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11 Address Real Estate Risk

Most value capture techniques depend on value creation through real estate development. Public agencies need to understand the profile and stream of revenues created from the value capture-related project, which are principally linked to real estate markets. This chapter highlights the real estate market issues that public agencies and other stakeholders should consider in implementing value capture-related projects.

Definitions

Real estate consists of land, buildings, and other location-based rights. Real estate assets can usually be freely bought and sold by individuals or companies in a variety of markets.

The real estate market consists of several sectors, including the following:

• Housing, which includes single family and multifamily housing.
• Office buildings.
• Retail, which includes shopping malls, restaurants, and grocery stores.
• Industrial.
• Warehouse and logistics.
• Hospitality.
• Institutional, including public buildings, educational facilities, and hospitals.
• Special purpose, which includes entertainment venues.

Each of these sectors has unique characteristics affecting the level of demand, business cycles, and access to capital. For instance, the single-family housing market may be more heavily affected by interest rates than the warehouse sector. Relatively new financing vehicles, such as real estate investment trusts, have had a major impact on retail developments. New technology, such as online shopping, is transforming the retail sector.

11.1 Real Estate Market Drivers

The economy, as expressed in the form of gross domestic product, and demographic changes, as expressed in population change, are major real estate drivers.

These indicators often vary by region, city, or town. The regional variations create differences in local real estate markets. Real estate in a region dominated by commodities, like oil and gas, may exhibit different demand characteristics than real estate in a region dominated by high-tech firms. For example, lower energy costs in the Southern United States play a role in the lower construction costs found in those regions. Access to a city with major sports or entertainment amenities increases demand and real estate prices compared to cities without such amenities.

Other trends that influence real estate market conditions include housing prices, commercial building absorption rates, and other factors as shown in Sidebar 6.

Demographics have a significant impact on real estate supply and demand. For instance, in housing, an aging population has changed definitions of what makes up a household. Changing economics and new locational demands are also affecting demand for housing. Some of these demographic shifts translate into demand for smaller housing units, often in more urban-like settings. There is also new interest in housing that is flexible to adapt to household changes, such as residents aging in place and new forms of co-habitation, including short-term shared accommodations. ^{259 260} In some markets, the short-term rental market is having a material impact on the housing market by taking some rentals out of the market and serving as hotel competition.

Innovations are among the many drivers of the real estate market. For instance, the market for shared office space (coworking space) is quickly changing the office market. In addition, high-speed internet and innovations in connectivity in many areas of the United States may enable more Americans to telecommute. These changes could affect the demand for and location of office space.

This coworking model is being adopted by start-ups, smaller firms, and larger firms seeking flexible office space and ways to reduce costs. ²⁶¹ A recent Urban Land Institute conference projected that coworking would play a material role in the office marketplace and that by 2030 as much as 30 percent of the office market would be made up of coworking space. This trend could affect the demand for office space, the nature of short- and long-term office space leases, and office space locations. ²⁶²

11.2 Real Estate Cycle

Real estate markets are subject to business cycles, resulting in the underlying value and demand for real estate assets changing from one year to the next. Business cycles can have significant consequences for the effectiveness of a value capture technique.

For example, Figure 7 shows Standard & Poor's (S&P)/Case-Shiller 20-City Composite Home Price Index, an index of home values over the period 2000 to 2018, with index changes of a factor of 10 during this period. ²⁶³ It illustrates the tremendous swing in the value of much of the U.S. housing market, including during the 2007-2009 recession, when the index lost approximately 50 percent of its value. ²⁶⁴

Public agencies should incorporate their understanding of a region's real estate market volatility in their value capture plans. A well-built, yet poorly timed joint development office building associated with a new road may not succeed as expected if it opens when office demand is lower than projected. Many economic and demographic factors are subject to volatility, with real estate's volatility exacerbated by the fact that it consists of highly priced assets. These assets are often subject to "price stickiness," i.e., buyers and sellers may not immediately respond to price signals as market theory would hold, sometimes prolonging real estate cycles.

For example, the Atlanta BeltLine (see Appendix Section I) revised its assumptions for tax allocation district receipts following the 2007-2009 recession, resulting in a program slowdown. ²⁶⁶

In the case of the Silver Line/Dulles Metrorail (see Appendix Section VIII), the project corridor experienced three business downturns during the period in which the project was planned. The change in assessed value of commercial/industrial property over time is shown in Figure 8. While the assessed value in this area has grown appreciably, the downturn in the early 1990s was devastating to many businesses and could have "de-railed" project support. ²⁶⁷

In the Denver Union Station at-grade joint development project, planned since the 1990s, the financial plan for the $500 million project had to be rethought in 2010 due to the 2007-2009 recession. The sponsors had to abandon traditional financing instruments and pursue financing from the USDOT's Transportation Infrastructure Finance and Innovation Act (TIFIA) and Railroad Rehabilitation and Improvement Financing (RRIF) programs. ²⁶⁸

11.3 Local Market

Real estate markets can vary enormously within a region. Center city property values and lease rates may be higher than in outlying areas. Residential areas that are in highly rated school districts command higher prices or rents than those that are not. Industrial properties located near highway interchanges are valued higher than those that are hard to access. Even adjacent corridors can exhibit sharp property value differences. For instance, land for gas stations or fast food on a corridor that leads to a major highway can be much more valuable than land that is nearby but lacks such direct access.

