How broadly applicable is the All Aboard Florida development strategy?

» Coupling real estate investment with the construction of new transit lines is the future, but the conditions need to be right.

Public development and ownership of the transportation system in the United States provided some broad, important social benefits that would not have been possible had our governments left it in the hands of the private sector. The downfall of the public transit and rail industries between the 1930s and 1970s throughout the country (itself partly a consequence of government investment in roads) was due to the fact that those services were no longer profitable. Government intervention through takeover of bankrupt lines kept those services operating and ensured the continuing existence of what is truly an essential public service in our major metropolitan areas.

Yet with the governments takeover of transit services, our regions lost a powerful skill that private transportation providers a century ago used well: Connecting new development with transit investments. The history of New York City’s Grand Central Terminal is often told, but it bears repeating. The New York Central Railroad, which built the terminal, decided to submerge the tracks under Park Avenue north of the terminal in order to create a massive new business district surrounding the station. That neighborhood remains the nation’s most important commercial center.

The railroad understood that the land it used to build its line was valuable, and that allowing new investments in the area near its station would produce a virtuous cycle that built ridership, which, in turn, increased the value of the surrounding land. It’s an understanding we must absorb if we are to ensure that our transit investments are most effective.

After decades of simply ignoring the land use-related effects of transit investments, over the past two decades local governments have made halting efforts to take advantage of this fact, encouraging transit-oriented development by private investors in areas near new stations through the sale or lease of land or the altering of land use regulations to better accommodate denser growth. The most dramatic version of this is the Hudson Yards program on Manhattan’s West Side, where millions of square feet of new office and residential buildings are under construction or planned. Parts of this land was sold to a private bidder by the Metropolitan Transportation Authority (MTA), which will run a new subway station on the 7 Line, and parts were rezoned to allow big buildings by the city.

Altogether, this represents an intentional effort by New York City to repeat the lessons of Grand Central Terminal by merging transportation investment with a real estate program. But, unlike previous private sector development programs, the MTA and city have not been directly involved in the surrounding projects themselves, relying instead on third-party developers to make the choices and, eventually, reap the rewards.

All Aboard Florida’s $1.5 billion investment in new intercity rail services between Miami and Orlando suggests that the private sector is, in part, picking up the slack by taking advantage of the same forces that the private sector used to build its rail lines a century ago. The rail line will run 235 miles from downtown Miami to Orlando airport in around three hours (compared to five hours on Amtrak today). All Aboard Florida is investing in massive new station complexes in Miami, Fort Lauderdale, and West Palm Beach. The Miami terminal, which will be located on company-owned land downtown, will include two million square feet of office or commercial space, and one million square feet of residential space, as shown below. The project is coming along more slowly than initially planned, but company officials insist they will not need government aid other than a large, low-interest loan from the federal government which it expects to pay back from ticket revenues.

Why has it taken so many decades for the private sector to get back into the development game? The growing demand by individuals to live in urban centers is attracting interest in monetizing the benefits of transit-oriented development, and that’s particularly true for large urban markets like Miami. All Aboard Florida will not need its real estate investments to subsidize its rail operations, which it expects to be operationally profitable, but those developments will certainly help justify the investment in the rail service. They’ll also build the rail line’s ridership, as they’ll create major destinations right at the stations.

Government transit agencies focus on the provision of good transit service, and if you ask management at most agencies, they’ll let you know that they need to focus on “what they’re good at,” i.e., running buses and trains. Yet that approach has repeatedly produced projects with mediocre ridership and little nearby development. Transit agencies are reliant on surrounding land uses to support their operations and whether or not they want to, they must make real estate development something they’re “good at.” It is in the public interest to make our transit system not only well-used, but also the foundation for a sound urban development strategy.

The idea of melding new transportation infrastructure with real estate investments does not have to be a strategy reserved to the private sector. For decades, Hong Kong has used its metro system (76% owned publicly) to invest in surrounding developments, which include properties as diverse as towers and shopping malls (this is known as the “rail plus property” model). Similarly, the Grand Paris Express program I profiled earlier this week will integrate its stations into large new developments directly planned by the government implementing agency (“Completed by private developers, the connected project takes into account the technical and functional prescriptions defined by” the agency, with a program “defined by municipal land use plans“). A special tax on property near stations on the line will help pay for the construction of the metro project.

