Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 1568

If you had to pick an epicentre for the housing bust of 2008, I’d say that Las Vegas would be a pretty safe bet.

Las Vegas home prices doubled between 2002 and 2006 (the peak), and then fell 62% through to 2012!  According to RealtyTrac,  Las Vegas saw the highest rate of foreclosure  (in 2009) compared to any other major city in the US. 1 out of every 13 properties was in foreclosure. That’s pretty incredible.

Now, hindsight is always 20/20, but from the beginning I had a hard time understanding Las Vegas from a real estate standpoint. You have a city that’s running out of water and who’s major economic drivers are tourism, gambling and conventions . Not only are these industries highly cyclical, but they don’t create a lot of high paying local jobs.

So for home prices to double in the span of 4 years, it must mean that there’s a lot of investor activity in the market. But how much is a lot? As one example, the 678 unit Meridian Private Residences, which was a condo conversion done by American Invsco , apparently only sold 14 units to end users . The remaining 98% of the units were bought by investors.

Those are pretty scary numbers - both for investors and end users. And while times today are certainly nowhere near as frothy, I still don’t get Las Vegas real estate.

I was driving down St Clair West yesterday and I noticed that Urbancorp had erected a marketing sign on their site at 836 St Clair Ave West (former Hungarian House ) and was in the midst of constructing a sales office.

The project is called The Homes of St. Clair West and it looks like it’ll be a promising set of semi detached houses. However, if you look at the City of Toronto’s Development Application website , the site shows a mixed use project with almost 100,000 square feet of residential space and roughly 12,000 square feet of retail space.

I’m not sure how to reconcile what’s planned for site, but I have two things to say:

First, I think it’s a damn shame that the Hungarian House was even torn down in the first place. I’m not exactly sure when it was built, but I thought it was an interesting building with lots of potential to be incorporated into a new mixed use project. We really need to get better at preserving the history that we do have in this city.

Second, if they’re planning townhouses along St Clair Avenue then I think it’s absolutely the wrong type of development for that street. St Clair deserves midrise. Let’s hope that’s what they have planned.

One of the things I often hear people say to me is that “you can never go wrong with real estate.” And indeed, if you’re talking about Toronto real estate over the past decade, then yes, it was fairly difficult to go wrong.

But that’s not a universal truth - either here or elsewhere. Real estate is very much an  imperfect market and it has always been prone to protracted market cycles.

Furthermore, if you’re in the wrong city or part of town, there could be absolutely no market for your property. Take this example from Business Week :

Helene Pearson’s belief in homeownership was shattered in Roseland, the mostly black Chicago neighborhood where President Obama got his start as a community organizer. Pearson, who bought her two-bedroom, red-brick bungalow on South Calumet Avenue for $160,000 in 2006 with a high-interest loan, put it on the market a year ago for $55,000—and didn’t attract a single offer. Her bank has agreed to take it back in exchange for canceling her remaining mortgage debt. “I was so excited to buy my first house right down the street from my mother, but they got me good,” says Pearson, a 35-year-old guidance counselor and mother of two girls. “This scarred me so badly that I never want to buy again.”

Here you have a case where the value of the property (whatever it may be - clearly it’s not even $55,000) is below the replacement cost. That is, the value is well below what it would cost to actually go out and build a similar property. When you have a scenario like this, it intuitively translates into very little new investment.

And this is the case in many places, which is why when I hear somebody say “that you can never go wrong with real estate”, I secretly cringe inside.