Cities, Skyscrapers and Development with William Strange | EP135

William Strange is a Professor of Economic Analysis and Policy at the Rotman School. William is former Editor of the Journal of Urban Economics (with Stuart Rosenthal), and he served in 2011 as President of the American Real Estate and Urban Economics Association. He works in the areas of urban economics and real estate. His research is focused on agglomeration, industry clusters, labor market pooling, skills, private government, real estate development and real estate investment.

In this episode we talked about:

• William’s Background and how he got into Real Estate
• Rotman School Real Estate Program
• Paper Analysis of Skyscrapers
• Macroeconomic Outlook
• Urban Economics Resources

Useful links:

Book “Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier” by Edward Glaeser

Book “The New Geography Of Jobs” by Enrico Moretti

https://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Strange.aspx

Transcription:

Jesse (0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Galley, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jesse for Galley, and you're listening to Working Capital, the Real Estate Podcast. My guest today is William Strange. Will is a professor of economic analysis and policy at the Rotman School that's at the University of Toronto.

 

He's the former editor of the Journal of Urban Economics, and he served in 2011 as president of the American Real Estate and Urban Economics Association. He works in the area of urban economics and real estate. His research has focused on industry clusters, labor market, pooling skills, private government, real estate development, and real estate investment. Will, thanks for being here. How's it going?

 

William (58s): Thanks a lot for having me, Jesse. It's going great.

 

Jesse (1m 1s): Well, I appreciate you coming on. Like we said before the show, I thought there's a couple different areas of research that I thought we could jump into and, and I think the listeners would get a lot out of. But before we do that, why don't we kind of circle back to you in, in your current role at the University of Toronto and kind of what you're working on today, how did that all come to fruition? How did you get into, into this business of real estate?

 

William (1m 25s): Well, I got into real estate as an urban economist, so when I went to graduate school, my favorite undergraduate econ class was urban. I liked it because there are so many things going on in cities. Cities are just interesting organisms. And so I, I pursued a PhD at Princeton with Ed Mills, who is the father of the feet, modern field of urban economics. That ended up with me at U B C amongst the real estate folks. And I gradually came to understand just how interesting real estate is too, and just how much an urban economist will have to say about real estate, you know, both on the residential and commercial side.

 

I feel incredibly fortunate that I've lucked into a, a career as satisfying as this one has been.

 

Jesse (2m 8s): That's great. And the current role that you have at Rotman, so for people that aren't, aren't familiar, that's the, the business school at the University of Toronto. The, the teaching that you do there, is it predominantly undergrad is,

 

William (2m 21s): It's almost entirely MBA and PhD. I teach some vanilla economics, which I think is important too. Yeah. But, but we also teach a bunch of econ cla a bunch of real estate econ and real estate finance classes. One thing that I would say to your audience is I'm also the director of the Center of Real Estate at Rotman, and we periodically put on public events, we put on one on downtown recovery back in December that was addressing the different pace at which downtowns were repopulating as Covid fingers crossed, recedes.

 

And, and we were scheduled to do a housing market one with City Post in March, and we'll keep doing them as interesting policy issues emerge. We are, we, we welcome people from outside Rotman. Please come everybody.

 

Jesse (3m 12s): Yeah, that's great. The, and we want to jump into one of the papers that you did, you did regarding covid. Before we do that though, I'm curious, you know, people in our industry, when we think of schools that have a real estate program at the MBA or or higher level, you know, whether it's economics or finance or real estate, I think of, you know, Rotman, I think of Osgood. A lot of people have gone to Columbia and New York for their Ms. Red program. Has that, how long has that program been the real estate specific aspect of it? How long has that been something that has been at Rotman?

 

Because I, I feel like you guys were one of the first to actually have the, that specialization.

 

William (3m 48s): It's nice of you to say, but it was, it started building up when I came in 2001 and we've specifically p positioned ourselves to not duplicate other programs. Like I, I, I like the SCHOOK program very much, but there's no reason that we need to do something that's as specialized as their program is, given that they already have such a program that's, that's a good program. So what we have done is to set up a smaller real estate program. We have three electives of the 10 classes and MBA would take with the idea being that people in real estate benefit from taking things outside of real estate, you know, that a good real estate person needs to know about finance, a good real estate person needs to know about strategy and my various colleagues in Rotman can help in those ways very much.

