Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 204

I'm not an expert when it comes to roads and highways. I mean, usually we talk about bike lanes around here. But today I learned, via Brian Potter over at Construction Physics, that there is such a thing as an International Roughness Index (or IRI). In simple terms, it measures how much a car bounces up and down over a given distance of driving, and it is usually expressed in units like "millimeters per meter." A low IRI is good. It means less bouncing up and down. And a high IRI is bad. It means more bouncing up and down, suggesting the road is poor. This, it turns out, is the most commonly used index in the world for evaluating whether a road sucks or not.

And in this recent post , Brian uses the index to chart out road quality across the US. Here's non-interstate roads for the 19 largest metro areas:

At least two things can be readily gleaned from the data in his post. Number one, US Interstates tend to be pretty good. More than 80% of the mileage is classified as "good" or "very good." Non-interstate roads are, on the other hand, much poorer. And in every single case, urban roads are worse than rural roads, presumably because of their higher traffic volumes. Number two, there doesn't seem to be much of a correlation between climate and road quality. Intuitively, one would think that freeze-thaw cycles and road salt would give cold cities the worst roads, but that is not actually the case.

Los Angeles sucks the most.

Cover photo by Thaddaeus Lim on Unsplash

In years past, it was relatively simple for Toronto condominium developers to underwrite pre-construction sales (which, as most of you know, is a requirement for construction financing). Notwithstanding the temporary blips, like at the start of the pandemic, it was easy to feel generally confident that the sales would be there when you needed them. It was just a question of 1) pricing and 2) how quickly could you get there (i.e. get through the zoning and entitlement process).

This is not the case today. And it's happening in many (most?) markets, not just Toronto.

Today, the market clearing price for new condominiums is below the cost of actually building them. So no developer knows what the pricing should be , because no developer can price there and still have a feasible project. In addition, the question of timing is no longer dependent on approval timelines (though please don't take this to mean that approval timelines don't impact projects). At this point in the cycle, there are lots of zoned sites available. The question is now: When will the pre-construction condo market return?

It is impossible to know the answer to this. If you have a truly differentiated product catering to a specific buyer pool, then it is possible the answer could still be today. But if you look at the number of condominium suites under construction in the region (more than 85k) and the number of suites expected to finish construction this year ( around 27k the last time I checked), most people are broadly assuming the answer is, at the very least, a few years from now.

Not surprisingly, this is having a meaningful impact on high-density land values . If you don't know when and for how much you can sell for at the back end, then it's pretty challenging to run a residual land value model today. Because it's a lot harder to have conviction in your assumptions. What this also means is that, if your assumption is the market will take years to return, then you need to add in this additional cost of time into your model.

To provide an indicative example, let's say that you're buying land today for $75 per buildable square foot, but that you don't anticipate being able to launch condominium sales for a few years. The result could be that once you add in interest charges and other carry on the land, your effective land basis could end up being somewhere closer to $125 pbsf. (Again, these are just indicative numbers.) The end result is that you have to pay that much less today.

In today's market, you need to have the flexibility of patience. So this is one of the ways that developers are thinking about new acquisitions, assuming they're still active. And it represents a significant discount on land (>50% in many cases) compared to where we were a few years ago.

Photo by Nadine E on Unsplash

Home, as I've always said, is not an actual building typology. A home can be anything. For some people, a comfortable home might be a suburban single-family house in a bucolic community. And for others, a home might be two converted office spaces in Le Marais that also double as a highly coveted event space for art and design. That's the thing about homes, they're very personal.

This latter scenario describes the home of Jérémy Rocher and Kym Ellery -- a space that seems to be making the rounds in Paris and getting people in the art and design community excited. It was featured in HTSI magazine over the weekend and looks like the below. (In case you were wondering, the answer is yes, that is a piece by James Turrell.)

The design brief given to architect Simon Pesin was to create "a home and a meeting place for art." This is a fascinating use case to me. Because it's cool and interesting and, in my view, a positive thing for the city. Brands like Danish furniture company Frama are some of the groups that have programmed it, which suggests there's maybe a need for more unique spaces like this.

But at the same time, as a real estate developer, it's mostly impossible to underwrite spaces like this. If you were developing this building and thinking about the various buyers/tenants who may want to one day occupy it, this segment would never be on your list. In fact, it is yet another example of Jane Jacobs' famous mantra that "new ideas require old buildings." This is an old building. Here's an excerpt from HTSI:

Rocher bought the property six years ago, though he and Ellery only moved in last year. “It’s funny, the property was on the market for six months because people didn’t see the potential behind it,” he says of what was formerly two office spaces fitted with partition walls, false ceilings and carpeting. “Even the windows and skylights were hidden,” he adds, pointing skyward.

Thankfully, all you need is one person to see the potential. That is one of the magical things about cities.

Photos: Depasquale + Maffini