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Banking on Transit-Oriented Development

It’s safe to say that Sherri Ziller, President and CEO at Northwest Indiana Regional Development Authority, is a little excited. After nearly a decade of pushing for a commuter rail expansion throughout northern Indiana, funding has been locked down and commuter trains are expected to be whizzing by within the next 2-3 years, spurring a ripple effect of new real estate developments and economic expansion. “Ultimately,” writes Ziller in a recent op-ed, “the goal of expanding commuter rail service and surrounding it with transit-oriented development is to create places where people want to live. We want to make it possible for people who would like to stay in Northwest Indiana to do so, and make it an attractive option for other people looking to move in.”

As urban populations continue to grow, so does the need for efficient and sustainable transportation options. In response, transit-oriented development (TOD) has emerged as a popular real estate strategy, and for good reason. TOD refers to the practice of developing mixed-use properties, such as apartments, offices, and retail spaces, in close proximity to public transportation. The term “transit-oriented development” was officially coined in the 1980s by San Francisco-based architect Peter Calthorpe, who was interested in creating more walkable, transit-friendly communities. However, the concept has its roots in earlier planning ideas, such as the Garden City movement of the late 19th and early 20th centuries, which emphasized the importance of planning and design in creating healthy, livable communities. 

The goal of these developments is to encourage transit ridership and reduce dependence on cars, by making it convenient for people to live, work, and play near transit options. A TOD typically involves a pedestrian-friendly environment with a mix of residential, commercial, and community spaces. By building in areas with easy access to transit, developers can create thriving communities where residents and workers can easily travel to and from work, shopping, and entertainment without relying on personal vehicles.

Now, before we delve further, it’s important to understand that this development strategy is not the same as transit-adjacent development (TAD). TADs are generally located near transit infrastructure, however, they’re not designed to maximize access to public transit, nor do they have the same potential to create a walkable and vibrant community as a TOD.

All aboard!

In the United States, the passage of the Intermodal Surface Transportation Efficiency Act (ISTEA) in 1991 became an impetus for the growing popularity of TODs by providing funding for transportation projects that supported more sustainable, multimodal transportation options. This legislation helped to promote the idea that transportation and land use planning should be integrated in order to create more sustainable communities. Since then, many prominent real estate companies have incorporated this model into their investment strategy. 

I reached out to David Garten, Senior Advisor to RXR, a well-known New York-based real estate owner and developer to learn more about the evolution of transit-oriented development within the firm. “Starting back in the early aughts, our investment strategy revolved around the realization that New York City was getting increasingly unaffordable,” Garten explained. “So we recognized that we could target suburban places with transit to the city and create a high-quality development at a much cheaper price point than you would find in the city.” One of RXR’s most high-profile TODs involved the redevelopment of New Rochelle, New York. Under RXR’s guidance, 12 million square feet of land was rezoned for more than 30 commercial, residential, and mixed-use structures, including 7,000 apartments. 

In order to maintain the community’s accessibility and inclusivity, the buildout will also feature a mixture of market-rate and affordable housing units. “Due to the transit infrastructure that we have in New Rochelle, you can get to Midtown Manhattan in 30, 40 minutes—which is sometimes a better commute time that you would experience in places like Brooklyn and Queens,” Garten said. “Thanks to TOD we could offer our product at a more affordable price point, that’s been our investment strategy here in New York and we’ve replicated it elsewhere.”

Now that RXR’s New Rochelle development is moving along at full steam (the construction of a 218-unit affordable apartment complex is nearing completion) RXR is focusing on transit-oriented developments in other places, including Garvies Point in Glen Cove and Sawyer Place in Yonkers. Garten also hinted that RXR is eyeing other opportunities elsewhere, and it’s clear to see why. From a real estate investment perspective, TODs can be an attractive strategy because access to public transportation and walkability continue to be in high demand for commercial and residential properties. Additionally, TOD developments can help revitalize previously underdeveloped areas and spark more investment in an area that can help raise property values. 

Delay we go

As much as TOD has the potential to revitalize urban and suburban areas, it is important to know that the return on investment for these types of projects is prone to a substantial time lag. Researchers examining the impact of TOD on Atlanta’s housing value resilience during the Great Recession showed that TOD developers can expect a long delay in ROI. “As suggested by our findings,” the researchers wrote, “TOD projects used to be valued less than TAD properties, but the past decade or so has demonstrated a return on investment from earlier TOD projects. Regarding transit-oriented land value capture policies, it is important to consider this time-lagged positive effect on TOD values.”

One reason for the substantial time-lag in return on investment for TOD is that it can take time to plan and build the infrastructure needed for the increased public transit ridership. The infrastructure investment requires significant resources and buy in from the city which can take years to complete. In addition, the construction of TOD itself is a complex process that requires careful planning, coordination, and investment. It can take several years to design, obtain necessary permits, and construct the buildings and infrastructure required for a successful TOD. The success of TOD is heavily dependent on factors such as the strength of the local economy, the availability of jobs and services, and the willingness of people to use public transportation. It takes time for these factors to develop and for the benefits of TOD to be realized.

Overall, the time-lag in return on investment for TOD is a result of the complex nature of the investment. However, the long-term benefits of TOD, such as reduced traffic congestion, improved air quality, less car dependence, and increased economic development make it a worthwhile investment in the long run. Transit-oriented development is a solid real estate strategy that offers numerous benefits for investors, developers, and communities. By promoting the creation of thriving mixed-use communities that can access public transit, TOD can help to revitalize urban areas, increase property values, and improve quality of life for residents. While TOD presents some challenges, careful planning and execution can help to ensure success and make TOD an attractive option for a resilient real estate investment.

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