Transit Agencies Lease Real Estate to Generate Much-Needed Cash

This story was originally posted by Stateline, an initiative of the Pew Charitable Trusts.

The pandemic has sent ridership plummeting at transit agencies across the United States. Riders are slowly returning, but not in pre-COVID-19 numbers—and they may not for a long time, if at all.

Transit agencies must generate cash to replace the lost revenue from fares. One strategy that is gaining renewed traction is leasing agency-owned land to developers to build housing, office space and retail near transit stations.

“The precipitous drop in ridership across the country during the pandemic really exposed the vulnerability of the agencies’ funding because of the close tie with fare revenues,” said Paul Supawanich, an associate director at the National Association of City Transportation Officials. “A lot of them are saying, ‘How can we be creative and think about real estate development as an opportunity?’”

Many large transit agencies already have their own real estate departments and for years have been leasing property—often parking lots near rail stations—to development companies. They typically use that rent to subsidize operations and maintenance. Other agencies have been dipping their toes into it.

Building near stations is called transit-oriented development, and it’s seen as a way not only to create a long-term revenue stream, but also to increase ridership, minimize traffic congestion and help communities by providing jobs and housing, some of it affordable, near transit.

During the pandemic, some transit agencies across the country have been pushing ahead with development plans.

The Washington Metropolitan Area Transit Authority, for example, announced in August a lease agreement with a group of companies that wants to redevelop an area near a rail station in suburban Virginia that would provide more than 1 million square feet of residential, office and retail space. The effort has been in the works for a few years.

New Jersey Transit is in the process of selecting a developer to convert a 12-acre parcel at one of its busiest rail and bus stations, in Woodbridge, into a mixed-use residential and commercial development.

Transit-oriented development “not only means new opportunities to generate revenue and optimize the agency’s real estate around our public transportation hubs throughout the state,” said Kevin Corbett, the agency’s president, in a July news release, “but also to meet the state’s economic and environmental goals.”

Before the pandemic, many transit agencies saw real estate development as an auxiliary revenue source, said Baruch Feigenbaum, managing director of transportation policy at the Reason Foundation, a libertarian think tank based in Los Angeles.

“The pandemic added some new urgency. Now it’s become something they’re really focused on,” he said. “Many hadn’t taken advantage of transit-oriented development as much as they could. They might have developed near one metro stop or part of the land, but not all of it.”

Ridership Woes

Transit agencies saw a huge drop in ridership after the pandemic struck in March 2020. In the early months, ridership plummeted about 80% nationally, according to the American Public Transportation Association, a trade group. Commuters worked remotely, transit agencies enforced social distancing and riders stayed away for health and safety reasons.

Ridership has been improving, but it still was down an estimated 37% nationally, as of the week of Sept. 19. Many transit agencies were experiencing even worse numbers.

Congress has helped, with its three COVID-19 relief measures together allotting nearly $70 billion to transit agencies as a stopgap. But some transit agencies are still suffering major financial fallout from the pandemic.

Agencies have been experimenting with scrapping or reducing fares or adding service to bring back riders and ensure access for disadvantaged communities. During the pandemic, the majority of people who continued to ride buses and trains were essential workers with low incomes, often people of color.

The plunge in ridership also prompted many transit agencies to look at various ways to diversify their funding beyond relying on fareboxes and federal, state and local dollars. Some are considering selling ads and naming rights. Some are continuing to look to transit-oriented development projects with developers or public-private partnerships.

“If you’re a smaller public transit system with a bus that runs every 30 minutes, you still have assets like land that you might want to monetize to come back from the last year,” said Supawanich, of the city transit officials’ group.

Even many larger systems that have been making real estate development deals for years are taking a fresh look at their holdings.

In Georgia, the Metropolitan Atlanta Rapid Transit Authority, known as MARTA, the biggest transit system in the Southeast, jumped into land development more than a decade ago. It had lots of surface parking around its rail stations that developers were interested in, said Jacob Vallo, a senior director at the agency.