Of course, the All Aboard Florida, Hong Kong metro, and Grand Paris Express projects are exceptional programs that cannot be repeated in most regions. All rely on strong local real estate markets where there is significant demand for major new development. All Aboard Florida takes advantage of that company’s prior ownership of the tracks used for the trains and of the land where its stations and surrounding real estate will be completed. Meanwhile, the transit investment programs in Hong Kong and Paris have been supported by major infusions of government grants that are not available in most American cities and by considerable political will to invest in the creation of denser, more transit-oriented regions.

Most U.S. regions are too sprawling, too auto-dominated, or too poor to expect this kind of transit-oriented development to occur simultaneously with new rail or bus links, particularly if that means that the transit agency has to take on some risk that a project will fail financially.

Nonetheless, major U.S. cities with significant demand for dense living and working environments like Boston, Chicago, Los Angeles, New York, Seattle, and Washington should evaluate their transit investment programs to ensure that they’re taking the greatest advantage of surrounding land to develop large real estate projects. These developments will not only increase system ridership but also bring decades of future revenue from office, residential, and retail rent, all of which can be used to improve transit system finances. Recent system expansions in Los Angeles, Seattle, and Washington — none of which have included major development projects on land owned by the transit agencies — suggest that there is significant work left to be done.

Images above: Proposed Miami station, from All Aboard Florida.

11 Comments | Leave a Reply »
  • Bob

    I completely agree with your contextualization of the AAF plan. The fact that we have divorced nearly every transit system in the country from land development means that we are doomed to hear about how ‘transit never makes a profit.’ A more holistic view of transit (like AAF provides in the inter-city context) will hopefully allow transit-critical folks to recognize the need to include an economic development component in the cost-benefit analysis of transit.

    One note about AAF and Florida East Coast RR (FEC) that impacts the generalizability of the model. FEC’s freight traffic is almost exclusively intermodal, trans run from the South Florida port complex up to an interchange point in Jacksonville — there are generally no stops. Intermodal freight is typically high value and time sensitive so FEC has already invested in Class 5 (79mph for freight) track for most of the route. Since FEC lacks slower mixed trains or any local freight the new passenger trains won’t impead existing freight, and track upgrade costs are relatively low (the bulk of the loan is going to completing a second shared track IRRC). Unfortunately there are few other freight lines in the country which share this arrangement.

  • Of course, the road to a good rail + property model is paved with examples where it did not end out well. The most egregious of these examples would be Los Angeles’s Pacific Electric, which ran loss-leading streetcars to sell property, but then started bleeding money once they had no more property to develop.

    A big problem is that at least in Hong Kong, land ownership is strictly in the hands of the government, with developers being issued leases of land for up to 99 years. The MTR was granted a lot of its original land by the government, who wanted to build vast new housing estates to reduce overcrowding in the central areas. Governments in the United States, as far as I am aware, do not have vast tracts of barren land to just grant to transit companies for next to nothing, and most transit agencies do not have large amounts of vacant land in desirable places to sell.

    For example, the 7 Line extension in New York is being funded partially by a massive office development above the West Side rail yards, but given the expense and difficulty involved with finding a project partner that can reliably develop such complex projects (Atlantic Yards was reportedly sold at an extremely low price and couldn’t be built out as much as originally planned, and the MTA went through several contracts before finally going through with a company that could actually build Hudson Yards), it’s not too clear whether or not such projects can easily be replicated. The worst case scenario is the MTA turning itself into the Port Authority, which spends a ridiculous amount of energy and money pumping large amounts of office space into a market that doesn’t clearly need it.

    • Dexter Wong

      In his book, Ride The Big Red Cars, Spencer Crump had a chart that showed that Pacific Electric had run a profit, for Southern Pacific, from 1911 to 1923, then a deficit from then on (except for the World War Two years).

  • EngineerScotty

    There are many folks in the US who view TOD as corruption–and in some cases, it can be argued that developers get a better deal than does the public. In addition, many existing riders would rather see service improvements to where they live now, not to some place that they would have to move to.

