Internalizing positive transit externalities

by Stephen Smith

The Wall Street Journal ran an article a few days ago claiming that the MTA’s recent NYC transit cuts have lowered real estate prices along train and bus lines that have been axed. While it’s not a quantitative study, the anecdotes are compelling:

“The buyer who buys in Astoria is looking for a cheaper price and to get into Manhattan quickly,” said Ms. Palmos, adding that she is having the same problem with a condominium building in Upper Ditmars, north of Astoria. Apartments there that she said would have easily sold for $500,000 with the express bus nearby are now languishing on the market at prices about $420,000.

” ‘How far is it to the train?’ That’s the first thing people ask me,” said Charles Sciberras of Realty Executives Today, a longtime Astoria broker. “The closer to the train the higher the demand… Two to three blocks away from transportation is very easy for me to rent.” [...]

“The best areas in Brooklyn have great transportation into the city—the most expensive neighborhood in Brooklyn is Brooklyn Heights—you can get just about anywhere in the city easily. You go out into where there is less transportation, the prices go down,” Mr. Giordano said. “It’s one of the many emotional decisions that people make that can add or detract value from real estate.”

What’s most striking to me is that a simple express bus route can raise prices by $80,000 for a single apartment. Multiply this by the thousands of apartments along the bus route and it appears that the lost value from the cut bus route ought to exceed, by orders of magnitude, the cost of maintaining the route.

But of course, since the MTA doesn’t see a penny of the value it creates, it isn’t surprising that “the impact on property values isn’t something the agency takes into account.” One way for transit agencies to benefit from the value they create is the use of “tax-increment financing” or “special-assessment districts” that levy taxes on infrastructure improvements specifically on those who benefit, but these mechanisms are pale imitations of the only way to truly link transit-induced value and real estate: allowing joint ownership.

Transit agencies in the US can’t/don’t develop property and property developers can’t build transit, but it wasn’t always that way. Around the turn of the century, when America’s great mass rail-based transit systems were being built, they were often built by developers who had large stakes in land around their stations. The transit systems could even be loss-leaders that subsidized their developers’ real estate positions, and joint ownership allowed for the sort of coordination necessary to build what’s today known as “transit-oriented development.”

Progressives and planners in the US soon put an end to this practice by subsidizing roads and placing onerous restrictions on transit operators that eventually let to nationalization, as did governments throughout the world. Some Asian governments, however, have begun to backtrack. Japan’s rail privatization in the late ’80s made transit operators some of the country’s largest real estate developers (.pdf), and Hong Kong’s private transit companies have similar large property investments around their stations. (For an in depth discussion of the Hong Kong model, see this pdf.) Singapore, where the state owns and operates both the transit systems and the vast majority of residential units, could even be considered an example of joint private ownership, if one considers the one-party city-state to be akin to a private entity.

Although private ownership of NYC train lines seems about as likely as legalized heroin in the short-run, private bus services run by property developers (of groups thereof) could serve as a more politically palatable stepping stone. Very tentative steps toward private bus service have been started, but it will take much more to allow developers to be truly innovative with transit.

  • Alon Levy

    Stephen, overall it’s a good idea, but I have 2 comments, of which the first is a nitpick and the second more important.

    1. Singapore doesn’t really follow the model of Hong Kong and Japan. The state owns the vast majority of residential units, but the vast majority of commercial units are private, and independent of the transit operators; unlike the MTR or the private Japanese railroads, SMRT and SBS do not build shopping centers on top of their stations. And while the sovereign wealth fund Temasek Holdings has a majority stake in SMRT, SMRT is still run as an independent private business, as are many other Temasek-owned businesses.

    2. There’s a major difference between 1900-era US transit and modern-day private transit in Hong Kong and Japan: in Hong Kong and Japan, the transit by and large has primacy, whereas in the US, it was a loss leader for real estate dealings, and treated accordingly. For example, the Pacific Electric was never maintained to adequate standards once its owners had finished developing all the areas it reached. It’s systems that were conceived independently of real estate, such as the IRT and BMT, that managed to survive until government intervention (i.e. the five-cent fare and the IND) ground them down. It’s important to set a transit-cum-development regime up in such a way that the development helps transit make a profit, and not just the reverse. Once the transit is profitable enough on its own, it can prosper; today, even a relatively development-oriented private railroad, such as Tokyu, makes a profit on the trains, and in fact needs the trains to maintain its real estate holdings.

  • Jim

    1) Forward thinking state and local gov’ts all over the US use transit as development tools. Developers aren’t going to build transit because they don’t have that kind of money and because developers don’t pay for anything they can get gov’t to chip in for.

    2) Progressives and planners didn’t subsidize roads and restrict transit. That was accomplished by politicians, the highway lobby, engineers, and characters like Robert Moses and Dwight Eisenhower.

  • rationalitate

    Was Robert Moses not a planner? Did Teddy Roosevelt (a progressive) not support subsidized roads? Did The Nation (a progressive magazine) not lobby against transit and for zoning back in 1920?

  • Anonymous

    Here in the SF Bay Area, and I suspect elsewhere, there is already a form of privately-operated mass transit… but it’s not oriented around residential property but around commercial property. Namely many employers offer free shuttles to their work sites from many places. These are pretty limited, however, as they mostly operate during commute hours, and may not allow non-employees to use them.

  • Stephen

    I’ve heard about that. I’m not sure about the specific rules, but I suspect that it would be illegal to charge and therefore let non-employees use the services.

  • T. Caine

    Great post, Stephen. Alon touched on what I was thinking, being that one of the barriers to more privatization of transit seems to be that it isn’t a viable business model. The future of New York’s system looks abysmal despite service cuts and fare increases and they are still predicting budget shortfalls in 2011 and 2013. It seems like a tough model to attract private money to and they are fresh out of money to be investing in development outside of the system. If I’m not mistaken, one of the things that drove systems like Boston and New York’s public transit to municipal control was that they were going bankrupt.

    That being said, if there was a model that could work then I think it’s effect could be most acutely felt not in the big cities, but the struggling cities to which serious public transit investment seems even more unlikely than a privatized NYC MTA. Cities like Syracuse, Hartford, Providence or especially Detroit that could benefit from transit mobility in order to help promote economic expansion simply don’t have the money to even think about a comprehensive system. But if there was some kind of incentive for developers and public entities to construct property and transit side-by-side, maybe new transit systems have a brighter outlook.

  • Pingback: Extracting value « Price Tags

  • Gradplanner

    THe DC area metro has a vested interest in where new stations will be created. They usually own the land around/ on where the station will be created and then look for investment. Its very valuable land and easy to get developers on board since you know there will be a ton of foot traffic. Very interesting model.

  • rationalitate

    Do they really? I noticed a lot of WMATA-owned garages when I lived there, but I never saw/heard that they owned or developed land (then again, I never really ventured out into Maryland or Virginia). Do you have a link or a source or any more info? I believe you, but I’m just curious about specifics and I can’t seem to find anything on my own.

  • Steve

    Thanks for the article. I presume when you used the expression “turn of the century,” you actually meant the turn of the 20th century–not the more recent one.