Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 652

If you're building a multi-family rental building, you're almost certainly building it "on spec." What this means is that you're building an empty building and, once it's done, you will then work to rent it out. (Nobody rents an apartment years in advance.) In this scenario, you will know what your costs are once the building is complete, but you won't really know what your revenue will be until you start leasing. If demand is strong and the market has moved since you started building, maybe your rents will be a pleasant surprise. If the market has moved in the opposite direction since you started building, your rents might be an unfortunate surprise. The laneway house I recently completed is an example of a spec rental building. I built it without a tenant, but I assumed that I could rent it out upon completion. That proved to be true, but mind you it was only one unit. So it was relatively low risk.

If you're building an office building, it is bit more common to have some pre-leasing in place. Early on in my career, I worked on an office development where we started construction with about 25% of the leasing complete. This wasn't enough for construction financing, but we saw that demand was strong and we needed to start right away in order to meet our lead tenant's occupancy timing. And so we made the decision to go. We ran on equity for the first bit of construction, but once we completed enough leasing we were able to place our construction facility and lower the project's overall equity requirement. We took a chance and everything ended up working out okay. But it could have not worked out. What would have happened if a pandemic hit after we started construction? Leasing activity would have completely stopped.

If you're building a condo building (at least in this city), you'll likely be pre-selling your suites. You don't necessarily have to do this. There are examples of well-capitalized condo developers building on spec without any pre-sales whatsoever. (Build, lock in your costs, and then sell.) But generally most developers will pre-sell, secure their construction financing, and then begin construction. In some ways this lowers your risks, as well overall systemic risk in the market. It also lowers your equity requirement as a developer. But it does create another possible risk. Once you pre-sell, you're effectively locking in and capping your revenues. So you better have a very good handle on your costs. Otherwise you could be exposing yourself to cost escalations without any way to claw back some of your margins.

The other thing to consider is whether you want to yield or not. Is it better to sell all of your suites as soon as possible (bird in hand) or sell only what you need, holdback the rest, and hope that prices increase going forward? I don't think there is a right or wrong answer here. Some developers don't want any market risk and so they take the bird in hand when they can. Other developers prefer to profit maximize and/or safeguard themselves against unforeseen costs, and so they sit on inventory. If you have unsold suites, you can always push revenues. Either way, what is hopefully clear from this post is that development is risky. This is just one example of some of the decisions that need to be made. There are countless others. Sometimes you'll get it right. And sometimes you won't. Hopefully the former happens more than the latter.

In the fourth quarter of last year, the average house price to earnings ratio in the UK was about 8.4x. Apparently this is about as high as it has been in the past 120 years. But interestingly enough, if you go back to the 19th century, this ratio was even higher. It was over 12x back in 1845, but then went on a steady decline until about the 1920s. What changed, according to some researchers , is three things: homes got smaller (making them more affordable), incomes rose, and supply increased.

So what's going on today? The obvious answer is perhaps that interest rates are low. But in this recent FT article by Martin Wolf , he argues that that's not really the primary driver. Part of his logic is that low interest rates are a global phenomenon. And so how is it that real home prices in the UK rose 93% between 2000 and 2020, but only 29% in Germany? There must be some other structural force(s) at work. (Germany has a lower homeownership rate for whatever that's worth.)

Wolf argues that it's a problem of housing supply. Very little housing was built during WW2, for obvious reasons, but housing delivery did really spike in the post-war period in the UK. Local authorities also played a major role. If completions from 2000 to 2019 had averaged the same rate seen between 1950 and 1970, the country would have 2.9 million more homes today, representing a 13% increase to total dwelling count.

This, Wolf argues, would be having an impact on house price dynamics.

Chart: Financial Times

I just discovered the work of artist and photographer Federico Winer. More specifically, I just discovered his ongoing art project called ULTRADISTANCIA , which uses Google Earth satellite imagery as a starting point for beautiful map art.

Above is a piece from his "Mines" collection. What you are seeing is the Ekati Diamond Mine in Canada's Northwest Territories. It is located about 310 km northeast of Yellowknife, 200 km south of the Article Circle, and apparently it's Canada's first surface and underground diamond mine.

In addition to using images of mines, Federico has transformed airports, ports, and other urban landscapes. Here is a link to his "Selected" gallery, which includes places ranging from Venice to Minas Gerais, Brazil. I think his work is amazing.

If you're interested in learning more about his workflow, you can also check out this short video .

Image: ULTRADISTANCIA