While "location, location, location" is the dominant adage in describing how real estate pricing works, this may be better described as "proximity to good transportation, proximity to retail, proximity to employment centers, etc." Properties that are otherwise similar may vary in value due to proximity to amenities. For instance, numerous studies have shown that housing within one-half mile of a transit station can command values of up to 10 percent more than other, similar properties. Likewise, proximity to highways and arterials is critical for certain types of office and retail properties.

Finally, as with any business affected by human preferences, certain corridors, neighborhoods, and locations become "hot" and exhibit market characteristics that defy expectations based on quantitative analyses. Developers become confident that they can more easily find buyers or lessees in those areas and are willing to pay a premium in terms of land and higher construction costs. ²⁶⁹

The converse may also be true. Certain areas have a poor reputation and, as a result, real estate values are lower than expected based on intrinsic property characteristics. Furthermore, an area that is characterized by an abundance of developable land may discourage denser development that frequently benefits value capture efforts.

In the case of The Cap at Union Station, the construction of a retail strip was able to overcome the barrier that an interstate (I-670) created between two neighborhoods in Columbus, OH. One consequence of this barrier was that two very different real estate markets developed over time, despite their close proximity. One neighborhood south of I-670 was relatively thriving as the central business district and the location of a convention center. The other, north of I-670, was struggling with real estate values that were much lower (see Appendix Section IV).

11.4 Real Estate Market around Transportation Facilities

Public agencies also need to understand how a specific property or site in question fits into the overall real estate market and how it may be affected by transportation-related decisions. Transportation can impact the value of a property, either causing an increase due to better connectivity or a decrease due to negative externalities such as noise and congestion. Relevant decisions may include zoning differences, street access, or ability to offer amenities. Furthermore, major natural or human-made barriers can significantly affect property values. A large parking garage near one project may reduce the attractiveness of a property to pedestrians, while a neighboring project without such a barrier may be unaffected.

Real estate forecasts need to consider the effect of transportation changes and innovations, including the impact of new technologies and the move to alternative transportation modes. For example, some services provided by transportation network companies compete directly with transit and personal vehicles and may challenge the advantages of being located near a transit station or near certain roads or intersections, as discussed earlier, and shown in Sidebar 7. While the magnitude of changes is yet unknown, these factors are likely to shape various land uses. Other shared mobility modes, such as bicycles and scooters, help to improve the competitiveness of properties that have poorer road or transit connections than otherwise similar properties.

11.5 New Urbanism, Density, and Value Capture

In transit, value capture techniques (including special taxes, incremental growth techniques, and joint development) are often associated with transit-oriented development. These techniques often result in dense, multi-use, and amenity-rich developments that are located around transit stations. These developments may be characterized by multi-family housing and first-floor retail interspersed with commercial facilities. Examples of transit-oriented development projects include the following:

• Denver Union Station in Denver, CO.
• The Orange Line Corridor in Arlington, VA.
• The State Line Development in suburban Dallas, TX. ^{270 271 272}

As discussed in this Manual, value capture can also be associated with more traditional development. This was the case with an assessment district around less dense suburban commercial and multi-family housing around the Silver Line/Dulles Metrorail near Washington, DC. However, in that case and similar ones, real estate development patterns and planning were changing as public agencies allowed for increased density in certain portions of the transit project's corridor (see Appendix Section VIII). ²⁷³

For highway and road projects, public agencies also must contend with similar real estate trends. Throughout the United States, developers are building denser, pedestrian-friendly, mixed-use projects that have a similar look and feel to classic transit-oriented development in suburbs and towns. They may be named "town centers" or "lifestyle centers" and are characterized by unique "placemaking." They are usually accessed by car but may also be accessed by rail or bus transit and, in some cases, by bicycle or pedestrian facilities. These include the Mosaic District in Fairfax, VA, Park Potomac in Potomac, MD, and Baldwin Park in Orlando, FL. ^{274 275 276}

While every real estate project is unique, there are several issues that may affect a public agency's thinking as it investigates implementation of value capture techniques involving highways and roads. The agency should consider how the existing real estate and highway and road characteristics affect potential project plans for development of transportation infrastructure and real estate, as shown in Sidebar 8.

11.6 Timing

Timing can greatly influence the feasibility and effectiveness of a value capture technique. Timing perspectives can differ among value capture participants, such as a State DOT, regional agency, or a municipal road department. Their perspective may depend on the need for the project and the length of time required to plan and construct it. Improvements to existing roads may require 1-2 years of planning and 1 or more years for construction. Depending on the need for ROW, new roads can take 3-5 years for design and ROW acquisition. Large projects, like a new arterial or interchange, can take 5 or more years to plan and 2-3 years to construct.

