Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 175

As many of you will know, I very much enjoy reading the investing memos of Howard Marks . And buried somewhere in one of them is an analogy about the kind of investors who try and time the market and/or who constantly chase the next hot thing (whatever asset class that may be).

It goes something like this: If you're trying to catch a bus and you're running from bus stop to bus stop trying to perfectly time the arrival of the next one, there's a chance that you might never catch a bus. But if you patiently wait at one stop, eventually a bus will come and eventually you'll be able to get on it.

I like this analogy because you see this jumping around in every industry. In tech, a lot of people have moved from the crypto bus stop to the AI bus stop and, in real estate, we've seen it, and are seeing it, with industrial, student housing, and other in-demand asset classes. Capital wants its yield.

Now, it's obviously important not to ignore macroeconomic shifts and fundamental changes to your sector. If your bus route has been cancelled or rerouted, you don't want to be waiting patiently at that stop. You want to be on the move.

But if the long-term fundamentals in your sector haven't changed and everyone else is distracted by what's new and shiny, hanging out can be a powerful strategy. And this brings me to something that Marks recently wrote about in a memo called " On Bubble Watch ." In it, he talks about the three stages of a bull market.

Here's how he describes stage one:

The first stage usually comes on the heels of a market decline or crash that has left most investors licking their wounds and highly dispirited. At this point, only a few unusually insightful people are capable of imagining that there could be improvement ahead .

In my view, this is broadly the stage we are at in the commercial real estate industry. It's tough out there. But at some point in the future, we will move past this stage and go from "a few unusually insightful people" to "most people" and then finally "everyone." These are the exact words used in his 3 stages.

But here's the thing.

There's lots of opportunity if you can be among the "few unusually insightful people." It gives you the chance at being right about something that "most people" are overlooking. But that means you need to hang out at the bus stop that you have high-conviction around, which can be hard if everyone has left you in search of another one.

We've spoken before about how much electricity is going to be demanded by data centers in the future. According to this study , data center energy usage is expected to represent somewhere between 6.7-12% of total electricity consumption in the US by 2028. And according to McKinsey , demand for data centers is going to at least 4x by the end of this decade. So the consensus is that we are going to need more, not less, data centers in the foreseeable future.

But if data centers represent the physical infrastructure needed for our digital activities, it's both interesting and valuable to think about where this stuff wants to go, especially since tech is, in some ways, a decentralizing force for cities. Interestingly enough, they exhibit the same economies of agglomeration as many other urban activities in that they want to be near density and other data centers. Maybe even more so.

Here's an excerpt from a Harvard Business School report (2022) called " Where the Cloud Rests: The Location Strategies of Data Centers ."

The study finds a pervasive urban bias in the location of third-party data centers. For example, we find that all large metropolitan areas with over 700,000 population have at least one supplier. Less dense areas may or may not have any. Moreover, local entry rises with the presence of local information industries and intensive data users, such as finance, insurance, and real estate. Because less supply locates in the areas with lower density, a high fraction of buyers in small and medium-sized locations must get their services from non-local suppliers—likely located in the closest major city. Relatedly, we also find supply of more specialty services in denser and more competitive locations. We interpret all these patterns as the result of tension between economies of scale and user preference for proximity.

And here's a quote from LA-based Rising Realty Partners :

Once a data center hub is entrenched, it tends to create its own gravitational pull. Data center tenants want to be near other data center tenants. And the main hubs also boast high levels of connectivity. The calculus is straightforward: It’s far easier to run a fiber optic cable across the street or across town than to run a connection across the state or country.

This is what is happening in Northern Virginia with "Data Center Alley" and what is now now referred to as the world's largest data center hub. As of July 2024 , Loudoun County, VA (which is located just 34 miles from Washington, DC) had 43 million square feet of existing data centers and ~47 million more square feet in the pipeline. This represents an increase of ~60 million square feet compared to where the area was as recently as 2022.

Overall, there are only so many "primary" data center markets in the US. CBRE lists 8 . This makes it a relatively concentrated real estate asset class in terms of geography.

Cover photo by Claudio Schwarz on Unsplash

Neat B and I were on the Bench this past long weekend. Hidden Bench Estate Winery was doing " Raclette on the Bench " and so, naturally, we went to check that out. We're suckers for Savoie-like mountain food. Anthony Bourdain was also right when he said, "you can never have too much cheese, bacon, or starch."

All of the above ingredients were local and we ended up sitting beside a nice lady from Upper Canada Cheese (the source of the raclette). She told us all about the benefits of A2 milk and explained that it's why people often feel better consuming copious amounts of cheese in Europe compared to in North America, even if they're lactose intolerant.

After Hidden Bench, we decided to go down the street to Domaine Le Clos Jordanne . We had never been before but we actually served one of their wines at our wedding last summer. They specialize in chardonnay and pinot noir. As soon as we walked in the door, we were super impressed by the space, and our host Tamara.

The interiors are by Solid Design Creative and they collaborated with Pamela Nelson on a really great 16-foot high art installation. It is meant to represent the "terroir" of the winery -- namely its strata of limestone, clay, sand, and silt -- and that is, of course, what their winemaker is all about. Turning the Bench region into liquid form.

If you haven't been, I would highly recommend a visit to both of these wineries, followed by a stopover at UCC for some A2-milk cheese. Or so I've been told.