In the world of real estate investment, location remains the gold standard of value. In our last conversation with Christopher Leinberger, he told us that “rail transit is the most important infrastructure investment this country will make in the 21st century.” For an in-depth look at how and why developers must lead this development, rather than government, you may want to read Leinberger’s article, “Here Comes the Neighborhood,” in The Atlantic Monthly, June 2010. Leinberger elaborates on how and why private developers should invest in rail lines as a way to promote more dense development that encourages walking over driving.
Why private financing? In the days before the automobile became ubiquitous, proximity to a train station made land accessible, and hence desirable. Developers paid to build railroads to their developments with the profits from the value added–read: location creation--and no government subsidy required. Today, long commutes, rush hour traffic, and high-priced gasoline have created at least a new niche market for vigorous real estate development at transit centers. “One of the best examples of this exists in Washington, D.C. The New York station cost over $100 million, and about a third of this came from the property owners who benefited,” says Leinberger. Jim Curtis, managing partner of Bristol Group, a real estate and development firm based out of San Francisco, was one of these property owners, and he told Leinberger, “This was probably the best investment I ever made,” after having realized returns approaching 20%.
Given the history of location-making through rail stations, Leinberger and the Brookings Institution undertook a study on streetcar development in Washington, D.C. “It turns out that if you could capture just 17% of the increased property values created by a streetcar line, you could pay for the whole thing,” says Leinberger. Several other studies support the strong correlation between land values and rail stations, concluding the increase in land value provides a ready means to fund at least one-third the cost of building commuter rail lines.
Another study, “The Impact of Transit-oriented Development on Housing Prices in San Diego, CA,” done in 2010 by Michael Duncan from the University of North Carolina’s Urban Studies program shows the impact of transit development in San Diego.
This research measures the influence of transit-oriented development (TOD) on the San Diego condominium market. Many view TOD as a key element in creating a less auto dependent and more sustainable transport system. Price premiums indicate a potential for a market-driven expansion of TOD inventory. A hedonic price model is estimated to isolate statistically the effect of TOD. This includes interaction terms between station distance and various measures of pedestrian orientation.
The resulting model shows that station proximity has a significantly stronger impact when coupled with a pedestrian-oriented environment. Conversely, station area condominiums in more auto-oriented environments may sell at a discount. This indicates that TOD has a synergistic value greater than the sum of its parts. It also implies a healthy demand for more TOD housing in San Diego.