Transit success? It's the real estate, stupid

By ANDREW JAKES
Jakes Associates

The San Francisco cable car, the Las Vegas bus system and the existing Seattle monorail transit systems make money. But the overwhelming majority of U.S. transit systems, particularly newly installed West Coast systems, are big financial losers. They frequently offer a "ride to nowhere" resulting in scarce ridership generated from stations remote from prime destinations.

Why is this the case, when systems in other countries often enjoy high ridership and even earn profits?

This monorail system is integrated into the Waikoloa hotel complex in Hawaii.

The answer is that they are linked to real estate development through public/private ventures, while U.S. systems are usually built by governments in a development vacuum. The result here is high cost and disappointing ridership.

For example, after years of extensive marketing, the Santa Clara light-rail system in San Jose, Calif., serves only 22,000 passengers per day -- compared with 40,000 projected at the beginning of the 1980s, when only 8,000 rode the trains.

By contrast, the Las Vegas monorail, which is a public/private venture linked to commercial development, carries up to 25,000 passengers per day with two trains comparable in size to Santa Clara's 50 trains. Even more striking, it took 16 months to build the Las Vegas monorail when a typical public transit system takes approximately 15 years to implement.

In Southern California, plans have been in progress for years to construct a six-city monorail system connecting Anaheim and Irvine. Approximately 30 consulting studies have been conducted to date with each study starting with a review of the previous one.

A typical light-rail system presents a significant burden to taxpayers, but a properly designed monorail line can have the opposite effect. The Disney monorail, for example, adds substantial value to the entire development. Hotel rooms in the Disney monorail loop in Orlando are priced in the $200-to $300-per-night range, whereas neighboring hotels cost half or less.

Real estate brings riders

The added value to real estate from transit is a key issue to making transit investments viable for private investors. Proper station integration into a real estate complex not only adds value to the property and land but simultaneously boosts ridership -- which results in higher revenues from fare collection.

The conclusion is very simple: Develop new transit lines jointly with real estate complexes.

One may say that combining them complicates the issue, but this is not really the case. Typically 60 percent to 70 percent of a transit system's cost is structural and civil work, including trackways, guideways and stations. This type of work requires the same kind of construction expertise as does large real estate development. Frequently, the same construction companies who build roadways also build guideways.

Transit stations themselves may offer a variety of opportunities, including retail, coffee shops, restaurants, daycare centers, services, athletic facilities, pedestrian plazas, bicycle parking, lockers and news stands. In examining annual financial statements of public-private transit lines in Japan, one can discover significant revenue generation from station retail sales and advertising. A rare American example of transit-oriented design can be found in West Chicago, where a substantial investment was made in the expansion of a Fruitvale health clinic, La Clinica de la Raza, in the new pedestrian plaza adjacent to the local transit station.

Transit stations should become more than just a place to park the car.

Transit-oriented design is a term familiar to many transit authorities, and the idea of public land teamed with private investment for transit-based development is often mentioned. Rarely, however, is a significant and meaningful effort made to implement it in the U.S. In San Jose, for example, the airport light rail station is located two miles from the airport, as it is in Los Angeles and other cities.

One of the biggest challenges of intermodal transit centers is to minimize the "transfer penalty." The more transfers a trip requires, the less likely passengers are to make a trip, so in Europe and Japan designers seek to limit the number of times a traveler must change conveyances.

The Las Vegas monorail carries 25,000 passengers a day, dropping many of them off at the front door of this casino.

Again, it appears that most American planners and designers have never been to Europe or Japan. They may have been too busy doing more of the same old thing. A rare exception can be found in Boston, where the South Street Station Intermodal Transportation Center brings together rapid transit; commuter and intercity rail; intercity, suburban and local buses; taxis; and a link to Logan International Airport.

Public/private ventures

The problem lies in the jurisdictional nature of transit project implementation. A typical transit authority has an objective to implement a major corridor urban rail line. However, feeder systems such as small horizontal elevators, supplemental monorails and station integration with adjacent real estate is beyond their scope, budget, and frequently their expertise or even interest.

The implementation entails numerous individual construction contracts rather than a unified approach to finance, design, build and operate the line by a single consortium or franchise. A unified approach saves money by eliminating costly project integration and providing a motivation to do it in a cost-efficient way.

