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RV 2014: TOD Market Dreams + Reality by Christine Maguire

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TOD Market Dreams + Realities AICP CM 1.5

The station is in, the riders are coming and the development has been proposed. Now everybody wants retail. But is there a market for it? Will it be supported? Or would other uses be more appropriate and generate additional riders? Everyone expects TOD to generate a mix of uses -- to create a 24/7 environment at every station. How do market realities change that equation? Learn what it takes to support that mixed-use environment that everyone expects; how to assess the market and what residents really want; and how to manage expectations if the market doesn't deliver.

Moderator: William M. Velasco, Chair of Board TOD Committee, DART, Dallas, Texas
Christine Maguire, AICP, EDFP, Senior Manager, Development Planning and Finance Group, Austin, Texas
Anne B. Ricker, Principal/Owner, Ricker Cunningham, Centennial, Colorado
John Breitinger, Vice President, Investment and Development, United Properties, Bloomington, Minnesota
Michael Horsting, AICP, Principal Analyst, Regional Transportation Authority, Chicago, Illinois

Published in: Real Estate
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RV 2014: TOD Market Dreams + Reality by Christine Maguire

  1. 1. TOD Market Dreams + Reali1es Rail-­‐Volu1on 2014 Minneapolis, MN September 22, 2014
  2. 2. 2 Discussion Agenda § TOD in (my version of) context § Current trends in the marketplace § Key Actor PerspecHves on TOD § Lessons Learned § Discussion / Q&A
  3. 3. 3 TOD: A Brief (revisionist) History Development Pattern Technology Time Frame Example Steam-powered commuter rail mid-1800s New York, San Francisco Electric streetcar and horse-drawn carriage late 1800’s to early 1900s Pacific Electric Railway in southern CA, Chicago “L”) Auto-oriented Development Auto dominance Post WWII Suburbs spurred by Federal Interstate Highway System Transit-Related Development Rail and bus transit Post Urban Mass Transit Act of 1964 Lease-revenue focused joint ventures with transit agencies Transit-Supportive Development Rail and bus transit 1980s - present Lease-revenue and ridership focused joint ventures Development-oriented Transit Source: Institute of Urban and Regional Development Working Paper 2009-02
  4. 4. 4 Which One is It? Development-oriented Transit (transit-lead high density development)
  5. 5. 5 Which One is It? Right: Santa Clara Valley Light Rail Authority Top LeQ: Phoenix Metro (Tempe) BoSom LeQ: Dallas Area Rapid Transit (DART) Transit-related Development (auto-lead low density development)
  6. 6. Right: Norfolk, VA Top LeQ: Capital Metro proposed Leader StaHon BoSom LeQ: Murray, UT proposed Fireclay StaHon 6 Which One is It? Transit-supportive Development (high density mixed use development)
  7. 7. 7 It’s about the residen1al density, darn it!!
  8. 8. 8 Market Demand: The Two Key Demographic Cohorts Want TOD
  9. 9. 9 But This TOD Stuff is Expensive Development Costs § Higher density building costs – elevators, building codes for safety and energy efficiency § Upgrade exisHng infrastructure if urban infill § Need structured parking Market Rental Rates § First project must “prove up” the market § Retail si1ng requirements rule regardless! § Dictated by space supply and demand Entry Costs § Regulatory “brain death” factor (by-­‐right density?) § Land cost and ability to assemble § Few developers can successfully carry this off
  10. 10. 10 Developer Perspec1ve on TOD § Intense compeHHon for expanding development § Debt is scarce, Equity is expensive and Costs are substanHal When: Costs > Debt + Equity § “Finance, finance, finance is the new locaHon, locaHon, locaHon.” (Kirk Williams, Cypress EquiHes) “market share” requires product differenHaHon: sense of place § City Policy through comprehensive planning and zoning regulaHons (ease of obtaining density?) § LiSle to no appeHte to construct speculaHve commercial development -­‐ established markets with demonstrable (not proforma) demand
  11. 11. 11 Lender’s Perspec1ve on TOD – RISK!! § Banks have liSle to no appeHte to finance specula1ve development § Bank regulaHons limit the amount of construcHon financing § Small pool of seasoned developers & contactors § Underwrite on the separate parts and as a whole: Can the other piece carry the retail porHon? § Credit quality important for commiSed tenants on the commercial piece § RelaHvely long financing and en1tlement lag -­‐ higher carry costs and higher risk
  12. 12. 12 Retailers Perspec1ve on TOD § Banks have liSle to no appeHte to finance specula1ve development § Main focus = successful business operaHons = WORKING CAPITAL § Banks have liSle to no appeHte to finance specula1ve development § Main focus = successful business operaHons = WORKING CAPITAL § Rent and tenant improvements take away from working capital § If making a profit requires walk-­‐in customers, needs to be criHcal mass of walk-­‐in customers in the near term (density and access) § Does more retail make sense? Synergy or starva1on
  13. 13. 13 Lesson #1: Public Subsidy is Essen1al Reducing Development Costs § Federal tax credits for housing and/or energy efficiency § By-­‐right higher density zoning § Expedited permigng and review § Fee waivers § City CIP investment in infrastructure § Tax Increment Financing (TIF) and tax abatements § Federal/Regional/State grants Removing Barriers to Entry § Land assemblage/swaps § Below market land lease § ROW/street abandonment
  14. 14. 14 Lesson #2: Residen1al Density Leads Transit Type DU/Acre Persons/ Sq. Mile Bus - minimum service 4 6,192 Bus - Intermediate Service 7 12,096 Bus - Frequent Service 15 25,920 Light Rail 9 15,552 Rapid Transit 12 20,736 Source: Mineta Transportation Institute § Need high residen1al density (approximately 15,000 persons/ sq. mile) to sustain light rail § Synergy between housing, retail and transit only if easily walkable § People only willing to walk 2,300 feet for general purposes § Commuter support of transit needs residen1al density at both ends
  15. 15. 15 Lesson #3: Retail Follows § Retail is a business opera1on – rent subtracts from service § Retail site loca1on science: (cluster, scale, access, visibility, zoning, consumer preferences, compeHHon and capture) § Free rent won’t change bad fundamentals § A vacant development is worse than no development § MANAGE EXPECTATIONS
  16. 16. 16 Discussion and Q&A “If you ask me a ques1ons I don't know, I'm not going to answer.” -­‐-­‐-­‐ The Immortal Yogi Berra Chris1ne Maguire, AICP, EDFP Senior Manger ◊ DPFG 609 Castle Ridge, Suite 310 AusHn, TX78746 ChrisHne.Maguire@dpfg.com 512-­‐732-­‐0295

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