Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 1305

Earlier this week it was announced that Sam Zell – the billionaire who initially made his money in real estate – is selling over 23,000 apartment units to Starwood Capital Group (Barry Sternlicht) for $5.4 billion. The units are all controlled by Zell’s company, Equity Residential .

This is interesting for a number of reasons, but I’d like to point out two of them today.

Firstly, Zell is famous for selling another one of this companies, Equity Office Properties Trust, to Blackstone for $23 billion in 2007. This was right before the market fell out and so some people are asking whether this signals the end of the apartment run. Average apartment rents in the US have  increased roughly 20% over the last five years.

But at the same time (and this is my second point), it might not be that at all. Instead, it could simply be a rebalancing of the portfolio. Here’s an excerpt from the Wall Street Journal :

…Equity Residential has become “less aggressive as buyers of assets” in recent years, Mr. Zell said in an interview late Friday. Instead, it is getting out of suburban markets and into downtown urban centers, where young people are moving and where it is more difficult to build, he said.

Most of the 23,300 apartment units in the deal, roughly a quarter of Equity Residential’s total, are low-rise and mid-rise units in suburban markets in and around southern Florida, Denver, Seattle, Washington, D.C., and Southern California. Analysts expect a significant amount of new supply to be concentrated in those markets in coming years.

Of course, Sternlicht is buying these suburban properties and so he clearly has a different investment thesis. (The purchase price works out to be $230,600 per unit at a cap rate of roughly 5.5%.) But that’s what makes these deals so interesting to scrutinize. Nobody really knows what the future holds.

For over 10 years I have been a big supporter and proponent of Ontario wines. It’s almost the only kind of wine I buy. When I go to a restaurant I will always look to see what wines they have from Ontario, because I would much rather support a local winemaker.

This past weekend I was in Prince Edward County visiting Norman Hardie . They are one of my favorite wineries in Ontario and if you haven’t yet tried their wines, I would encourage you to give them a go. They also have a great wood pizza oven if you decide to visit them in person.

One of the things I appreciate about Norman Hardie’s wines – besides obviously the wines themselves, though the two aren’t mutually exclusive – is his philosophy behind the wines. Here’s a snippet from the website:

I’ve chosen Southern Ontario to grow and vinify cool climate varietals, because I truly feel that these soils are unlike any other in the New World. As the worldwide market grows, the majority of wines available to us have been carefully manufactured to fit a flavour profile as opposed to smell and taste like the region they came from. I strongly believe in the importance of crafting wines that tastes of the place they came from. The French know this notion as “terroir”. Matt Kramer (Wine Spectator) calls it “Somewhereness”.

I like this approach because I feel exactly the same way about architecture and cities. Who wants a city that looks and feels like every other city in the world? That’s boring, bland, and banal (couldn’t resist the alliteration).

In my opinion, the best buildings respond to their local context and the best cities create a unique sense of place. They create somewhereness.  

City Observatory recently republished their commentary on a report (released earlier this year) called Who Pays for Roads . I missed their original post, so this is new to me.

The report and commentary are all about the mispricing of roads/driving and the fallacy that “user fees” (gas taxes, tolls, and so on) are enough to completely cover the costs associated with driving.

I have been a vocal supporter of road pricing and/or congestion charges here in Toronto, and so I’d like to share two pieces from their commentary.

The first is this paragraph, which talks about how mispricing leads to demand issues (i.e. traffic congestion):  

The conventional wisdom of road finance is that we have a shortfall of revenue: we “need” more money to pay for maintenance and repair and for new construction. But the huge subsidy to car use has another equally important implication: because user fees are set too low, and because, in essence, we are paying people to drive more, we have excess demand for the road system. If we priced the use of our roads to recover even the cost of maintenance, driving would be noticeably more expensive, and people would have much stronger incentives to drive less, and to use other forms of transportation, like transit and cycling. The fact that user fees are too low not only means that there isn’t enough revenue, but that there is too much demand. One value of user fees would be that they would discourage excessive use of the roads, lessen wear and tear, and in many cases obviate the need for costly new capacity.

And the second is this chart, which shows the cumulative net subsidy to highways in the US from the late 1940’s:

The point of all this is that when you subsidize something it’s because you’d like to see more, not less of it. So why then are we even surprised by the crippling traffic that plagues our cities? We are doing a lot to encourage exactly that.