    Two other follies with TOD (there are examples of both in the Portland metro area, both built-out today and in the minds of planners)

    * Higher-density housing, often in the suburbs in neighborhoods lacking “critical mass” (and possibly with barriers that will prevent critical mass from being acheived) where transit is the only amenity being offered. True, established urban neighborhoods are not desirable because there is a bus or train nearby, but because so many amenities (including several that can’t be replicated on neighborhood scale, and have citywide or regionwide patronage) are nearby.

    * Alleged TOD, but with poor connections to transit. The Progress Ridge neighborhood in Beaverton, OR comes to mind: It’s quite walkable, medium-density, full-service, and not very auto-convenient. It is in close proximity to major employment areas and a major regional mall, and has a few unique amenities within it that attract patrons from around the city. But it’s served by one peak-hour express bus, and skirted by another bus line that runs every half hour or so. Leaving the neighborhood to go somewhere else practically requires an automobile, or a lot of time. (TriMet has plans to improve this, but funding is not yet identified).

    • Beta Magellan

      Semi-related to the corruption argument, often public agencies are, at least to some degree, legally required to “focus on ‘what they’re good at,’” and even with a private partner taking on some of the risk and managerial duties for real estate developments the regulatory and legal requirements can be stifling. That’s part of the reason why, in many cities, you don’t see a lot of new schools or libraries being built as part of new developments—even if though there’s an advantage for both (neighborhood amenity for the developer, construction cost and, depending on the sort of deal struck, source of revenue for the library or school) the weight of paperwork can end up discouraging partnerships.

  • Doug

    I’m just so glad to see this site more active!

  • Frank

    Yonah:
    As usual a thoughtful, articulate piece. Congratulations. I enjoy your work a lot.

  • The Canadian National Railroad and The Canadian Pacific Railroad were two examples of successful of Private Public Partnerships prior to 1950s. Today we see a few of them returning to the fray and promoting new rail services such as in Saskatchewan for farm products and in Ontario (Waterloo) for commuter services. Wherever taxpayers are reluctant to pay the full shot for such projects, it will be entrepreneurs with vision who will initiate the transformation from highways to efficient and environmentally clean rail services.

  • Emma Boil

    A very interesting article, indeed! There can be no doubt that this entire project will greatly benefit the commerce in Florida and help improve the rate of economic recovery while simultaneously reducing automobile emissions. I am really looking forward to using the service.

  • Chuck

    Some good points here. Unfortunately the author’s premise is wrong, that (quote) “All Aboard Florida will not need its real estate investments to subsidize its rail operations, which it expects to be operationally profitable.”

    A prospectus for AAF’s recent $405M private junk bond offer (at 12% which gives you some idea of how the private equity market views this project) states that income from ticket sales may be insufficient to achieve profitability, but that gains in real estate will compensate.

    AAF sued to prevent release of the document, but Florida media obtained one privately, see http://www.politicalfixflorida.com/2014/06/20/internal-pitch-to-private-investors-sheds-light-on-all-aboard-floridas-business-plan-financials/ and http://www.tcpalm.com/franchise/shaping-our-future/our-roads/all-aboard-florida-files-suit-blocking-agencies.

    Which leads us to ask if parent companies FEC Industries and Fortress Investment Group (NYSE: FIG) are really serious about good rail service, or more interested in pumping up their real estate. Evidence strongly suggests the latter.

    The rail project FL Gov Rick Scott vetoed, a true HSR running on dedicated tracks from Orlando to Tampa, was far better justified since Amtrak already serves Orlando from Miami 2x daily, with ticket prices ~1/2 projected AAF rates. The vetoed project would also have run on dedicated tracks so as not to impede existing FEC freight service.

    Crony capitalism seems to be at play in this. Scotts chief of staff was CEO of FEC sister company Parallel Infrastructure before joining Scott. National attention is now focusing on some of the questions this has raised, see http://time.com/3023740/rick-scott-scandal-florida-governor/

    Regardless of corruption and real estate deals, the AAF project is a sad waste of decent rolling stock which will only get up to speed on ~1/2 of the corridor, since the rest of the track runs through urban areas and small towns.

    Overall this project will do more harm than good to efforts to win over average Americans to the idea of passenger rail.

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by Yonah Freemark

yfreemark (at) thetransportpolitic (dot) com

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