weeks for our regularly scheduled programming.
Slate just published a new thought piece on the evolution of the grocery store. It starts with the first “self-service” Piggly Wiggly in Memphis (an innovative approach at that time) and ends with the important functions that grocery stores serve today and will likely serve in the future.
The shopping experience has become increasingly omnichannel (i.e. online & in-store), which means that grocery stores are in the midst of transforming from simple retail stores to hybrid retail and last-mile distribution hubs. (Related post here.)
All of this is central to how we think about this real estate asset class and we are to happy share it publicly in this new thought piece. Slate plans to publish more of these and so, if you’re interested, I would encourage you to subscribe at the bottom of the page.
Full disclosure: I am personally long Slate Grocery REIT.
Last month a digital-only version of a Gucci bag sold on gaming platform Roblox for about US$4,115. Again, digital-only. No physical bag that can be brought to brunch. At the time, this was about US$800 more than the real life version of the same Gucci bag. So why not go and buy that one instead?
I am sure that most of you are scratching your head at this and wondering: who the hell is valuing the digital more than the physical? Could it be that status and signaling — perhaps the real purposes of a designer bag — are even more important online in the world of Roblox than in real life? In this case, it wasn’t even an NFT and so presumably there aren’t any value claims around scarcity and authenticity. (Full disclosure: I don’t know how Roblox works.)
It’s important to keep in mind that meaningful innovation often starts out looking pretty silly to some/most. And to me, this feels like one of those times. What we are clearly seeing is a blurring between our digital and physical worlds. In fact, just today I was reading about a slew of digital-only clothing companies that sell, you know, contactless cyber fashion. One of those companies is Tribute (embedded post above).
The way it works is that you first buy a piece of digital clothing (which can sell out just like regular clothing). You then send them a picture of yourself and the company goes and renders that piece of digital clothing onto your photo. The result is what you see above, which to me looks fairly realistic (though at the same time fantastical, which I think is part of the point).
As out-there as this may seem, this strikes me as something that could become a very big deal. What is real on Instagram anyways? I can also see this being applied to other industries, including real estate. Maybe that is already happening.
In the first quarter of this year, Canada’s national net worth increased by over $1 trillion or 7.7% to reach nearly $15 trillion. This is, as I understand it, record-breaking. National net worth is defined as the sum of national wealth and Canada’s net foreign asset position, the latter of which is assets that Canada owns abroad, minus the value of any domestic assets owned by foreigners. Most of the increase this past quarter was in national wealth.
Here is a chart that speaks to this (quarterly change in national net worth by component). Again, the light blue is national wealth. It is the biggest bar.
On a per capita basis, which is much easier to contextualize, national net worth rose from $365,184 to $392,496.
The other metric that is up is household savings. We’ve talked about this before on the blog, but check out this chart. In the first quarter of this year, it was 13.1%. And at the beginning of the pandemic, back in Q2-2020, it was 27.4%. I believe these figures represent the percentage of after-tax disposable income that is saved. Either way, a double digit savings rate is not typical for Canadians.
So what is driving this increase in national wealth? A big part of it is the value of residential real estate, which increased 9.4% in the first quarter. StatsCan is calling this “unprecedented” but I don’t know how far back they are looking to make this claim.
Because of this, increases in net worth have been, not surprisingly, unequally felt. For households that own their home, net worth increased by over $730 billion last quarter. For households that rent their home, net worth increased by approximately $43 billion. On a per household basis, this translates into net worth increases of approximately $73,000 and $8,000, respectively.
This is a meaningful spread.
For the full Statistics Canada article, click here.
In the past two decades, about 400 million people moved into China’s cities — so more than the entire population of the United States
By 2035, about 70% of China’s entire population is expected to be urban (up from 60% today and up from 30% two decades ago)
To accommodate this scale of growth, China’s national urban development approach has shifted to something that now revolves around city clusters, or megalopolises (term coined by French geographer Jean Gottmann back in the 1950s to describe the Boston-Washington corridor in the Northeastern US)
By 2035, there are expected to be five major city clusters (see above)
One of the reasons for this is to improve cooperation across the various clusters — less competition and less redundancy
But it’s also about creating smaller more manageable cities — is this what one needs to do after a certain scale, go polycentric?
To service these clusters, China is rolling out a network of 16 new high-speed rail lines
By 2035, China expects to have 200,000 kilometers of rail, with a third of it being high-speed — assuming this happens, China will be home to 60% of the world’s high-speed rail coverage
Current cost estimates for the construction of this network comes out to about US$150 million per kilometer
1-2-3 Rule: The plan is that everyone should be able to get around a city within 1 hour; a city cluster within 2 hours; and travel between the country’s clusters inside of 3 hours
Benedict Evans asks some great questions in this recent post about ecommerce penetration. Instead of just looking at the product itself and/or the way in which we buy it (online versus offline, for example), he focuses on the logistics model that accompanies the transaction.
What can be parceled and shipped via Amazon? What can be delivered using a bicycle? What requires some sort of special delivery or collection method?
The point he is making is that different things need to happen for a new fridge to make it to your home, compared to say a Chipotle burrito. And these differences matter when it comes to how we should be thinking about ecommerce and the real estate in our cities.
Personally, I find it helpful to reframe the questions in this way.
