By: Mike Millar
The real estate mantra, “Location, Location, Location,” has its roots dating back to the 1950s. An advertisement in the Real Estate section of the Washington Post proclaimed this now all too familiar phrase under the heading, “The 3 Most Important Considerations of the Wise Home Investor.”[i] It is as relevant today as it was over 60 years ago, and equally applies to other asset classes beyond residential. But times change. Real estate markets change. Development projects change in response to changes in human behavior and settlement patterns. The world today, the Greater Toronto and Hamilton Area included, is more urbanized than it was half a century ago. Maybe, just maybe, it is time to replace this mantra with the following one that is more definitive, if not more prescriptive, for urban real estate markets: “Transit, Transit, Transit.”
Transit Oriented Development, or TOD, is defined as “walkable urban environments with direct access to frequent transit service and a mix of uses.”[ii] The markets attracted to these types of developments are broad, deep and have mass appeal. They are attractive to small, medium and large businesses; institutions such as hospitals, colleges and universities; and a variety of government organizations. They are the allure of residents, travellers, and consumers alike. Compare this type of development to traditional suburban developments, and one can see that the days are numbered for the latter type.
While the attraction to TOD can be explained in many ways, I like to attribute it to three simply qualities. Let’s call it, “the three-As of good development”: Accessibility, Amenities and Assortment.
Accessibility is the ability for people to move around from point of origin to point of destination in an efficient and cost-effective manner with choice among more than one mode of travel. Some of the most common modes include driving, taking public transit, bicycling and walking.
Amenities are those things that people want, or need, to access for daily living. They include such things as places of employment, health care, education services, transit, cultural and leisure services, and parks and recreational facilities.
Assortment is the presence of variety in both built form and the people that occupy or use the urban space. It is a heterogeneous as opposed to homogeneous environment.
For the Greater Toronto and Hamilton Area, Vancouver, Montreal and other major cities in Canada, accessibility will become a more important feature, and a more significant draw, to highly marketable real estate developments in the years to come. Continued urban intensification will make travel by car a cost-prohibitive and more inefficient form of transportation than exists today, even with existing ridesharing and Uber-like services, and the imminent introduction of autonomous vehicles. And while modal shift to active transportation, like walking and cycling, will continue, they have a long way to go to approach the passenger volumes posted by public transit.
Compared to the rest of the developed world, it is an undisputed fact that North America, particularly Canada, has been slow to respond and capitalize on TOD opportunities. Government and land developers alike have more often than not, relied on what has worked in the past: low density, homogeneous, greenfield development projects. Producing steady, albeit unspectacular, real estate returns, the land development community has been content on the tried and true. But a dwindling supply of undeveloped land, coupled with a softening real estate market, will surely put pressure on the entire industry to look at more creative, and more sustainable, development opportunities.
One does not even have to hypothesize about the benefits of TOD. They have been proven over and over again across the globe. The benefits most often cited include the following:
Real estate markets are highly volatile and subject to the influences of the economic cycle. The past recession, particularly south of border, is a good example of the magnitude of property land value depreciation that can occur as part of the normal ebb and flow of the economy. A 2013 study that looked at real estate markets in a number of US cities concluded that between the years 2006 and 2011 residential property values performed 42% better, on average, when located near public transportation with high-frequency service.[iii] Boston is a particularly good example of the extent of the transit / non-transit divide. The Rapid Transit Shed outperformed the region by 226%, with one station location in particular (E Berkeley St.) outperforming the region by 316%.
Return on Investment
Quantifying Land Value Capture (LVC) resulting from the introduction of new, or expanded, public transit services is a difficult task and varies from market to market. This should come as no surprise as TOD takes many forms. Some are more suitable for Value Capture than others. The type of development, proximity to transit service and level of transit service, all significantly impact land value uptick. Beyond that, there is the challenge of isolating all other site-specific factors that have either a positive, or negative, impact on property values.
There is a wealth of research on LVC. The overall consensus is that public transit has a positive impact on land values. The benchmark often used among public transit authorities is 20% appreciation in land values for property in reasonably close proximity to transit (say, less than 500 metres). A 2015 study by the commercial real estate company Avison Young concluded that commercial buildings located in downtown Toronto within 500 metres of a subway station sold, on average, for 30% more than buildings not similarly served by transit.[iv] Similar, albeit slightly more modest returns, were found in similar studies of TOD in cities in the United States[v].