 

Jesse (4m 33s): Yeah, no, that makes sense. So before we, we jumped on here, we, we talked about a paper that kind of pid my interest and it was just being in the commercial real estate world and it was a basically a, a paper analysis of skyscrapers. I thought before we jump into this Covid paper, we could talk a little bit about this, this paper that you did regarding skyscrapers.

 

William (4m 53s): The skyscraper paper is still pretty relevant. I mean, what it's motivated by is that we're living in a new era of skyscrapers that if you look at something online like the skyscraper page, you can see the big buildings that people are planning to build. The Empire State Building was the biggest building in the world for on the order of 40 years before the World Trade Center. It has since been sub topped by Burge Dubai. And there are other buildings that are, are also really large that are either recent or, or that are being planned.

 

The big question is, are these big buildings being built big because it's economical to do so? Or are they being built big for some other reason? You know, possibly ego reasons, possibly other stuff. And so we have analyzed skys, this is in my paper with Bob Helsley from UBC. In this paper we look at skyscrapers as a contest for who is the biggest, this, this is assuming that people want to be bigger than the other person. Let me give you a couple of historical examples of that.

 

I mean, people did look at whether h skyscrapers were economical in the 1930s after the big skyscraper wave of the twenties and thirties. That was mo allowed by things like structural steel and elevators. And we see there a lot of stuff that looks game theoretical. So one story is the story of the lower man of the Manhattan Company building, which is now Trump's lower Manhattan building. And, and, and the incredibly beautiful art deco Chrysler building.

 

And they were each built to be the biggest building in the world at the time. Manhattan Company building finishes first, so it has a ceiling on it, and they are very happy because the ceiling on the sky on the Chrysler Building is, is gonna be lower. So for some reason, the Chrysler building did not build an extra a hundred feet that would've made them bigger than the Manhattan Company building. And, and this has an added issue of personal interest, that the lead people on both of those projects hated each other. They used to be partners. There was a breakup of their partnership and, and not the owners of the buildings, but the architects despised each other.

 

Unbeknownst to the people who built the Manhattan Company Building with the Chrysler Tower, the most famous thing about it, if, if the readers Google it right now, you'll see it is the spire at the top. It was hidden inside the structure, so people didn't know what happened. And so they waited until the Manhattan Company building had reached its ceiling and then they raised like a giant middle finger, the spire of, of the Chrysler building, which made it an extra 50 feet taller than the Manhattan Company building. It's really hard to argue that there is some economic tenants paying rent sort of argument that would make you do something like that.

 

That's one example. Another example is the Empire State Building, which I mean we've all seen King Kong bu movies, so we know how the Empire State Building looks, but, but the, you may not know that the spire on top of the Empire State Building, which made it by a couple hundred feet bigger than the Chrysler Building when it was built, that was originally pretended to be a Zeppelin loading dock. So people would be taking international flights by blimp and, and on top of Manhattan where winds are pretty big, they, they would tie the Zeppelin on and then people would get off on on it.

 

No one ever did that. That was just totally a fiction to allow the building to be as big as it could possibly be. So in, in, in this paper, we look at that as what is called in game theory and all pay auction. That's an auction where you have to pay, even if you don't win in, in this case, you pay to build the building even if you don't win the race of having the very biggest building subsequent to our paper, which was theoretical. Others have looked in various ways for empirical evidence in the data, and there seems to be a lot of it around the moral of the story being some of these big buildings look like they should be built based on economics, or at least you can make a justification of building such a big building on economic grounds.

 

But there's a lot of evidence that people wanna build a little bit bigger than the other guy, even if it's not economical because of the prestige that seems to go with being the biggest building in a market or in the world or of a particular type. If you look online, you'll see all kinds of lists of, you know, biggest office building, biggest residential building, biggest building in Canada, biggest building in Toronto. It seems to be something that people do care about and not simply just the economics of, of building real estate space for tenants to use.

 

Jesse (9m 29s): Yeah, that's a fascinating story. I'm almost embarrassed to say I I had never heard of that. So they continued to build with regard to the Manhattan Chrysler, they continued to build hiding the spire within, within the

 

William (9m 41s): Envelope, within the structure because the seal structure, you know, you can have it own. And then they literally leveled it up. There's a, I forget who wrote it, but there was a book, there's a book on this whole episode, which I think is a fascinating story. Yeah.

