Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 1379

‘Jailhouse Rock’ by Michael Hill on 500px

Real estate development is a risky game. So much so that some people in the business like to say that their primary function is to mitigate risk. 

Today I’m going to focus on 3 risks that developers face. There are, of course, others risks, but these are some of the biggest. Some people might also categorize them differently, but this is my simplified way of thinking about it.

The first risk is approvals. Oftentimes in development you need some sort of special permissions to build what you hope to build. These permissions come in many different forms, but whatever the case may be, there is risk associated with this part of the process. 

What happens if you’re not able to build what you were hoping to build? Is the project still feasible? Do you have a viable plan B? Did you budget for a redesign? Have you now overpaid for the land? There’s a lot of uncertainty in this phase and uncertainty generally means risk.

Assuming you’re able to obtain your entitlements (this is more of an American term), the next big risk factor is the market. Can you sell or lease out the space that you’re about to build and can you do it at the rates you were assuming when you acquired the site? 

In a bull market this isn’t usually a problem. In fact, prices and rents may actually exceed your early assumptions. But what if you bought the site in 2006 and now it’s 2008 and you’re hoping to go to market. Now you might be in trouble. In business school I learned to do sensitivity analyses and stress tests. How far does the market need to drop before I lose my shirt? Those are good exercises to do in development.

Assuming though that the market holds up and you’re able to pre-sell and/or pre-lease your new project and obtain financing, you would then be ready for construction – another big risk. This is why many developers bring construction in-house. It’s them trying to exercise more control over the process and mitigate risk.

Construction is messy both literally and figuratively. There’s a lot to consider. 

Are the drawings that you’re using to buy construction properly coordinated? Because if they’re not, you’re going to pay for it later. Is that Chinese curtain wall a great bargain or are you going to end up on a flight to China when it never shows up on your construction site? Are the trades hungry for work or are they busy? If it’s the latter, you’re going to get higher prices. And oftentimes there’s nothing you can do about it. You’re just buying construction at the wrong time.

But we all know that with risk there’s reward. So if weren’t for all these risks, real estate development just wouldn’t be the same. 

If you’re in the business, what keeps you up at night? Did I miss something? Let us all know in the comment section below.

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More so than any other genre of music, there seems to be a longstanding tradition in hip hop of promoting the city in which you’re from. From Los Angeles to Atlanta to New York, I’ve always admired the way that hip hop artists promote and showcase their cities.

For a long time in Toronto we didn’t have that. Our hip hop scene was too embryonic and we just didn’t have artists who were both big enough and willing to take the lead. Or at least, that’s what I was lead to believe as an outsider who candidly doesn’t really follow the scene.

But all that has changed.

Earlier this month, Pitchfork published an interesting article by Jamieson Cox called: Views From The 6 – Inside Drake’s Toronto . It talks all about Drake’s love affair with this city and it even has a map of all the areas of Toronto that have been featured in his videos.

But at one point in the article Jamieson argues that – like many hip hop cities – Drake’s depiction of Toronto is more fantasy than reality:

His mythological Toronto is a metropolis where everyone knows your name and exes are always lurking around the corner, a forest of penthouses with a panoramic view, a park-studded playground where the skies are free of ambient light and the highways are always clear. Like many hip-hop locales, it’s a city closer to the realm of theory—and fantasy—than reality. 

However, at the end of the day, I don’t think that matters. Similar to how your mind actually believes that wine tastes better out of an expensive glass, I think a big part of city branding has to do simply with how you’re supposed to feel. What is Toronto supposed to be like? How am I supposed to experience this?

I love what Drake is doing. Because if everyone thinks it’s supposed to be a certain way, eventually that becomes a self-fulfilling prophecy.

Aaron M. Renn of The Urbanophile , recently wrote an interesting article in Governing called, Where’s America’s Entrepreneurial Economy? In it, he argues that despite the fact that there’s a perception that entrepreneurship is on the rise, overall rates are actually declining.

The Brookings Institution found that so-called “firm entry rates” have declined since the 1970s and that they suffered a steep fall post-2005. And though millennials are often seen as an entrepreneurial generation, The Wall Street Journal reports that business ownership among those under the age of 30 recently hit a 24-year low. Self-employment has seen a similar downward trend. A study by Economic Modeling Specialists International found that both the total number of self-employed and their share of jobs have fallen since 2006.

His argument is that outside of tech — where yes, the barriers to entry have fallen significantly over the years — it has actually become harder to start a company in a lot of other cases. And he specifically mentions two industries where he believes that is very much the case: construction and real estate.

Why is that?

Well, he cites a number of possible factors, one of which is increased licensing requirements for many industries. But the two most interesting for me are slow disruption cycles and the presence of large dominant firms.

Real estate has both of those. 

It’s also a capital intensive industry. And it’s becoming harder for smaller private players to compete with larger institutions and pension funds who struggle with “moving the investment needle”, not with access to capital. Real estate is no longer the fringe asset class it once was.

In contrast, you have the tech space with fast disruption cycles and low barriers to entry. Yes, you also have large dominant players (Apple, Google, Facebook, Amazon, and so on), but even they don’t have complete immunity in an environment where new ideas frequently trump access to capital.

A culture of entrepreneurship across all industries is important for our society. I hope we never lose that.