Build transit, build buildings, make money

If you can build a $6B Australian subway project, you'll win the right to build some downtown towers and make a few bucks. So goes the transit value capture logic of a recent tender for a Melbourne Metro project according to The Age.

At this time, the city's central loop, where a half-dozen lines coalesce (think about it like the Chicago loop, but underground), is a major transit service bottleneck. The Metro Tunnel project promises to provide an alternate route for some of the lines to pass through the central city. With only five stations, two of which are essentially expansions of existing stations, the project's main impact on regionally accessibility will be increased throughput on the existing suburban lines.

All this could mean higher frequencies to the suburbs and marginal overall connectivity increases in the CBD. Based on urban economic fundamentals and U.S. empirical experience, this investment could lead to suburbanization of some land uses, like housing, and further clustering of land uses that benefit from agglomeration, like office, entertainment, and retail. Thus, one might expect that those valuable development sites offered as part of this tender will eventually be developed as high-rise office towers, perhaps with a smattering of retail and entertainment uses at the bottom and top.

Notably, this is a little different from how it's usually done in the U.S. context. Typically, you'd see a project like this put out to bid without the land development rights. Contractors would compete to build the tunnel and that's all. A few years after all the construction equipment was carted away and internal transit agency politics coalesced, the agency would get around to putting out an RFP for development on the "remnant" sites it owned in the CBD. We call this particular transit value capture mechanism joint development. On the other hand, there's an implicit assumption in the Australian mode of thinking that the tunnel builder will value the future development rights in the near term at a magnitude that is preferable for the transit agency to retaining temporary control of the sites and selling the development rights to a specialized real estate developer at a future date. It's an interesting comparison in approaches to a very similar value capture strategy.

By the way, you have until 2:00PM on June 9th to respond to this solicitation. When timing your trip to your local FedEX office, keep in mind that Australia is a day ahead of the U.S.!