 

Jesse (9m 51s): Oh, that's great. Yeah, that it's, it's interesting too, I'm reading a book right now that New Kings of New York by The Real Deal, and it talks about a lot about kind of the Trump era of New York when it was the, the basically push to build more and more price per square foot condos, high-end condos. And it was really almost a race of who could build the best, the the tallest. And it became a lot of, seemed to be a lot about ego rather than economics.

 

William (10m 16s): Yeah, I mean, I think ego matters in real estate. Look, I mean, I I'm just a professor, I just write papers. Somebody who actually builds tall buildings can, you know, look at this thing that they've built and I understand why people's personalities are invested in it and why, you know, they wanna build buildings that are deemed to be significant. I mean, for a long time the, the CN Tower was the biggest structure in the world, and people make a distinction between occupied buildings and unoccupied structures. And so, you know, clearly we in Toronto are, are not immune to building buildings for ego-based reasons.

 

Jesse (10m 51s): And it was there a distinction in your research between commercial skyscrapers as opposed to residential towers? Or, or was it,

 

William (10m 59s): I mean, the early ones were, were all commercial and, and well, I mean the Eiffel Tower shows people how structural steel lets you build stuff that's big and then the Woolworth building becomes the biggest building in the world. And then as supplanted, as I said a little while ago, briefly by the Manhattan Company building the, whatever the Trump building is in lower Manhattan and, and Chrysler, they were commercial. But now, now we see people building big residential buildings. I mean, it, it can be problematic. The, the, the former Sears Tower, and I'm having a brain cramp now about its current name, Willis Tower.

 

I believe it, it was renamed a while ago. It had a problem after its initial construction because it was big enough that the building swayed in the wind and, and this made people feel very uncomfortable. And so there was a period of time and it, it could continue. I'm not sure whether it is or the tallest, the, the, the highest suites in that building were used for storage because people didn't wanna be up there because it wiggled around too much. Yeah. And, and, and just made them uncomfortable for residential.

 

I mean, I don't know what your experience is, but I have a friend who was on the 40th floor of a Toronto building and which, you know, he thought was beautiful, gave him a view of the lake and so on and so forth. But during covid when you don't wanna be in the elevator with a lot of people or worse still, if the elevator is slower is not running, you know, 40 stories is a long ways to walk.

 

Jesse (12m 24s): Yeah, absolutely. Well the one with the Willis Towers kind of, that'd be Chicago too, so I I'm sure it, it, it'd get pretty windy up there. I think for us, if, if I'm not mistaken today, our first Canadian place, at least in the Toronto area.

 

William (12m 38s): Yeah. Ever since it's been built, that's been the biggest building in Canada and it's, it's of course commercial. Yeah. There are some things that I believe people are considering that might be bigger but haven't been built yet.

 

Jesse (12m 48s): So you, you mentioned something that you ask your class at Rotman question that I, right before we got on this call, I would, I would've failed and can pose the question to, to listeners that you normally ask your class at Rotman.

 

William (13m 2s): Well the, I mean, I I've said that this is an era of skyscraper construction and I've talked about the earlier one. And the question is what is it that it took for us to have skyscrapers? And it turns out there are two things that it took. It took structural steel and it took elevators. And before I ask the question, I can give you the elevator story because that is also one that's worth hearing. Sure. Elevators are old. They're like, they're like, Archimedes figured out how you could use pulleys to lift things. The problem with a, a classical elevator is if the cable was cut, the elevator would fall and whatever was on it, including humans would be destroyed.

 

And, and, and thus elevators were not used, you know, for large distances for human beings because it was just considered to be too dangerous. The name that most people will associate with elevators is Otis. And, and Otis went to the New York World's Fair in, I believe 1856, give or take two years. And he demonstrated his safety elevator. And the way he did it was he was pulled up in the elevator with a very sharp sword in his hand to about 40 feet with an audience watching him. And then he cut the cable above the, the rope that was on the elevator above himself and the audience went, Ooh, because the, they, they were sure that he was now going to fall to his death.

 

But the Otis elevator's innovation was, it didn't fall, it was a safety elevator and it had automatic brakes that would arrest it. Before that you wouldn't see apartment buildings that were any bigger than six stories. Cuz you know, six stories is a lot to walk up. You wouldn't wanna walk up 10. But now once you have elevators, vertical distance is not a barrier anymore. And that really changes the ability, the demand for big buildings on the supply side. This is my question, what was the biggest building in the world in 1850 around when the elevator was developed and before skyscrapers were, were started to be built?

