Friday, August 12, 2011

Overpriced real estate and its underpriced access

Last week Andrea Bernstein interviewed Alex Marshall of the Regional Plan Association about the profitability of Jay Walder's new employer. After only 32 years of operation, Hong Kong's Mass Transit Railway is able to offer Walder a million dollars a year while constructing a large system expansion, all without direct financial subsidies from the government. Walder's old employer, our own Metropolitan Transportation Authority, gets hundreds of millions of dollars a year from the government for operating costs, and billions for capital programs, and it still has been required to cut service and borrow billions to balance its budget. It could barely afford to pay Walder $300,000 a year, and some critics have demanded that that salary be reduced for the next MTA chair.

The MTR and the MTA are the largest transit providers in Hong Kong and New York, respectively, two very large, fairly dense cities, so why the difference in their financial shape? That's what Bernstein asked Marshall, and Marshall responded that the Hong Kong MTR makes money on real estate and uses that money to subsidize its transit facilities.

On the face of it this sounds a little odd; you could equally imagine the government running a frozen yogurt stand and using the profits to fund interplanetary exploration. But transportation and real estate are more directly connected than that. The real estate cry of "location, location, location!" is really about access. Housing properties with access to jobs, shopping and entertainment command higher prices and rents. Workplaces that are convenient to housing can attract better workers, and thus pay higher rents to property owners. Commercial properties that are on the way from home to work also attract higher rents.

As Jarrett has pointed out, transit systems - and transportation systems in general - are more about access than about mobility. In other words, they provide the real value in real estate. Without access there is no demand for property. That is why Google runs buses to bring workers to its suburban campuses, why condos in Brooklyn, Queens and New Jersey run buses to bring residents to the train, and why Ikea runs buses to bring customers to its Red Hook store.

It makes sense, therefore, for the transportation system to receive some benefit in exchange for that value. This is Marshall's point, which he also lays out in a blog post: in New York the City and the railroads own just enough real estate to run the transit system, and they sell it whenever they can, as the New York Central and the Long Island Rail Road have sold the air rights over their yards. They have minor concessions in their stations, but just enough to keep the passengers from rioting.

By contrast, in Hong Kong the MTR keeps ownership of the areas around its station and develops shops, offices and apartments on that land. They use the rent from those developments to subsidize the trains. In essence, the property is overpriced and the access is underpriced, so the MTR is packaging the property and its access as an integrated product.

Here in New York, the MTA could do some of that. Stephen Smith just yesterday tweeted about a property right next to the Prospect Park subway station that is being built with an unnecessary underground parking garage. The MTA owns several surface-level stations in the outer boroughs, and could build on or near those properties to bring in additional revenues from those train lines - assuming that the zoning and the NIMBYs would allow them to build enough, without adding too much parking.

I've got more to say about Marshall's interview and blog post; stay tuned.


Anonymous said...

At the Transport museum in London, it talks a lot about how the Metropolitan Line developed the areas at its extreme ends and then sold them as being easily accessible from London via the Metropolitan Line.

I know that a Philadelphia streetcar company built Willow Grove Park out in the suburbs to drive demand in the summer. It's not quite the same as real development, but it probably drove transit-oriented development in that part of Montgomery County.

Alon said...

Marshall is wrong. The MTR's transportation business is profitable by itself. So is that of every major private railroad in Japan. Less famously, the same is true in Singapore, Taipei, and some of the lines in Seoul, without any real estate dealings.

What the MTR does with the real estate development is a synergy, in which the subway raises property values, while the development generates demand for the subway. It's not the same as a cross-subsidy.

jehiah said...

reminds me of Grand Central; it would be good long term if the MTA can execute more locations like that.