What Drives TOD?
High gas prices, traffic congestion, and long commutes increase the desire for transit-oriented developments.
Americans may have a love affair with their cars, but
their relationship isn't as sweet as it once was. Rising fuel prices,
frustrating traffic congestion, and exhausting commutes make the idea of
walking to work sound pretty good. Add to that Americans' growing desire for
vibrant town centers with a defined sense of place instead of sprawling
subdivisions and retail strips, and what do you get? Factors that, combined
with other changing demographics, are fueling the need for well-planned,
accessible transit systems in markets of all sizes. And where transit systems
and their riders go, commercial real estate opportunities are soon to follow.
While transit-oriented developments, or TODs, are gaining
a lot of attention in the industry, the idea is not new. Urban dwellers long
have traveled without cars, relying on mass transit systems for mobility. Now
the idea is taking hold outside of city centers in suburbs and smaller towns as
communities seek new ways to counter big issues such as urban sprawl. The
mixed-use projects clustered around rail stations and bus transfer centers make
it easy and appealing for residents to use mass transit. And most of these
developments include a strong combination of retail, office, and multifamily
space. Many even offer green spaces, cultural attractions, and entertainment
As a result of increasing TOD, commercial real estate
professionals are finding creative ways to get involved. For instance, Regina
L. Emberton, CCIM, director of corporate services for CB Richard Ellis in South
Bend, Ind., leases commercial space for Transpo, South Bend's transportation
agency. In 1998, Transpo built South Street Station, a mixed-use development
that includes the city's rail depot, to better serve riders and to help spur
development in the surrounding area. The station boasts 1,948 square feet of
customer area as well as 16,000 sf of office and retail space.
Development and leasing opportunities are likely to
increase as small to mid-size metropolitan areas continue to focus on
implementing transit systems. Cities such as Salt Lake City, Sacramento,
Calif., and Charlotte, N.C., recently have emerged as leading TOD markets, and
Portland, Ore., has been considered a TOD trailblazer. Suburbs near many large
metropolitan areas also are developing around commuter stations.
Why TODs Make Sense
Issues such as urban sprawl, traffic congestion, and even
air pollution have sparked public interest in improving transit. Public
transportation ridership has increased 22 percent in the last six years,
according to the American Public Transportation Association. Taxpayers also are
more willing to pay for better transit: Nationwide, 42 out of 53 ballot
initiatives for public transportation or with a public-transit component were
passed in 2004, according to the Center for Transportation Excellence in
But quality-of-life arguments for TOD increasingly are
coupled with economic concerns, says Shelley Poticha, president of the Center
for Transit Oriented Development in Oakland, Calif. "There's increasing
recognition from the business community that the combination of uncertainty
about how to get [people] to work and the difficulty of attracting people to
congested regions ... is a problem," she says.
"What started out as being an environmental
philosophy is becoming the bailiwick of big-business and chamber of commerce
groups around the country," Poticha says. Such groups are pushing for
investment in transit infrastructure as well as housing and job centers near
stations "for people to get to work on time and for a greater variety of
CTOD is an initiative of Reconnecting America, a national
nonprofit organization that works to integrate transportation networks with
their communities. The center released a study last year showing that by 2025,
14.6 million households will seek housing in "transit zones," or
areas within a half-mile of fixed guideway transit stations. This is an
increase of 8.5 million over the 6.1 million households that lived in transit
zones in 2000.
No Two TODs Are Alike
While some characteristics, such as mixed-use components
and pedestrian-friendly areas, are similar among TODs, each project is unique
and varies in scope. For instance, CityCenter Englewood was built in suburban
Denver in 1999 on a defunct shopping mall site. With the extension of a
light-rail line to the area, the city of Englewood and a team of private
partners developed the project, which includes a light-rail station; a
400-bus-a-day transfer station; and more than 350,000 sf of retail space,
50,000 sf of office space, and nearly 500 apartments.
In the case of South Street Station, Transpo actually
owns part of the development, and the rents it receives from tenants help to
offset the need for public subsidies, according to Mary McLain, Transpo's
general manager in South Bend. The terminal also has helped to increase
ridership and polish the agency's image within the community. "When we
announced plans to build, we said, 'OK, good, bad, or indifferent, we're going
to do things a lot more publicly,'" she says. "It really served us
well. People in the community started being more familiar with us. We changed
our view of the customer from [being] the person who stepped on the bus to the
entire community. Building a showcase - a very visible passenger terminal -
makes a statement," McLain says.
TOD also is making inroads in a state long recognized for
its auto dependence: California is home to a wide variety of TODs. In San
Diego, for example, several rail and light-rail lines serve the city and
surrounding county, and a trolley line runs downtown and out to Mission Valley,
a major retail center.