 

So I'll leave leave you a minute to think about it. Look it up on Wikipedia or, or whatever the answer is that the biggest building in the world was the great pyramid from something like 1400 bc. Why is that worth mentioning? Because it's a masonry building and, and the key feature of masonry buildings is that the supporting walls on the lower floors have to get bigger and bigger as the building gets taller in or in order to bear the weight to say, to say nothing of earthquakes and other problems with masonry buildings, structural steel changes that structural steel lets you go up.

 

I mean it's, it's incredibly robust. We don't always use structural steel. Now the World Trade Center did not to, to its peril. It used much lighter framing. And that was one of the things that meant that the intense heat that the airplanes produced when they hit the building were able to bring it down. That's a worthwhile story to to point out because the Empire State Building was also hit by an airplane during World War ii, which people might not know about because the Empire State Building is still there. Yeah. It was foggy and a, a World War II bomber crashed into it, but because it was structural steel, it basically bounced off.

 

I mean, it was, was not good for the airplane and not good for the pilots, but it, it survived. But we've learned cheaper ways to build buildings subsequent to that without structural steel. And that seems to be one of the factors that's responsible for the skyscraper wave that we have seen in, in recent years with Birds Dubai. Now the tallest building in the world for a while, Taipei 1 0 1 was, was the biggest building in the world. You have very tall buildings being built in, in many Chinese cities, especially Shanghai.

 

People are building big buildings, you know, and, and part of it is the strategic thing that we talked about a minute ago in the case of Taiwan. I mean, if you read about that building, it's clear that this was a matter of great national pride. And so the Chinese were building it to make Taipei obvious as an important business city and to make, to make Taiwan an an important place. The same sort of thing in places like Birds Dubai, I mean, what will be the financial center in the Middle East, it's, it's not obvious what it would be having big buildings, you know, they're hoping that if they build it, people will come.

 

Jesse (17m 10s): Hmm. Yeah. That's fascinating. Well it was good to, good to jump on that cuz that paper I saw that the title and I was like, well it's got economics, it's got skyscrapers. So just being from the commercial real estate side of things, I thought it'd be something listeners get some value out of. Well, I

 

William (17m 24s): Mean, so for, for your readers who are in the industry, I mean, it's a valid question for folks to ask. Do the economics justify such big buildings? I mean, in, in a lot of cases they do. People were convinced that the, say the Empire State Building did, of course the Great Depression happened begin after the Empire State Building was started and before it was finished. And so the Empire State Building was financially rather a disaster. It was called the Empty State building for about the first 10 years because they had so much trouble tenanting it up.

 

And so this is something that market participants should ask themselves. Does the market support a big building or is there something else that's going on with the building's size?

 

Jesse (18m 2s): Yeah, well we're certainly going through a, you know, a different version of that in terms of some of the construction or or over construction in some of our major cities. And just trying to see if the, if the lease ups will, will actually, if the absorption will be able to fill those buildings.

 

William (18m 18s): Right. I mean, we had buildings that were designed pre covid and that came on the market in 2022 and are partly responsible for the slow absorption that we've seen in recent years. I mean that's a, a very valid point. I mean, a lot of my other research has dealt with the fundamentals of why people want to concentrate spatially. Hmm. So, I mean, in Canada, a huge amount of our population is in the three cities of Vancouver, Montreal and, and Toronto. Yeah. In, in the case of the US when people use satellite data to look at how much of the country is actually occupied.

 

So you're looking at data that reflects down on the land and the satellite can tell you, is this dirt or is this concrete? The US is a big country, 2% of it is developed. I suspect the number would be even smaller in Canada. But I haven't seen somebody use satellites to do that. So we have this situation when Toronto and Vancouver at least are incredibly expensive when households say that affordability is the biggest issue that they face economically, not just real estate, it's the biggest issue that they face.

 

And yet everybody keeps piling into Toronto no matter how expensive it is. And thus prices continue to go up and up. I mean, I think one of the silver linings we may see from Covid is, is that through Covid we have learned that remote work is possible, can't do everything remotely that you can do in person, but you can do a lot. And that to the extent that Covid allows people to do things remotely, you know, either at different places in the same city or even in different in in, in different cities completely.