A municipal planning agency or zoning board can have similar time horizons, although they may often be affected by the term of policymakers, often a 2- or 4-year cycle.

Developers are highly affected by unpredictable real estate cycles. They are also subject to highly competitive and fast-changing markets, resulting in an environment that may be quite different from one in which transportation agencies and municipalities operate. Timing considerations are summarized in Table 12.

Such differences in time horizons, culture, and risk perspectives should be acknowledged and overcome to the greatest extent possible.

Table 12. Value Capture Timing Issues by Various Public Sector Stakeholders

Stakeholder	Timing Challenge
Transportation Agency	Short- and long-term, from 2 to 10 to as much as 20 years, reflecting the period to plan and construct small street improvements to major highway facilities. Some public agencies may be directed by board members appointed by policymakers who have a focus on implementing projects within an election cycle.
Local Government	Short-term: 2-4 years, reflecting political cycles. Long-term: 10+ years, reflecting planning period.
Planning and Zoning Agency	Normally 2-5 years, reflecting typical real estate cycles. Some master plan developers or those with considerable local interest may have much longer time horizons.

11.7 Implementation Steps

Successful value capture implementation requires that the real estate market be thoroughly researched so that accurate financial projections can be developed. In addition, if a project funding relies on the use of a value capture technique, the budget and cash flow should be robust enough to survive economic downturns. Furthermore, practitioners should assess legal and political risks to the real estate market as it relates to value capture projects. Sidebar 9 summarizes some of the key real estate market implementation steps, including collecting appropriate data, consulting real estate specialists, and developing feasibility studies and plans.

Table 13 summarizes key data that public agencies and stakeholders should consider in analyzing real estate issues. Not all of these data sources are required for all techniques.

Table 13. Key Data Used in Real Estate Market Analysis

Data Category	Examples
Economic	National and regional gross domestic product. Income and jobs growth. Spatial distribution of jobs and residential units within the region.
Demographic	National and regional population characteristics and growth. Breakdown of regional population by demographics.
Real Estate-Related	Land and other building prices. Rental and lease rates. Rates of building permit issuance or starts. Rates of commercial or industrial development starts. Occupancy rates. Land values. Commercial absorption rates. Zoning along or in close proximity to the corridor.
Site-Specific	Existing property base. Planned properties. Zoning on the site. Key site-specific amenities. Lot size. Existing utilities available for the site. Developable land, including existing environmental features (wetlands, floodplains, etc.) and slope of the land.
Other	Information on local political climate. Public attitudes.

Footnotes

259 "Making Room: Housing for a Changing America," National Building Museum, Exhibit, December 2017 to January 2019, Washington, DC.

260 See: www.airbnb.com.

261 See: www.wework.com.

262 John Egan, "Coworking Spaces Seen as Key Tenant for Houston Office," Urban Land Magazine, December 7, 2018, urbanland.uli.org/economy-markets-trends/coworking-spaces-seen-as-key-tenant-for-houston-office/.

263 "S&P/Case-Shiller 20-City Composite Home Price Index," Federal Reserve Bank of St. Louis, fred.stlouisfed.org.

264 "Wilshire U.S. Real Estate Investment Trust Index," Wilshire Associates, n.d., wilshire.com/indexes/wilshire-real-eState-family/wilshire-us-reit.

265 Federal Reserve Bank of St. Louis, "S&P/Case-Shiller 20-City Composite Home Price Index."

266 Catherine Owens, "The Atlanta BeltLine," Presentation at the Federal Highway Administration EDC-5 Summit, Baltimore, Maryland, October 18, 2018.

267 Page et al., Guide to Value Capture Financing for Public Transportation Projects, 88-96.

268 Page et al., Guide to Value Capture Financing for Public Transportation Projects, 54-65.

269 Sharada R. Vadali, Rafael M. Aldrete, and Arturo Bujanda, "Financial Model to Assess Value Capture Potential of a Roadway Project," Transportation Research Record: Journal of the Transportation Research Board 2115, no. 1, 2009, 1-11, journals.sagepub.com/doi/10.3141/2115-01.

270 Page et al., Guide to Value Capture Financing for Public Transportation Projects, 54-65.

271 Hank Dittmar and Gloria Ohland, The New Transit Town: Best Practices in Transit-Oriented Development, Washington, DC: Island Press, 2004.

272 "How Do You Create A City Between Two Cities?" Omniplan www.omniplan.com/work/case-studies/cityline.html.

273 Page et al., Guide to Value Capture Financing for Public Transportation Projects, 88-96.

274 "Mosaic District," Mosaic, mosaicdistrict.com/.

275 "Park Potomac," Park Potomac, parkpotomac.com/#/.

276 Daniel Herriges, "Baldwin Park: A Test for New Urbanism," Strong Towns, May 31, 2017, www.strongtowns.org/journal/2017/5/31/baldwin-park-a-test-for-new-urbanism.

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