Michael R. Dyer, CCIM, vice president of Burnham Real
Estate in San Diego, is involved with two projects in the area. Currently he is
working on market analyses and strategies for a Solana Beach train station
development along the Coaster, a rail line that runs from downtown San Diego to
Oceanside, the northernmost town in San Diego County. The Solana Beach station
serves the Cedros Design District, a neighborhood of businesses related to home
design and furnishings. California's North County Transit District owns the
station's land and plans to lease the ground to the developer, Sedona Pacific.
The new project, which will sit on the 4.7-acre site of the station's current
parking lot, will feature nearly 150 rental apartments and 25,000 sf of retail
space over a 500-space parking garage and a separate 35,000-sf retail and
office building. One of the anchor tenants will be a community theater.
The rental units will attract North County residents who
work downtown and commute on the Coaster, Dyer says. He expects that businesses
also will take an interest in the location, since employees who live in San
Diego's burgeoning downtown easily can travel north.
Dyer's other TOD project is along a Sprinter rail-line
station in San Marcos, Calif. The project will have 345 condominium units,
70,000 sf of ground-floor retail, and a 9,000-sf office building. The station
will provide transit for local college students, and a bridge will connect the
station to the school, where commuters can link up with the bus system.
The Coca-Cola Co. sold the land to a developer, and the
city "was interested in working with a developer who would entertain the
challenge of rezoning the property to a residential mixed-use development. The
problem there was that it required a change in the specific plan for the
property and an environmental impact report," Dyer says. He represented
Coca-Cola in the sale and assisted the developer in the project's conceptual
plan and entitlement process. Dyer expects to have approvals complete by year-end.
States such as California are making it easier for
developers to get involved in TOD projects by providing online resources. For
instance, California's Department of Transportation boasts a searchable
database that includes information on land uses, implementation processes,
financing, facilities, zoning, and transit services at
http://transitorienteddevelopment.dot.ca.gov for some 21 different developments. Other regional sites, such as the Transit
Oriented Development Advocate (www.todadvocate.com/todresources.htm), provide case studies and specific
information about TODs in the Pacific Northwest. In addition, the American
Public Transportation Association's site (www.apta.com) provides numerous case
studies, background information, and other resources for states and cities
around the country.
Surmounting the Roadblocks
Not surprisingly, most TOD projects face numerous
development challenges. Zoning restrictions can be a barrier as developers
often face change-of-use issues and density regulations that restrict
Parking is another significant issue. Municipal parking
codes often require that certain numbers are met for specific uses, which can
drive up development costs. Yet TOD proponents argue that these developments
actually allow parking-space requirements to be trimmed. "We're gathering
all kinds of evidence showing that as a transit system grows, people use it
more, and they don't have to have as many cars," Poticha says.
"Parking standards can be reduced. Maybe not wholesale right away, but [a
reduction] creates an enormous cost saving for any developer."
Parking also presents a TOD design challenge. Traditional
wide-open parking lots aren't particularly pedestrian friendly and use land
that otherwise could be occupied. Some developers, such as those working on the
Solana Beach project, tackle that problem with underground parking; others opt
for multideck garages.
TOD developers sometimes encounter community groups that
fear these dense, multi-use projects will bring noise and congestion to their
neighborhoods. Dyer cites one other location-specific concern for the Solana
Beach project: blocking prime ocean views. One solution is to involve community
groups in the process as early as possible, he says. This provides an opportunity
to get their input as well as to explain TOD's benefits. "Any infill
development is being faced with concern by local residents. It really takes
strong leadership at the local level - by the mayor and city council - to get
beyond that or to frame the opportunity in a positive light," Poticha
TOD advocates also can come up against transit agencies
who "shy away from land development matters on the grounds that it is not
central to their mission of delivering safe and efficient transit
services," according to Transit-
Oriented Development in the United States: Experiences,
Challenges and Prospects, a recent Transportation Research Board report.
"So getting to know who the players are and their receptivity is really
the key," Poticha says.
McLain concurs, although she thinks the situation is
improving. "People are reaching out to cross that void," she says.
"At one point in my career, [transit agencies] didn't speak to developers.
Now it's moved to where developers should contact transit early on, and transit
systems, if they know of something that's being developed, shouldn't wait to
see what it is - they should try to find out and contact the developer. The
earlier that's done, the better."
Transpo takes an active role in selecting tenants for the
South Street Station terminal, which takes longer than leasing standard retail
or office space. From a broker's perspective, "decisions are slower,"
Emberton says of her leasing work with the transit agency. "Transpo takes
a very close look at who the user is, how it's going to affect ridership, if it
will be beneficial to them and to the public. They're very selective," she
Agencies also do their homework when selecting leasing
agents. "We look at the creativity of the leasing agency as well as the
prospective tenants," McLain says. "We try to work up a good dialogue
and review their business plans to see if it makes sense." South Street
Station's 6,600-sf second floor has a long-term lease with a state social
services agency; elsewhere in the terminal, there's a call center. Other
tenants have included a coffee shop and a temporary-services company.
