Transit Agencies Venture Into Real Estate—But Why Weren't They Already?

America's whole approach to public transit has long been upside-down and backwards. Fundamentally, almost every transit system in the U.S. is awkwardly grafted on to, as a secondary and lesser partner, a primary system of mobility which is car-centric. 

Santa Clara Valley Transportation Authority. Image source.

This treatment of transit as secondary to private vehicles is true of commuter rail systems which serve affluent riders—often via stations with vast park-and-ride lots, or stations perched in the median of a busy freeway instead of surrounded by pedestrian-friendly buildings. It is also true of local bus transit, which U.S. cities have in the post-WWII era tended to regard as a last-resort social service for the poor and have perennially underfunded—leading to, among a myriad of other sins, a whole lot of really sorry bus stops.

One consequence of this demotion of public transit in the hierarchy of government services is that we've rarely grappled with the actual value proposition of transit, treated it as a revenue and prosperity engine for cities, or allowed it to fund itself in ways that are solvent and reliable and self-reinforcing in the long term.

That's made especially clear by how rarely, in the contemporary U.S., we encounter one simple but powerful funding mechanism: paying for transit through real-estate development by the transit agency.

Real Estate Development as a Bailout Strategy

In Early March, Fast Company published a piece titled "Facing a $40 Billion shortfall, U.S. transit agencies jump into real estate". It profiles one way that transit providers are dealing with budget holes caused by a catastrophic 79% loss of ridership in 2020 from the coronavirus pandemic. That way is by selling, leasing, and/or developing underused land around their stations that they have long been sitting on.

But why were they just sitting on it? Fast Company explains: 

In California’s Silicon Valley, the Santa Clara Valley Transportation Authority, or VTA, has started to look differently at the roughly 140 acres of land it owns in what has become one of the most expensive housing markets in the country.

For VTA, and many other agencies, that means parking lots. “In the ’80s, our transit agency built seas of parking, and the theory was if you build it they will come, meaning they’ll park here and ride. That’s not how it worked in our area,” says O’Malley Solis. “Just building seas of parking wasn’t going to generate ridership. You needed to generate connectivity along the system to make it valuable for riders. That’s been a missing element.”

The VTA is now working with developers to build out some 25 of these sites, which Fast Company says could amount to about 7,000 housing units (including 2,500 affordable) and millions of square feet of commercial space, all on land the VTA owns, most of it in walking distance of VTA stations. This will ideally be a win-win: not only will it generate $250 million in revenue by 2040 (and an ongoing revenue stream, because VTA will retain ownership of the land), but the new development around VTA light rail stations will hopefully boost ridership. 

Fast Company also devotes several paragraphs to similar efforts by Atlanta's MARTA rail agency, with a particular focus on incorporating housing affordability into development plans around MARTA stations. As MARTA senior director of transit-oriented development and real estate Jacob Vallo told the magazine,

“What the pandemic showed everybody is every single transit agency is so fragile in the way that we’re operating because of the reliance on these variable income streams. I think of ridership almost like the hotel business, where you have to make a sale every day,” says Vallo. “To the extent that we can build long-term ground leases into these projects, those are locked in for 99 years. You know that you’re going to get that revenue.” 

Why Are We Just Doing This Now?

The surprising thing, to an observer from much of the rest of the world, would be that we weren't already doing this. Why were U.S. transit agencies sitting on all this land?

In theory, transit and land development should be inseparable. They should always be considered jointly. The point of urban transportation is to get people to places they value. And the value of urban land, in turn, lies almost entirely in what it has access to. Transportation investments increase the value of land around the stations or access points. Rather than allow that value to simply be a windfall for private owners, transportation agencies should make sure they recoup the increase.

This is called value capture, or alternatively, land value return and recycling. You can read a very in-depth piece on it by expert Rick Rybeck here, or a simpler explanation here.

Land value capture is how transit is funded in many countries, famously including Japan, where shopping malls often sit right on top of train stations because the railroad authority sold the air rights to a developer. It is also how much transit was historically funded right here in the U.S. Railroads in the 19th century, and streetcar operators in the early 20th, would own the development rights to land around a planned station. After the station went in, that land would be vastly more valuable, and the proceeds from its development would offset the costs of building transit. That would leave the agency free to use the farebox only to fund ongoing operating expenses. 

Bay Area Rapid Transit. Image source.

This mechanism broke down in the postwar era because of the way we funded transit. A lot of America's big regional rail systems, including MARTA, the San Francisco Bay Area's BART, and Washington DC's Metro, were built in a flurry of activity in the 1960s and 1970s. They were paid for using a combination of federal funding and local taxes not fundamentally tied to the value proposition of transit itself.

These 1970s rail projects also occurred at a time when the highways were ascendent and cities everywhere were losing population to their suburbs. This explains the shortsighted focus on amenities such as park-and-ride lots rather than walkable development around stations. A whole lot of transit stations built in this era are in places like Lafayette, California (recently the subject of national attention for controversy over transit-oriented housing development at its BART station) that never had the ridership or concentrated activity to really justify it. Or at least would not have justified a station in a system where transit planning had actually been tied to local revenue derived from the value created by transit itself.

Even today, we too often do transit planning in a silo disconnected from planning for land use, zoning and development. This results in perverse situations like land zoned for literal mansions right next to a train station, and the windfall proceeds going to those owners instead of the public agency.

All this myopia has resulted in funding crises over time, as overbuilt and underutilized transit systems attempt to cobble together funds from multiple sources (fares are usually less than 25% of revenue) not just to keep up with operations and maintenance, but often to pay down long-term debt from capital projects. Let alone expand the system to serve new riders. 

Now agencies are belatedly sitting on these real-estate assets—a whole lot of park-and-ride lots, mostly—and they find themselves at a time where it just might help plug a pandemic-sized revenue hole. The results won't be as good as if they'd developed land thoughtfully in conjunction with transit, and built transit as a central element of a productive place.

But it's an important start. The next step will be to more consistently integrate land development going forward into not just how these agencies think about their budget, but how they think about their core service.

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