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Rail-Volution in Real Estate

In San Francisco, a new streetcar line has been built to ferry riders to a 303-acre project set on an old rail yard site. With 6,000 planned residences, 5 million sq. ft. of office space and shops, offices and a medical campus, the Mission Bay project exemplifies a rapidly-growing niche, transit-oriented development (TOD).

Similar projects are springing up across the country, with sizzling markets in Denver and Washington, D.C., as well as in places such as Phoenix and Norfolk, Va. Set close to transit lines, the developments offer buyers and tenants an environment-friendly opportunity to take a train or streetcar instead of expending gas on a lengthy drive to the suburbs. For developers, the reward for a successful TOD comes in the form of potentially lucrative returns from a high-density development with plenty of potential buyers.

“Already we're seeing demand for the residential units,” in San Francisco, says Daniel M. Cohen, vice president of planning and development with Catellus Development Corp., which master-planned Mission Bay, a mixed-use redevelopment. Presale prices for higher-end units starting at $700 per sq. ft. haven't deterred buyers. When Catellus sold one of the first office buildings in Mission Bay, it was fully leased by the Gap upon completion.

Mission Bay offers 800,000 sq. ft. of retail, a hotel, and a medical campus for the University of California at San Francisco. About 40% of the new project space is complete, including 1,500 residential units, says Cohen. The Third Street streetcar line enhances Mission Bay's status as a TOD, since it now operates in addition to Caltrain, a regional heavy-rail line.

Rocky Mountain rail

Municipalities want TOD to bolster quality of life as well as tax bases. In greater Denver, according to the FasTracks Regional Transportation District of Denver, a remarkable amount of real estate development occurred in anticipation of the completion of the 19-mile Southeast Corridor line in November 2006.

“Developers have a much stronger interest in transit-oriented development than even a few years ago, in large part because municipalities are pushing for it,” says Herman Bulls, founder and president of Jones Lang LaSalle's public institutions specialty. “Without municipal interest, the projects aren't going to happen.”

Some 3,704 new residential units, 460,000 sq. ft. of retail and 300,000 sq. ft. of office space associated with TODs were built or under construction just along the new Southeast Corridor rail line, which is only one branch of the system.

Taken altogether, the 17 development projects at nine new stations along the Southeast Corridor line totaled about $800 million in private investment, with more proposed. Eventually, as the full Denver light rail system is built out over the next decade or so, there may be as many as 51 TOD sites, 18 of which are larger than 10 acres.

Hundreds of opportunities

For the commercial real estate industry, TOD offers plenty of opportunity. Sometimes TODs follow traditional heavy rail, such as subway extensions in Rust Belt cities, but more often they follow — or anticipate — light rail systems, which have proved popular with riders and city planners alike in recent years.

Currently, about 25 light-rail systems operate in the United States. Others are in various stages of development such as the Oceanside, Calif. system set to open at the end of this year. There's also the Valley Metro Rail in Phoenix set to open in 2008 and the Tide Light Rail in Norfolk, Va., set to open in 2009.

As many as 50 light rail systems have been proposed nationwide. Even Detroit has commissioned a study to look into the possibility of a light rail connection from downtown to Detroit Metro Airport.

Even if only half these systems were built in the next 10 years, with 10 stations each, that would represent 250 TOD opportunities. So the potential for TOD along these systems, if not precisely quantifiable, is nevertheless quite large.

Capitalizing on hotspots

“Denver and Washington, D.C. are currently the hotspots for TOD,” says Mark Falcone, managing director of Denver-based Continuum Partners, a mixed-use development specialist. Among others, Continuum is developing Belleview Station, a Denver-area TOD totaling 2.3 million sq. ft. on 18 acres. The project focuses on the light rail station near the juncture of I-25 and Belleview Avenue.

“Both areas have rapidly expanding rail systems and the political will to capitalize on their new stations through zoning,” Falcone says. The end result will be high-density, mixed-use development within roughly a quarter-mile radius of many of their transit stations.

Washington and Denver are hardly alone, Falcone adds. TODs in one form or another can be found in such traditional “progressive” cities as Austin, Portland and San Francisco, but also in Dallas, Houston, Atlanta and San Diego.

