Guide to Value Capture Financing for Public Transportation Projects (2016)

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24 Successful value capture strategies are dependent on value creation through real estate devel- opment. Real estate markets are cyclical, and market cycles are not coincident between different classes of real estate. Fluctuating markets will affect the rate of value creation and the effective- ness of value capture strategies in any particular period and location. The effectiveness of value capture is dependent on the vigor and timing of relevant real estate markets. Understanding eco- nomic and market dynamics is vital to achieving transit-induced value creation and to designing effective value capture strategies. As discussed in the Dulles Metrorail case study, the project corridor experienced three major business downturns during the period in which the project was planned and orga- nized. Changes in assessed value of commercial/industrial property over time are shown in Figure 11. While the assessed value in this area has grown appreciably, the downturn in the early 1990s was devastating to many businesses and could have derailed support for the project. 3.1 Local Economic Conditions and Market Considerations Beyond economic factors, market area demographics, in addition to national trends, influence the vitality of local real estate markets. These include: • Population, income, and employment in absolute size and growth rates; • Levels of educational attainment, wages and wage growth, and rates of job creation; and • Age and other demographic factors influencing household creation rates. Specific trends defining local real estate market conditions include: • Rates of housing permit issuance or starts, • Occupancy rates, • Real estate price trends, • Office space absorption rates, and • Retail trade patterns. Factors influencing market conditions affecting a specific value capture project may include: • Prospects for corporate relocation, • Significant employment growth, • The level and vibrancy of real estate market activity predevelopment, and • Major planned competing developments. C h a p t e r 3 Local Economic Conditions and Market Considerations

Local economic Conditions and Market Considerations 25 The City and County of Denver commissioned CB Richard Ellis (CBRE) to carry out an absorption feasibility and site-specific study for the Denver Union Station project (CBRE, 2009). The study analyzed demographic, economic, and growth trends in major real estate markets relevant to the project, including office, retail, hotel, and multifamily residential. Figure 12 provides an example of a demand projection in the Denver Union Station study area. The study further evaluated regional, submarket (a smaller and more defined sector of the overall market), and study area trends, including demand projections, current supply, and pipeline of new projects and absorption rates in the critical office and residential markets in the study area. Figure 13 shows an example of a submarket map used in the Denver Union Station analysis. Source: Fairfax County Economic Development Authority, 2016. $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 1980 1985 1990 1995 2000 2005 2010 2015 2020 A ss es se d V al ue $ B Year Assessed Value in $B Figure 11. Assessed value of taxable commercial/industrial property in the Phase 1 Transportation Improvement District of the Dulles Metrorail case study (in $ billions). Source: CBRE, 2009. Figure 12. Example of Denver Union Station study area commercial demand and absorption projections, 2009–2028.

26 Guide to Value Capture Financing for public transportation projects 3.2 Density Considerations The existing density of an area may affect both demand and market acceptance of any new form of value-maximizing transit-influenced development. Density may also influence develop- ers’ perceptions of risk related to complex, capital intensive, mixed-use TOD. In general, value capture has the greatest potential in densely developing urban areas due to the ability to attract more foot traffic into retail establishments and more taxable square footage of commercial, housing, and office uses (Vadali, Aldrete, and Bujanda, 2009). Where land for development is constrained, transportation options are limited or expensive, and competitive/non-TOD submarkets are of densities and price points similar to those in TOD, developers may embrace significant TOD densities and complex mixed-use real estate in anticipa- tion of TOD price premiums. In such cases, it may be easy to make the business case for participa- tion in value capture projects. Alternately, in instances where land for development, automobile ownership, travel, and parking are plentiful and inexpensive, developers may perceive significant additional market risk both in pursuing optimal TOD yield and in embracing value capture. 3.3 Network and Station Characteristics In addition to market-wide and submarket influences, the opportunity for transit- influenced value creation and subsequent value capture will vary by transportation net- work and station characteristics. In considering TOD placement and estimating value Source: CBRE, 2009. Figure 13. Example of central business district (CBD) and lower-downtown (LODO) submarket boundaries.

Local economic Conditions and Market Considerations 27 creation, the type of transportation network is important. For example, heavy rail transit is characterized by high passenger capacities and frequent service. This transportation mode will generate very different trip volumes and patterns from commuter rail, which trav- els at higher speeds, covers longer distances, and varies service based on commuting pat- terns. These trip volumes and patterns help determine the level of street activity around a station and subsequently the level and type of development that can be supported near the station. Unique characteristics of site and location will influence the potential for value creation and capture at each station. Even assuming relatively uniform levels of demand and economic oppor- tunity across any particular transit line, mature urban station locations, greenfield development sites, brownfield redevelopment sites, and predominantly park-and-ride station locations will produce different levels and types of development opportunities. Even along the same transit line within one local government jurisdiction, significantly different value capture strategies may be appropriate, as summarized in Table 5. 3.4 Timing Timing can be a significant issue for effective value capture. As shown in Table 6, timing perspectives can differ among primary value capture participants. Transit agencies have a long-term perspective of a decade or more, reflecting the length of time required to plan and construct major facilities. Local governments can have similar time horizons, although they are often affected by the term of major political office holders, who tend to have a 2- or 4-year cycle. Developers, on the other hand, are highly affected by these unpredictable real estate cycles. Real estate developers are also subject to highly competitive and fast-changing markets, resulting in an envi- ronment quite different from that in which transit agencies commonly operate. Such differences in time horizons, culture, and risk perspec- tives must be acknowledged and bridged to the greatest extent possible. These opportunities and challenges are discussed fur- ther in Chapter 7. Station Type (Example) Value Capture Opportunity Mature urban locations (Metro Center in Washington, D.C.) Densely developed; increased density realizable only through up- zoning; more difficult to impose special assessments; naming rights and some joint development possible Greenfield (Dulles Metrorail in Washington, D.C., region) Greatest opportunity for new development, dependent on land use and zoning changes; transit agency may own property for joint development; special assessment district could be implemented with property owner cooperation Brownfield (Denver Union Station) Depending on neighborhood, TIF may be most applicable; joint development could also be attempted if the transit agency or local government owns nearby property Park and ride (Eagan Transit Station in Minneapolis, MN) Like greenfield yet with more limited short-term development opportunity; depends on surrounding planning since access to station may be limited to cars or infrequent buses Table 5. Value capture mechanisms by station type. Eagan Transit Station: Minneapolis– St. Paul, MN The Eagan Transit Station in the Minneapolis– St. Paul region provides non-express bus service from a 750-space suburban parking facility to downtown Minneapolis. The Minnesota Valley Transit Authority entered into a 50-year ground lease with a private developer for 15,000 ft2 of on-site retail, which includes a coffee shop, a bagel shop, a restaurant, and a hair salon (Minnesota Valley Transit Authority, 2016).

28 Guide to Value Capture Financing for public transportation projects Entity Timing Perspectives Transit agency Typically, 10 to 20 years, reflecting period to plan and construct major transit facilities. Some agency staff may be politically appointed or affiliated and, as such, may have a strong desire to implement projects within an election cycle. Local government Short-term: 2 to 4 years, reflecting political cycles. Long-term: 10+ years, reflecting planning periods. Developer Typically, 2 to 5 years (or less), reflecting typical real estate cycles. Some master plan developers or those with considerable local interest may have much longer time horizons, as shown in the Boston Landing Station case study. Table 6. Value capture timing issues.