Paying Their Way
TOD project financing structures are as varied as the
developments themselves. "It can be complicated," Poticha says.
"The master developers who have experience working with the public sector
to pull funds from different sources are probably going to be the most
successful right now. But I'm seeing a lot of projects starting to happen where
the public sector is aware that they need to be making contributions to the
project," she adds. Such contributions are for parking garages,
streetscapes, and other infrastructure.
Local agencies or municipalities also might be more
willing to partner with private developers if a project can help leverage federal
funds. The Federal Transit Administration's New Starts program supports local
transit investments, and "increasingly, land use - economic development -
is an important factor in evaluating these projects," Poticha says.
"What FTA looks for is concrete evidence that the development community is
interested in these properties, is willing to make investments, and is going to
be there when the transit system comes in."
Debra Saunders, first vice president at Ambac Assurance
Corp., in New York, recommends visiting the New Starts Web site to see what
agencies have obtained New Starts grants, where these projects will be located,
and the projects' specific criteria. (See sidebar.)
Saunders also works with tax increment financing
districts around transit developments. TIF districts can be very useful in
developing parking or housing, where strictly private financing might be
difficult to obtain.
Kane McKenna & Associates, a Chicago-based public
finance advisory company, performed financial analyses for a TIF district
planned in conjunction with a suburban TOD project north of Chicago. The
company assisted in securing the TIF designation as well as projecting returns
for the developments proposed within the district. The TOD replaced a number of
industrial properties in the village's downtown with residential and commercial
uses, and TIF money offset the land acquisition costs and infrastructure work.
On the other hand, South Street Station in South Bend was
built entirely with public money; 80 percent of the cost came from
congressionally designated federal funds. "We had to do a lot of
convincing," McLain says. "We had to convince our delegation and our
delegation had to convince others from across the country." The other 20
percent were local funds that came from Transpo's budget.
The Solana Beach project near San Diego is all private
financing, "and the tricky part of this is the fact that it's on a ground
lease. Most of the institutions in California are more comfortable financing
fee-simple [projects], so the ground-lease aspect of it makes it an additional
challenge," Dyer says.
However, financing is growing easier as TODs' popularity
increases. "There's a much greater awareness now of [TODs] than two years
ago because throughout most major cities, you're starting to see infill
development that mirrors TOD," Dyer says.
Developers must keep TOD projects' economics at the
forefront of their minds, says Philip McKenna, president of Kane McKenna &
Associates. "What's the rate of return you really need? It can be achieved
by mechanisms like TIF - or by density or architecture - but you've got to know
it and then stay with it," he says.
And TODs can pay off: "The weight of evidence to
date shows that development near transit stops enjoys land value premiums and generally outperforms competitive
markets," according to the Transportation Research Board report. However,
the report also notes that "the payoffs are not automatic and quite often
a number of preconditions must be in place." Preconditions can include a
healthy economy with a demand for real estate, public policies such as zoning
bonuses, and transit development sites located in neighborhoods "free from
stagnation or distress."
"Savvy developers increasingly recognize that
profiting from TOD is a long-term process," the report adds. "More
and more, developers are using long-term pro formas when evaluating the
potential payoff of TOD."
Catching the Train
So what's the best way for commercial real estate
professionals to get involved in TODs? The first step is to talk to transit
agencies to learn where the big opportunities are, Poticha says. "The
transit agencies have pretty substantial land holdings - some is being used for
parking lots and some is just excess property that they bought when they built
the lines," she says. "So they're really becoming aware that they
could be capturing value from [the land], and they're looking for
The second step is to "talk to the cities, because
increasingly cities really see that the area - not just immediately around the
station, but the half-mile radius around it - as places where they're trying to
provide incentives for higher-density infill," Poticha adds.
As with any public/private partnership, commercial real
estate professionals who work with TODs urge patience. "Always plan on it
taking longer than your original schedule," Dyer says. "My experience
thus far is that if you think you can get it all done and entitled in 18
months, count on at least 50 percent more, because the entitlement process
almost always involves some zoning changes or interpretations that may involve
public hearings. I think five years from now it will be a much easier process
than it is now, but we're just in the process of making that successful
For all parties involved in the transaction, "know
the objectives as well as you can," McKenna says. "A lot of times
people will latch on to one methodology. So if you get the objectives down on
paper, everybody's got a big advantage in terms of figuring out the right
mechanisms to deal with. And it also keeps you on course."
Finally, many experts think TOD's potential is just being
realized. "There's a confluence of factors that is creating a tremendous
opportunity, and there's a receptivity that I haven't seen ever in this field
on the part of local jurisdictions and transit agencies," Poticha says.
the key to tapping into that is to frame your project in terms of what are the
benefits to the community and how can I help make a better life?"