Public/private ventures are frequently considered the save-all mechanism for modern infrastructure development. While the U.S. has failed miserably to take advantage of this concept, the Japanese have fully exploited its benefits. The entire Tokyo New Waterfront Line (a showcase of Japanese technology and financing acumen), consistent with other new transit systems in Japan, has been implemented with a public/private partnership.

Toyko New Waterfront Line

The Tokyo system was built by a team led by Niigata Engineering Co., Ltd., and includes Mitsubishi Heavy Industries, Kobe Steel, Nippon Sharyo, Kawasaki Heavy Industries and Tokyo Car Corp. The waterfront system cost 170 billion yen, of which 120 billion was provided by the Tokyo Metropolitan Government. The remainder came from private sources.

The model for the Waterfront Line is the older Yokohama Seaside Line, a public/private venture which earns a steady profit and is under expansion.

Japanese government funding and legal policies have encouraged guideway transit installations in urban areas, typically aligned parallel to roadways. This results in the development of joint public/private consortia to fund, construct and manage transit systems. These consortia usually contract with teams of companies.

A similar approach was attempted by Japanese maglev supplier HSST and German Magnetic Transit in Las Vegas, and by the French firm Boyugues in Baltimore at Camden Yard Park. In all three cases there was serious private funding available.

The Baltimore Sun newspaper called the Camden Yard proposal to link light rail with underutilized stadium parking lots an excellent deal for the taxpayers. But all these efforts foundered on a lack of political leadership. There was nobody to step forward and say, "just do it." Without a political champion, creativity gets lost in the bureaucratic maze.

Subsidies take many forms

The entire transportation system in Japan is solidly based on the assumption that urban transit systems can be basically profitable -- with an understanding that the time needed to achieve that goal may be much longer for smaller, less densely populated communities, or for major urban undertakings like subways.

Subsidies are therefore granted mainly for capital rather than operational costs. They are provided for carefully selected projects that would not initially take off without government support. This results in comprehensive networks covering all major areas of cities.

The subsidies sometimes take indirect forms. For example, the Specific Metropolitan Railway Reserve Fund System offers a reduction of interest rates plus tax incentives. Such an approach forces the private transportation industry to run their enterprises in innovative, cost effective ways by combining transportation system operation with adjacent property development and management and other related businesses (like retail and food chains at stations). Unlike in the U.S., railway and transit infrastructure is perceived as private property in Japan.

Portland partnership

In the Northwest, a noteworthy example of a creative approach toward extension of an existing rail system is underway in Portland. A light rail extension to Portland International Airport could be open within three years as a result of a public/private partnership proposed by the engineering and construction firm Bechtel.

The company is planning a $500 million office development on a vacant site near the airport entrance, and has put forward plans for a nine kilometer light rail extension to serve both the development and the airport terminals.

Bechtel is willing to contribute a significant portion of the estimated $130 million construction cost, and will buy six light-rail vehicles. In addition, Bechtel will pay 75 percent of the $2 million design costs for the extension. No federal funds will be sought.

As a general rule, however, little has been done in the U.S. to address the economic aspects of real estate (including retail) and transit. An exception is the public-private venture of the city of Las Vegas, Nevada Power Co., Boyd Gaming and Stratosphere Casino that resulted in a new monorail system being built.

In that venture, our San Jose-based transportation consultanting firm was hired to develop an economic model to project the economic impact of improved circulation, including the expected return on investment. This study demonstrated that a $60 million investment in a monorail system can be returned in eight to 10 years, depending on the option chosen.

The economic impact of a circulation improvement can be characterized from its tangible and intangible aspects. Among the tangible elements are patronage, capital and lifecycle costs, revenues (including induced revenues to adjacent businesses from retail, advertising and similar sources), and the project schedule. Intangible elements include risk, increases in property values and expansion potential.

This model is currently being applied in Indianapolis towards a typical urban application.

A model like it should be applied to the Seattle monorail to show what is needed for its success, and subsequently to use its data to attract private capital for the system implementation. The result would be a transit system with a real estate revenue component.

Copyright © 1998 Seattle Daily Journal of Commerce.