In Dallas, TODs follow the expansion of the DART (Dallas Area Rapid Transit) system. Mockingbird Station, developed by UC Urban in partnership with Denver-based Simpson Housing Group, focused on the DART line of the same name. Projects included a 500-unit apartment complex on the former Dr Pepper Bottling Co. site, the boutique Hotel Palomar and other retail and condo development.

More TODs are under way along the DART system. A study by the Center for Economic Development and Research at the University of North Texas showed that office properties near DART stations increased in value 53% more than comparable non-TOD offices between 1997 and 2001. For residential properties near DART stations, the value was 39% higher. Also, a 2005 study by the center tallied more than $3.3 billion in real estate developments in DART station TODs from 1999 to 2005.

Billions in new property value

Compared with standard greenfield or infill development, transit-oriented development (TOD) is unlikely to become more than a niche product. A TOD has to be close to a transit station, typically within a quarter-mile radius, and there will only be as many TODs as new transit stations.

But the niche promises fat profits for developers and billions in new real estate value for owners. TOD is a growth market for an increasing number of developers who master its complicated nuances, such as lengthy entitlements for various property types.

“The interest in transit-oriented development dovetails with the goal of taking cars off the road,” says Bulls of Jones Lang LaSalle. “Municipalities will pursue TODs to reduce an area's carbon footprint.”

For municipalities, the rewards for promoting TOD are considerable, Bulls adds. They include an increased tax base and creation of new places through a tightly woven, high-density mix of office, retail and entertainment. The uses add to an area's intangible appeal — especially to affluent people who might otherwise retreat to low-density, car-oriented places.

Premium for walkable sites

Chris Linberger, head of the University of Michigan real estate program and a visiting fellow at the Brookings Institute experienced in developing TODs, agrees. “Municipalities are getting it,” he says. “A good many are responding to demand. Over the last 50 years, developers have gotten really good at creating what the market wanted, drivable suburbs, but now people want the alternative — walkable urban developments.”

There are a number of ways to describe the potential payoff of a successful TOD, but in the end developers and owners are attracted by the prospect of greater returns from a high-density development that's in demand.

“Demand is best shown by the price premium that properties in walkable urban areas command,” says Linberger. His research shows that such properties in the investment market command from 40% to 200% more per square foot than comparable properties in drivable suburban areas. “That includes every kind of property — rental apartments, for-sale residential, office, retail, hotel,” he adds.

Developers and owners benefit from the price premium, as do municipalities. In Virginia, some four years ahead of the completion of an extension of metro Washington D.C.'s transit system, Fairfax County is in the process of changing its comprehensive development plan to foster TOD (See sidebar p. 71).

One of the stated goals of Fairfax County, articulated last year by a task force, is to attract mixed-use development to the new transit stations, presumably through zoning changes and perhaps subsidies.

According to the Fairfax County Planning Department, the commercial property in what's known as the Phase 1 Special Tax District is now roughly valued at $10 billion. It is located mostly in Tysons Corner, Va., which includes four of the planned new stations.

Changes to the Fairfax County Comprehensive Plan would increase allowable square footage of non-residential development by 43% and residential development by 151% in the district. That could translate into an additional $4 billion in property assessments.

“Developers see TOD as a way to add more value because higher density is possible,” says William C. Caldwell, vice president of Washington, D.C.-based RTKL Associates, an international architecture firm that has planned TODs extensively.

“It's difficult to entitle land whether it's transit-oriented or not, and so developers are attracted to the possibility of higher density for their efforts.” Put another way, they prefer more development bang for the buck.

Rewards might be high, but TODs pose challenges, says Caldwell. “Zoning, environmental impacts, the level of community outreach and the level of consensus you have to reach is staggering,” he says. “Also, in a lot of cases, a TOD takes five to seven years to build out, including working with the transit agency, so anyone involved has to have staying power.”

Finding the right team of planners and developers under a single master plan is the key, say those involved.

“TODs are easier with a master developer, who makes sure that the master plan has truly complementary uses,” says Jones Lang LaSalle's Bulls. “Sometimes government serves that role as a sort of quasi-master developer, but in any case consistency is essential.”

But so is flexibility, Bulls adds. “In a build-out that long, market conditions mean one aspect or another of the mixed-use plan is going to change. That's the nature of a beast this complicated.”