 

That may make it less essential for everybody to be down at bay in Adelaide, you know, paying the high rents that people pay down there and thus paying the high housing prices that you have to pay to be close to bay in Adelaide for your job as an investment banker, you know, this is a possibility to un unlock value for folks by freeing them from the Toronto housing price death spiral that people have been dealing with for so many years.

 

Jesse (20m 19s): Yeah. And we're, and we're dealing with, so we have 84 offices predominantly in, in North America, but we are a global company. And it's one thing where you are taking a b class or a suburban office and converting it to industrial or residential. It's, it's another thing to have these massive towers in cities and just trying to figure out how we repurpose the space, whether, you know, and

 

William (20m 39s): People are sure talking about that and there's, there's certainly fortunes to be made in people who feel how to figure out how to do it. Right. But I mean, what I'm hearing, and I'm, I'm nobody's architect, but what, what I'm hearing is the challenge of the seven and a half foot ceilings that you might see in an office in a residential setting are really problematic. And you can make a lot of internal changes in the building, but dealing with the floors is, is hard.

 

Jesse (21m 1s): Yeah, absolutely. And I think some of what you just mentioned here touched on, I noticed another paper on, on your, on your link on U F T or on Rotman's website was entrepreneurship in cities. And, and I imagine that kind of ties into what you're, what you're talking about here, it's that question of why do we congregate in these

 

William (21m 18s): Metropolis that, that there's something in downtown Toronto that people are willing to pay for. The market tells us that this is valuable. Both the housing market and the commercial real estate market say that Toronto's expensive people aren't throwing away the money for no reason they're paying it because it's a good, good value. As expensive as it might be. I mean, I like my job in Toronto, thus I'm willing to pay a whole bunch of money for a house here cuz I have to live here in or in order to be able to teach in, in, in the Rotmans school. So that, and a whole bunch of other things.

 

But, but ever since the dawn of the internet, some people have been arguing that distance is dead. And and I think that's wrong. Distance isn't dead. Maybe it smells funny, but it isn't dead yet. And in, in thinking about Covid, there was a New York Times op-ed that Jerry Seinfeld wrote titled New York City Is Not Dead. He wrote this in response to a friend of his, a fellow who owned a comedy club arguing that New York City was dead. And in this case, I'm happy to say that I agree with Jerry that that places like New York and Toronto are for sure challenged by, by things that happen associated with C O V D.

 

You know, two years ago what we were worried about is making each other sick. We are less worried about that as the disease has become less virulent as we and as we become vaccinated. But you know, hopefully, you know, COVID is killing 500 Americans a day. I don't know how many Canadians it's killed killing a day. Are we are much healthier than America is in that particular regard. But in, in addition to that being a challenge for folks, the working from home phenomenon is almost certainly here to stay.

 

It's just incredibly valuable for people to stay home and write reports for a day instead of fighting traffic to drive 45 that's from North York downtown, and then do the same thing again in the afternoon. So anyway, Jerry's friend wrote an article saying New York was dead. You know, that that that the value of being close to other people was, was really being challenged. Seinfeld said, no, it wasn't. We did some work using contemporaneous data. So the only time in my life I've used absolutely fresh data off the process and I I now have more patience with other professionals who use that, who use that kind of data.

 

It's just a lot harder to do stuff with that. And we looked at something called the commercial rent gradient. So the commercial rent gradient is telling you how much rents are declining as you, you're moving away from, from the city center. And so, so in Toronto, rents are highest in the city center. They go down as they move away, they rise in suburban sub-centers. We were not able to get good Toronto data to do these calculations here, but we did do it in cities that are like Toronto in the us like New York and Toronto and in and in cities like that, the gradient might be 6%.

 

So my, my co-authors were American, so they made me do this with miles, but the result was rents are declining by roughly 6% a mile as you move away from the center of activity in the city. If, if the big cities are dead, you know, given the long term nature of commercial leases, we should see people demanding large discounts when they're signing up in the downtown or, or close to the downtown, not paying the premiums they previously paid with the onset of covid and work from home and stuff like that.