If one wants a poster child for highly profitable LVC initiatives it has to be Hong Kong’s Mass Transit Railway (MTR) Corporation, the entity that manages the subway and bus system in Hong Kong. Viewed by transit authorities around the world as the gold standard for progressive, entrepreneurial, public/private partnerships, MTR has gross annual revenues of $6.6 billion and turns a mouth-watering profit of $2.6 billion.[vi] Yes. Their cost recovery ratio is a staggering 185%. Fully unsubsidized. Almost all of their non-fare revenue is generated from real estate. To put that into perspective, Metrolinx and the TTC have cost recovery ratios of 80% and 68%, respectively, with almost all of their revenue generated from the farebox. They run an operating budget shortfall of at least 20% per year. To be fair, the Toronto region performs better than most other transit jurisdictions across the globe, especially in North America.
Triple Bottom Line Benefits
Triple Bottom Line Benefits are the economical, social and environmental spinoff benefits of sustainable, urban development. TOD is the pinnacle of sustainable development. Sophisticated modeling exists today, and is continuing to evolve, to predict the broader local and regional benefits anticipated to flow from real estate developments. As a general rule, the triple bottom line benefits of TOD projects far exceed the project-specific financial benefits by a magnitude of 500%, 1,000%, or even more. The compelling case, especially for those groups that will not directly benefit from the proposed project, are the triple bottom line benefits that flow to the broader population indirectly.
Why triple bottom line benefits are of interest, and are important, to government and the public at large is self-evident. What continues to mystify me is how these spinoff benefits are all too often omitted, or given short shrift, by developers, government, the media and politicians. If reported responsibly, they can be the single greatest catalyst to building broad support for a development project.
Why did First Gulf’s East Harbour project secure a partnership agreement with the City of Toronto and Metrolinx, and obtain funding from the governments of Canada, Ontario and Toronto, so quickly? Simple. It was the $5.4B in annual spinoff employment income growth and incremental tax revenues so promised.[vii] Why did Amazon’s Request For Proposal for its second headquarters get every major city in North America salivating at the prospect that Amazon might make their city its next home? It certainly was not for the money to be had by Amazon and the developer partner.
Streamlined Planning Approvals
For many reasons, TOD developments often receive more favourable treatment by local planning authorities, planning appeal bodies, politicians and the media. This should come as no surprise as developers are on strong footing indeed to assert that mixed-use, higher density development is appropriate built form given its proximity to transit. Where a developer has successfully entered into a joint development, or joint venture, agreement with a public transit authority, they have an even more compelling case. Add to that the fact that in many jurisdictions, local, regional and provincial governments have specific policies in place to encourage TOD, and the probability of having a successful outcome in the planning approvals process is certainly higher than for less sustainable development proposals.
Two themes have emerged over the past five to ten years that point to the future of commercial real estate development in the GTHA and other regions in Canada: 1) urban intensification projects are becoming the norm, and 2) transit accessibility is becoming a prerequisite among developers and end users alike. Those organizations that successfully implement TOD will have profitable real estate initiatives that will stand the test of time. Those that do not are banking that the days of car-friendly communities will survive just a little bit longer.
Transit, Transit, Transit: The
new real estate mantra.
[i] David Sarokin, “Words, Phrases, Concepts”, online: FirstMention.com <http://www.firstmention.com/location-location-location/>
[ii] MetroTransit, A Developers Guide to Transit Oriented Development (TOD), TOD Office of MetroTransit
[iii] Center for Neighborhood Technology, The New Real Estate Mantra: Location Near Public Transportation (commissioned by APTA in partnership with National Association of Realtors, March 2013).
[iv] Garry Marr, “Toronto property near public transit worth 30% more than other buildings, study finds” (November 26, 2015), online (blog): Financial Post <https://business.financialpost.com/real-estate/property-post/toronto-property-near-public-transit-worth-30-more-than-other-buildings-study-finds >
[v] Saxe, Shoshanna and E.J. Miller, Transit and Land Value Uplift: An Introduction, Report #16-02-04-02 (Toronto: University of Toronto Transportation Research Institute, July 2016)
[vi] Neil Padukone, “The Unique Genius of Hong Kong’s Public Transportation System” (Sep 10, 2013), online: The Atlantic < https://www.theatlantic.com/china/archive/2013/09/the-unique-genius-of-hong-kongs-public-transportation-system/279528/>
[vii] First Gulf, East Harbour: Toronto (Toronto: Urban Land Institute, 2017)