Dees Stribling is a Chicago-based writer.

Experts debate the true meaning of TOD

There is disagreement about what makes a transit-oriented development. Urban theorists, mass-transit activists and urban planners often have more restrictive definitions of TODs than real estate executives.

At a meeting of the advocacy organization Rail-Volution, for instance, G.B. Arrington, principal practice leader with Portland, Ore.-based urban planner PB PlaceMaking, distinguished “transit-oriented” from “transit-adjacent” development, saying the transit connection must be integral to the mix of real estate uses, rather than merely located nearby.

Still, there are common TOD characteristics that most agree on: high-density real estate, a work-live-play mix of uses, and walkability within the TOD. A TOD's design needs to take into account the distance that people are willing to walk, says Chris Linberger, head of the University of Michigan real estate program. That distance is expressed through the floor-area ratio, the gross floor area permitted on a site. “Floor-area ratio is low in drivable suburban areas, high in walkable urban or suburban areas,” he says.

TOD observers say mixed-use is necessary to a successful development. “One component has to complement and feed off the others,” says Herman Bulls, founder and president of Jones Lang LaSalle's public institutions specialty.

“But that also adds significant layers of complexity to a project, and not every segment of the market is going to cooperate while you're in development,” adds Bulls. “Residential might be in demand while office isn't, so TOD developers have to read their markets carefully to get a workable mix — their timing has to be good.”

The thrust of TOD is bringing people to a specific point by a transit system — light rail, heavy rail or even streetcars — and then offering multiple uses that encourage walking within the TOD. Walkable urban space and transit-oriented development aren't exactly the same, says Linberger, but there's considerable overlap.

“People are typically willing to walk a quarter of a mile before they want to resort to something else — a horse, bicycle, car — so that's the radius of a walkable development,” Linberger adds. And that's often the typical radius of a TOD.
— Dees Stribling

Transit-oriented development without transit

Some transit-oriented developments have a committed developer, a master plan, financing and the cooperation of municipalities and other local stakeholders — all the elements of a TOD except the transit system itself.

Those projects could be called “TAD,” or transit-anticipated developments, which tend to occur in places experiencing significant economic growth, meaning that the deals would work anyway.

For example, Fairfax County, Va., has a cluster of transit-anticipated development. The planned Dulles Corridor Metrorail Project is an extension of the Washington Metrorail known as the Silver Line. The first phase will connect the system's existing Orange Line with Dulles International Airport. Phase one of the extension will likely begin next spring, with projected completion in 2011.

Not far from Dulles, Crimson Partners, a group of former Trammell Crow executives, is developing the TOD Dulles Station on the Silver Line, a 64-acre mixed-use project that will eventually include 1.4 million sq. ft. of office, street-level retail and about 1,000 residential units.

The lack of current transit might actually help a TOD, says William C. Caldwell, vice president of Washington, D.C.-based RTKL Associates, which has planned more than a dozen D.C.-area TOD projects, including Dulles Station, and more than 10 in the Dallas/Fort Worth area. “Entitlements are never easy, but if you're building out where there are fewer neighbors, the process is going to be less burdensome, and that takes time off the project as a whole,” he says.

The transit line is not the primary impetus for projects such as Dulles Station. “A project has to work as an ordinary real estate development first, even though in the long run it's going to benefit from the transit component,” Caldwell says.

Dulles Station will benefit from its central location and growth in Fairfax County. A lopsided 45.4% of the roughly 228,900 professional and business service jobs that metro D.C. added between 1990 and 2005 were in Fairfax County, reports the Bureau of Labor Statistics.

Retail REIT Macerich, owner of the Tysons Corner Center in Tysons Corner, Va., has big TOD plans for vacant land and parking space around the mall near a planned station. Four Silver Line stations are planned for Tysons Corner, one of the leading office markets in Virginia.

Macerich plans to add four new office buildings at Tysons Corner totaling 1.4 million sq. ft., four residential buildings with roughly 1,250 new units, a hotel, restaurants and street-level retail. Sidewalks and bike paths would encourage walking, which is a far cry from the car-oriented nature of the vintage 1960s mall.
— Dees Stribling

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