 

What we found was a little of that, but not a lot of it. What we found was that the gradient went down by about a sixth. It went down from about 6% to about 5%, but it's still a gradient. People are still signing leases in 2021 to pay a big premium to be downtown, which is suggesting that, you know, as mu as much fun as Zoom can be and as productive as Zoom can be, it's not the same thing as sitting next to the other person and, and hearing them talk with their clients and realizing there's some synergy with what you're after and what they're after, which is the kind of thing that people are paying big dollars to locate downtown and getting.

 

So our answer is so far the downtown is less attractive, but is still attractive in, in core dominated cities like Toronto. Now can I tell you that it's gonna be that way five years from now? Of course I can't And and we do promise I'm saying this to someone who will broadcast it. So I guess this promise has some credibility. We promise that once, I mean our intention was once Covid is behind us, do this again. We are realizing that Covid will not be behind us and we'll have to pick another time to do it again and see what the evolution of this is.

 

But thus far we're still seeing people attracted to large cities. One scenario would be that this is a continuation of a phenomenon that Toronto saw in the late eighties and the nineties when back office stuff got moved out of Toronto to Mississauga and then later to places that are farther away than Mississauga. You know, people thought, oh no, the downtown's going away. No. What we were doing was we were keeping only the people downtown who really need to be there, the people who really need to be there to interact with other folks, you know, that that's what really matters and not the fact that the physical files are located in the building there.

 

Yeah. So this may be the same kind of thing where downtown Toronto just becomes more and more rarefied. Yeah. You know, that the investment bankers stay there, but maybe not the middle managers now that, that that is a social issue that we have to engage with, you know, if Toronto just becomes a city of investment bankers and Uber drivers. Yeah. You know, which is sort of the story that I'm telling you. Yeah. But at least that evidence and that theory points us in the direction of that being someplace we could end up.

 

Jesse (27m 4s): Yeah, no, for sure. And I think for the, you know, kind of the anecdotal side of things, what we see on the street is we see leases being signed. We see that there is a bit of a spread between the bid ask, but it, but it's not at the discount, which we, you know, I have clients they call me and Yeah, especially in the middle, at the beginning and in the middle of Covid, they're expecting these 20%, 30% discounts, you know, on pricing and for leasing and they just weren't happening. Landlords were providing inducements, whether it was free rent allowances. But even today, we, we still see these leases being signed and if anything, the trend that I've seen with most of the clients in the downtown areas, whether it's New York, Boston, Toronto, is that there's a, you know, the term flight to quality gets thrown around a lot.

 

We're seeing a lot more of that. And we're seeing, I agree completely, we're seeing even four years ago where a startup might want to be in a trendy area in, in the periphery of Toronto or of New York, and we're starting to see more of them have transit as a component. Not that it wasn't important before, but it's, we're seeing that almost pretty much at the top of the list for these, for these tenants.

 

William (28m 5s): Yep. Transit matters and, and the businesses are deciding they wanna be where the accountants and the business lawyers and the, the bankers are, you know, because they need to interact with them all the time. So I mean, the flight quality, I've heard noises in that direction also that what we would see would be, look, people have been talking about the retail apocalypse for years about online shopping, cannibalizing brick and mortar retailing. Now, did that kill the Eaton Center? It didn't because the Eaton center's in a market position where people are still willing to go there, but it's gonna kill someone.

 

I've got,

 

Jesse (28m 37s): I've gotta go there today. There's

 

William (28m 39s): Good for you. I'm glad one of my predictions ends up being true. Yeah. But, but credit old, old, old fashioned malls, they're getting torn down and, and getting replaced with something different. And I think we could imagine that being something that would happen too. I mean, just something that the audience should think about more generally is that the way the downtown has been for the last 10 years is different than it was 30 years ago, you know, when you had back offices there and it's way different than it was a hundred years ago when there was still a lot of manufacturing activity in the downtown, taking advantage of the proximity to the lake and to shipping and stuff like that.

 

And so the notion that the downtown should be frozen in Amber as of 2000 or something like that is crazy. It's never been that way. It's gonna change as business changes. And that's a good thing. I mean, that's, that's a way that the ability of Toronto to deliver good, good jobs and high value business outcomes is crucial for all of Canada. And, you know, anything that we can do to make Toronto a better competitor to New York, Boston, and San Francisco very much, much serves Canada's interests.

