Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 416

https://youtu.be/TnlCRoBAcuw

I am not a structural engineer ( or an architect for that matter ). But one of the things that has come to greater light as a result of the devastating earthquake that hit Turkey & Syria last month is the number of "soft story buildings" throughout these countries.

Technically, a "soft story building" is exactly what the name suggests. It is a building where one floor is less than 70% as stiff as the floor above it, or less than 80% as stiff as the average of the three floors above it ( source ).

The typical application of this is a ground floor that has less structure (missing shear walls for example) and is more open. And it is usually done to accommodate things like parking and retail uses, and to, of course, build more cheaply.

However, there is a massive problem in that they are often structurally suboptimal! (Again, not a structural engineer.) This is why we saw so many of the buildings in Turkey "pancake" during its earthquake. The ground floor failed and then it brought down the rest of the building.

I can appreciate that retrofitting older buildings is both difficult and expensive; but it is inexcusable to not work toward that and it is certainly inexcusable to not mandate that every new building meet whatever building codes are required to save lives.

Big Ben Myers of Bullpen Consulting doesn't usually have strong opinions on Twitter (obviously joking), but I did see him respond to this tweet this morning:

https://twitter.com/benmyers29/status/1632377162404712448?s=20

The assertion he is responding to is basically this: "developers are stupid because they tend to hold onto land during downturns, instead of building through them." On some level, I think I know where this line of thinking is coming from. It's the whole Warren Buffet philosophy of "being fearful when others are greedy, and greedy when others are fearful."

But what it ignores is development feasibility. Developers typically rely heavily on the availability of debt financing. First you need land financing in order to acquire the land, and then, once you have your entitlements, condominium pre-sales and/or any other requirements in place, you move onto a construction loan (which often "takes out" your land loan).

Maybe you have deep enough pockets to fund everything with cash, but most of the time that is not the case. And so if these debt facilities are not available to you, then you are not building.

The other part of this equation is that, during downturns, it can be harder to forecast your future revenues. What can I sell/rent this space for, and how long will it take to absorb? These are difficult questions in the best of times, but they're even more difficult when you don't have a lot of market activity/comparables to point to.

All of this contributes to debt being less available, especially for smaller developers. It also makes new sites difficult to underwrite. Because as we have talked about many times before on this blog, land should be the residual claimant in a development pro forma. Revenue minus development costs equals how much you can afford to pay for land.

If the math doesn't work and if you can't get financing, it almost certainly doesn't matter how much "leading" you feel like doing. You're not building.

https://youtu.be/iHJnbyDHYzs

This is a fascinating interview with John Andrew Entwistle , the founder of vacation rental company Wander . The way to understand Wander is that it is a vertically integrated travel company. So unlike Airbnb, for example, Wander owns all of their real estate (vacation homes in top destinations), they property manage, they asset manage, and they are building out the technology required to connect all of this stuff.

They have also created what they are calling the first ever vacation rental REIT , which means that you can buy a piece of their real estate portfolio (currently 13 properties). In addition to being a source of cash, this creates an interesting flywheel effect where maybe you stay in a Wander and then decide to become an investor in their REIT, or vice versa.

Eventually though, Wander hopes to be just as asset light as Airbnb (which again, doesn't own any real estate; they're a booking platform). The idea is that REIT unit holders will ultimately own the real estate and they will be the asset manager / technology platform that sits on top. But that they will still control the entire travel experience.

John also gets into some of the specifics of how they run their business. For example, in each destination, they hire local cleaning crews and handy people (who are not Wander employees). They typically spend about 7% of the value of a property to furnish it (which is typically around $80-150k per property right now). And their average order size is around $4.5k, which suggests that people are willing to pay a premium for this vertically integrated travel experience.

If you can't see the video above, click here .