Transit improvements can have distinct real estate development benefits, both for horizontal (land conversion) and vertical (building construction) development. In addition to many of the operational benefits that a real estate asset manager might perceive from a transit investment, transit's impacts on markets, travel behavior, and public policies can influence the profitability of real estate development.
From the perspective of the developer, in what ways could a transit improvement impact a potential development project?
Developers might witness changes in the marketplace that would also be perceived by asset managers of existing buildings. In the case of a forthcoming transit improvement, a developer might anticipate the shift in local market dynamics and convince investors of their projections. Transit-induced changes in local real estate markets could directly influence the best use of land, informing the type and/or scale of projects that developers would undertake to maximize their return on investment.
For example, a transit improvement may broaden the market shed of a site and, in turn, increase absorption rates in the surrounding area. Faster absorption rates would increase real estate revenues and could reduce both leasing/sales costs and project financing costs. Such projections may give the developer a better shot at attracting investors to the project and, depending on the magnitude of the market changes, allow a developer to deliver a larger scale project than they would have without the transit improvement.
Additionally, a transit improvement may also fundamentally alter the market surrounding a site. For example, a site in a bedroom community might be an attractive location for auto-oriented residential development. The addition of a nearby station along a transit line connecting the airport and downtown might make the site an ideal location for consulting firms to lease office space. The developer may project that an office building would be a more profitable development option than a residential project. Thus, the site is now part of a broader, different market. As with other market-related impacts, the introduction of transit may influence the best use of sites and reshape development.
The transit improvement may also be expected to inform how people access the new development. Just as an asset manager might see a change the property's automobile parking utilization following a transit improvement, a developer might also foresee travel behaviors that would allow them to provide less parking. They might deliver less parking and enjoy the cost savings or they may repurpose the space for other productive land uses, yielding more leasable space.
Furthermore, different travel behaviors may lead to lower development impact fees in transit served areas. For example, development projects served by transit may not have to pay as much in fees related to schools, sidewalk infrastructure, or highway transportation improvements because projects in transit-served areas do not have as many offsite spillovers as auto-oriented projects. A reduction in impact fees may be a small overall reduction in the cost of developing a project but may substantially reduce equity requirements because fees are often not considered collateral for debt financing. This can make many otherwise marginal investments more feasible.
In all of the cases enumerated above, there may be local restrictions on how a landowner can use their site that could preclude changing the size, use types, and parking profile of a development. Yet, transit improvements can motivate local authorities change regulations so that developers can take advantage of market opportunities. For example, the city council can reduce parking requirements for new developments within 3,000 feet of a transit stop. Or, the local planning commission may modify the zoning code so that larger mixed-use buildings are allowed on select properties near a transit stop.
Transit can also have profound indirect impacts on real estate development by encouraging agencies and organizations to subsidize projects. To capitalize on a new transit investment, local officials may provide financial subsidy payments to spur development. Agencies that own land might offer it at discounted price to make development more attractive. Subsidies of various forms can make marginal projects feasible and profitable projects more profitable, increasing the supply pipeline in the process.
The landowner's bottom line
Ultimately, all of these vertical development impacts of a transit investment flow to the bottom line of the landowner. Those who own land that can be modified into more profitable uses stand to reap financial benefits because they actually own the right to convert the land and construct new buildings.
So, if a developer is the landowner when these transit-related advantages are conferred to property, that's great for their bottom line. If a developer shows up late to the game, after all the benefits have accrued, then the landowner will be able to sell the improved property to the developer and capture the value. The developer takes home their profit, but not the transit windfall that the landowner "earned" prior to the developer's arrival.
Ian Carlton is a transportation and land use expert specializing in transit-oriented development (TOD). He helps clients - including transit agencies, planning departments, and landowners - optimize real estate development around transit.
Special thanks to Burt Gregory at Mithun for permission to use the Portland Streetcar image above.