 

Jesse (29m 42s): Absolutely. So I wanna be mindful of the time here, will, but I do wanna get to your, your paper, your, I I'm not sure if it's your most recent paper, the one on Covid, but maybe you could give us the

 

William (29m 54s): Covid one was the one I just talked about a second

 

Jesse (29m 56s): Ago. Okay. So, so in, in, so what, what was the ultimate thesis of that? Was it this, this divide that we're seeing as, I would say even kind of an inequality of a potential outcome of having downtown cores be predominantly bankers? Or was that, was that the, the other paper,

 

William (30m 13s): The focus was on whether downtown would still be as important as it used to be. And we looked at, I, I left out some of the results. The, in addition to looking at core dominated cities like Toronto, we also looked at much more spread out car oriented cities like LA and Dallas and stuff like that. And the pattern in, in those places was different. In those cases, the gradient was already smaller. It was, you know, two or 2% rather than the 6%. And it didn't change a lot after Covid, you know, because la the downtown is, is different than the rest of the city.

 

But LA is not a downtown dominated city the way that Toronto is at all. And Covid didn't affect those. We looked at some parallel results that weren't as parametric, if you'll forgive my geekiness, the gradient puts an exponential functional form to get a percentage decline from the downtown. But look, I mean, how, how are we to think about sub-centers in North York and Mississauga and Markham and places like that in, in, in relative to having one downtown at Bay and Adelaide.

 

So we also looked at the premium that tenants pay to be in a high density environment. So that's a, a more flexible, functional form. We basically got the same results, which is the value of density does get smaller just like the gradient gets smaller. But it by no means goes all the way to zero. Cities aren't dead yet. Now the changes are just starting and things may change a lot. We may finally, eventually end up in a circumstance where distance really is dead the way people have been saying it would be since the early nineties.

 

But we're certainly not seeing it yet. And, you know, looking at real estate markets is one way to understand that, you know, because people put it, put their, you know, people can talk about distance being dead, but that's just talk, I mean a tenant paying, putting down a guarantee on, on real estate lease that's putting their money where their mouths are and how much money they're willing to pay for the downtown versus someplace extra or for a dense non downtown location like Mississauga Center of Mississauga relative to somewhere more peripheral.

 

You know, what we're seeing is people are still willing to pay premiums for those things. This could change, but it did not change in the early years of covid. And you're telling me that your sources say that it's not changing right now yet either. So I think that's where we are as of this minute. Will it change, you know, who knows?

 

Jesse (32m 39s): Yeah, it's a very, it's kind of a fascinating time in the sense that it's, it's hard to get data points when we're, you know, fingers crossed coming out of Covid, but potentially entering a recessionary environment. So it's, you know, we're, we're positive in one, but then we're drawn back in another. And I'd be re remiss if I didn't ask, if I was speaking to economists and didn't ask a little bit about the kind of macroeconomic environment.

 

William (33m 2s): I'm not a macro economist, so I'll probably avoid, but by all means you can ask.

 

Jesse (33m 6s): But, but yeah, I mean, how do you see this? Or if you do at all as a, as a comparison to oh eight or oh one or the early nineties and, and, you know, we, we come out of something that was extraordinary, the pandemic, but now we're entering inflation numbers that we haven't seen in, in years.

 

William (33m 26s): I, I think it, it, it is absolutely to be worried about because inflation, as, as economists who know more about the stuff than I do have always said it, it reduces the information, content and prices reduces the incentives that price systems have. So it just makes capitalism work less well than it would have previously. So it's certainly a risk. I will say that the government's decision to stimulate the economy during covid kept us from having a recession. I, I mean, I don't know if you recall, but in May of 2020, the C M H C who know a lot about housing more, more than I know about housing, they, their projection said that they predicted housing prices would fall.

 

I think the number was 18% in, in the preferred model that they offered. Now, I didn't have a model, but that was my inclination also, and also my inclination of the colleagues that, you know, housing is a normal good. People buy more of it when they're rich and, and there, there it seemed closing people out of their workplaces is surely recessionary. So I I I told my neighbor who I like and respect, you know, I I think you should, if you're thinking about selling your house the next few years are, are problematic. I, I was wrong.

 

I mean, the PR prices went up by more than 30% in Toronto. Quality adjusted during that, you know, in, in part because the government tried to keep people from being killed. But now they've spent huge amounts of money and they can't spend like that forever. And economies don't stay in boom, forever, ever either. So there, you know, there there is uncertainty and, and there is risk.