Here’s an excerpt from the post:
But if I buy online and then drive to the store to collect it, is that different to phoning and reserving it? We didn’t have a statistics category for ‘telephone ordering’. If I use an app to order pizza instead of phoning the restaurant, has that become ‘ecommerce’ or is it still pizza delivery? 30 years ago, if I drove to Walmart instead of walking to a neighbourhood store, or drove to Best Buy instead of going to a department store, we didn’t call that ‘car-based commerce’. So is this a tech question, or a retailing question, or an urbanism question?
The clearest way to understand NYC's housing market, and the politics involved, is to tell you a story about oranges.
A thread:
— Jeremiah Johnson 🌐 (@JeremiahDJohns) June 6, 2021
A friend of mine circulated this tweet storm over the weekend. It is an explanation of how NYC’s housing market works using the example of oranges. The author ends by saying that, “it is a parody and an exaggeration, but I promise you it’s not much of one.”
The crux of this story about oranges is that if you don’t deliver enough to meet market demand, you’re going to invariably run into a problem of affordability. If people really want oranges, they are going to bid up the price of whatever oranges they can get their hands on. The same is true for housing.
But there are, of course, some obvious differences between homes and oranges. People don’t live in oranges. And I would imagine that there are other ways to get your daily recommended intake of vitamin C.
As far as I know, people also don’t buy oranges with the hope that they can derive a rental income stream and/or that they will be worth more tomorrow. And so I’m sure that many of you will be quick to point out that it is perhaps the speculative nature of housing that makes it different from most oranges.
Still, there’s no denying that, in most cities around the world, we do a lot to make it exceedingly difficult to build new housing. We constrain supply — such that we perpetually underserve the market — and then we wonder why prices continue to rise.
Disagree with this take? Let me know in the comment section below.
Let’s talk some more about floor plan designs and the economic constraints that form part of the decision making process. There continues to be a narrative out there that for-profit developers only want to construct small apartments (a form of social engineering perhaps) and that they aren’t focused on livability. So let’s dig into some of the constraints.
Consider that the average price of a new construction condominium in downtown Toronto last quarter (Q1 2021) was $1,419 per square foot. And I bet that this number has already increased. Now consider that, in the City of Toronto, the “growing up guidelines” suggest that an ideal family-sized three bedroom suite should be around 1,140 square feet.
When you multiply these two numbers together, you get an “ideal” three bedroom suite that costs just over $1.6 million. Of course, this is without parking. So if you want downtown parking, add another $100-200k (which, at this price point, is still almost certainly going to be a loss leader for the developer).
All of a sudden, you’ve now got a $1.7 – 1.8 million residence. This will work in some submarkets and in some locations, but certainly not all.
So what happens is that the end price becomes a constraint. And in order to make the suite more affordable, the developer will naturally look for ways to make it smaller. Turn this into a 900 square foot three bedroom and all of a sudden you shave off over $300k from the price.
The point I am hoping to make is that developers generally aspire to respond to what the (sub)market wants. If the (sub)market wants a certain price point, developers will try and meet that need. If the (sub)market wants massive apartments, developers will gladly deliver. (We’re working on combining some supremely awesome suites at this very moment in fact.)
Blair Welch, co-founding partner of Slate Asset Management, was recently interviewed by Don Wilcox of RENX about the company’s recent acquisition of the Commercial Real Estate Business of New York-based Annaly Capital Management. As part of the deal, we also acquired $0.4 billion of grocery-anchored real estate assets across the US. These were purchased by Slate Grocery REIT (TSX: SGR.UN). What some of you maybe don’t know, though, is how we as a company view these kinds of assets as being essential food infrastructure, more so than as being retail assets. So here are a few excerpts from the article and quotes from Blair that explain why, in our view, this distinction matters.
“We started buying grocery-anchored real estate in a big way in the financial crisis and I think we always looked at grocery-anchored real estate as food logistics, rather than a retail play,” Welch explained. “In the pandemic it’s really proven the local food store, or the spoke in the hub, is just as valuable as the hub itself.”
Despite an increase in online grocery shopping (to about 10 per cent in the U.S.), people are still going to the stores. Or, at least, (are) getting their products from the local stores. Again, think “food logistics.”
“That (10 per cent bought online) means 90 per cent is done in store,” Welch observed. “Now, here’s the interesting thing. Over 90 per cent – probably closer to 95 per cent – of the online sales are done at the local store.
“So what we are saying is over 99 per cent of all the sales are done at the local stores, whether it is click and collect, or someone delivers. You are not changing the distribution pattern.”
Here are a few more words and a comparison to what Amazon is and has been doing when it comes to food logistics:
“If I’m Kroger or Walmart if I have to pay $10 (per square foot) for my warehouse what’s the difference if I’m paying $10 for my store? It’s the same cost, they just look at it as a distribution cost,” he said.
However, those stores are in the middle of most neighbourhoods. Exactly where Amazon wants to be.
“I think Amazon is an amazing company. I think their acquisition of Whole Foods and others is actually to get closer to the consumer. And the Whole Foods (acquisition) was just under 400 grocery stores in a market of 35,000 stores.
“If I am Walmart with 5,000 stores or Kroger with about the same under different banners, that infrastructure is extremely valuable.”