 

Jesse (34m 60s): Yeah. Well, I guess, we'll nobody has a crystal ball here for this next year.

 

William (35m 4s): Especially not Microeconomists and, and people who spent a lot of their careers doing theorists doing

 

Jesse (35m 9s): Theater. No, I, I, I wouldn't I once sell yourself short. I feel like a lot of the insights come from, from the micro and, and get extrapolated. Well,

 

William (35m 16s): I, I, unlike micro, I just believe in, I mean, economist, I believe in the division of labor and there are other people who know more about macro than I do.

 

Jesse (35m 23s): Yeah. So Will, we're, we're gonna wrap up here. What I'd like to do is, first of all, for those that want to kind of learn more on, you know, urban, urban economics, urban planning seems to be a, a passion of yours. But just generally speaking, are there books or resources that you've used in the past that you think would be good recommendations for listeners if this is something they're interested

 

William (35m 43s): In? Yeah, there, there are a couple of them. And, and I'm, I'm giving you civilian friendly books Okay. That you could read to pass the time on an airplane and not, not a boring textbook. The two examples that come to mind immediately are a book called Triumph of the City by a guy at Harvard called Ed Glazer and another book called New Economic Geography by a guy at Berkeley called Enrico Moretti. They are both lucid explanations of the kinds of forces that we've been talking about. Now both of them are a little less real estate than our discussion has been, but they are about forces that feed into real estate markets.

 

I mean, someone who's a market participant has to be asking themselves why are people paying the premiums for the downtown? Will they continue to pay the premiums from the downtown? And, and if not, how can I trade on that perce perception? I mean, because there are clearly gonna be places where people who get priced out by Toronto go and those real estate markets are gon are, are, are going to be booms. I mean, I don't think people are gonna go to Vancouver to be cheap, although maybe they will go to Vancouver for warmer winter weather.

 

A question that I think is, is unsettled as of this moment is, do people who get priced out of Toronto go to someplace close to Toronto like Hamilton? You know, so you can drive in for a Wednesday meeting, but it's cheaper than Toronto is, or do you go somewhere or do you go to someplace like Montreal that is farther but is cheap for a big city? Or do you think about somewhere that's even farther still and, and, and cheaper still like Halifax. I mean the Maritimes are wonderful place a whole lot cheaper than Toronto.

 

And if a huge amount of your work is Zoom meetings, you know, for some people that location is, is gonna be the more economical place to

 

Jesse (37m 25s): Be. Yeah, that's, that's interesting. So I've, I've read Ed Glazer's book, I've, I have not read the New Economic Geography. So that definitely put on the reading list for those. Just interested in, in kind of your research will or the Rotman program in general, what, what's the best place to send? And we'll put a link in the show notes.

 

William (37m 46s): I mean, look, people can email me and I will either respond or not, depending on how many thousands of emails that I get. I mean, for admission to the programs, you know, we are recruiting students every year. I think our, our MBA program is fantastic. We have programs that work at the full-time level and get done faster, but we also have part-time programs that get done that, that work better for professionals. And I actually think there's a, the case for the part-time programs have become stronger in recent years because there's gonna be a lot more times when somebody can meet a professor in office hours on Zoom rather than having to schlep up to the Rotman school af after work.

 

But, but also we, we have these public events and googling Rotman events. I, I don't know what the le the link would be, but Googling Rotman events is gonna put you in touch with real estate things. But a lot of other things would be useful and we, we try to be good citizens. We're physically close to the center of business in Canada. It's what five subway stops or so to get up here. You know, we want people in the building and now that the building is open, I think people would find it a good use of their time to show up for some of the things that happen here.

 

I would also give a shout out to the New School of Cities that was formed separately of us at the University of Toronto. This attempts to include the stuff from my world on econ and real estate, but also architects and planning and things like that that also relate to cities. It is the first of its kind in the world, has a fantastic director and I think we'll do very cool things in time.

 

Jesse (39m 21s): My guest today has been Will Strange, will, thanks for being part of Working Capital.

 

William (39m 25s): Thank you very much.

 

Jesse (39m 36s): You so much for listening to Working Capital, the Real Estate podcast. I'm your host, Jesse for Galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media. It really helps us out. If you have any questions, feel free to reach out to me on Instagram. Jesse for galley, F R A G A L E. Have a good one. Take care.