In 2013, the agency launched a transit-oriented development office. It has leased land to developers ever since. It’s a way for MARTA to get a long-term revenue stream and drive economic development, Vallo said.

MARTA has 17 existing ground leases, with a total of nearly 2,000 housing units, 2.6 million square feet of office space, 371,000 square feet of retail and nearly 2,400 parking spaces, according to Vallo. Eighteen new transit-oriented developments are either under construction, in negotiation or being planned.

MARTA receives about $6 million a year from its ground lease revenue, and it costs about $2 million a year to run the real estate group, so it’s a good deal, Vallo added.

“The real challenge is how do you grow that number faster?” he said. “When the pandemic hit, we found that while ridership revenue and parking revenue fell and advertising fell, we had long-term ground leases with credit-worthy developers who continued to pay their rent.”

Throughout the pandemic, the transit system has lost more than half its riders, and it continues to be hit hard, according to data from the American Public Transportation Association.

“Because of the pandemic, the conversation got even louder about how do we lean into this, when it comes to transit-oriented development?” Vallo said. “We may be able to generate even more revenue.”

But the idea isn’t just to make money for the agency; it’s also to stimulate economic growth in the community and develop affordable housing for low- to middle-income residents, Vallo added.

Over the years, MARTA has pivoted from developing offices to building housing. Its board requires that 20% of all new transit-oriented development housing units go to those earning 60% to 80% of the area median income.

Seven of the 18 projects MARTA currently is working on are at transit stations in federal opportunity zones: areas that have been designated as economically distressed communities, according to Vallo. The agency has committed to building mixed-income housing in those areas and will be requiring 30% of the units to go to those earning low incomes in the ZIP codes in which the developments will be built.

Like MARTA, some transit agencies that have gotten into the real estate business are trying to develop affordable housing projects. They often lease to private developers, but sometimes they work with nonprofits, community groups or local governments.

“In the U.S. we have created plenty of barriers to access transit,” said Art Guzzetti, a vice president at the American Public Transportation Association. “Shouldn’t we be putting affordable housing around transit hubs? We want to make money, but we want to serve broader community purposes.”

But the Reason Foundation’s Feigenbaum questions the true affordability of the housing that transit agencies tout.

“They like to make the claim because it makes them sound like good corporate citizens, but that’s not what typically happens,” he said. “Most of the housing at these transit stations is not really affordable.”

While some agencies are developing a small percentage of affordable housing aimed at people with lower incomes, Feigenbaum said, many developments near transit stations are priced at the market rate so developers can sell units and make money. The people living in them tend to be middle- to upper-middle class professional workers.

“In the right circumstances, if affordable housing is attractive to a developer, they could make money,” he said. “But that is not the case in most places.”

Development Deals

Transit-oriented development isn’t just popping up around urban rail stations. It’s also happening at commuter or light rail stations outside of major cities.

The San Mateo County Transit District, which oversees Caltrain, a regional commuter rail line that runs through Silicon Valley, for example, has made a deal with a developer on one project, is in the initial planning stages of another and is considering two others, said Brian Fitzpatrick, the agency’s real estate director.

“When we develop we’re not just looking at getting a good business deal,” Fitzpatrick said. “We also are looking to get more riders on the trains. We think these developments can be the center of a community.”

Money from land development projects also could help sustain the agency’s finances. Since the pandemic began, Caltrain has lost more than $100 million in farebox revenue, according to spokesperson Dan Lieberman. At its lowest point last year, weekday ridership fell to about 3% of its pre-pandemic amount. Now, it is about 15%, he said.

Like many other transit agencies, Caltrain typically develops on parking lots. The project furthest along—a five-story apartment building proposed near a transit station in San Mateo—would bring in more than $30 million in lease payments by the developer over 35 years, according to Fitzpatrick.

Another project is even more ambitious. The agency is planning the development of 1.1 million square feet of office towers and a plaza in downtown San Jose near a transit-oriented, mixed-use neighborhood that Google proposed to develop.

Santa Clara Valley Transportation Authority, a light-rail and commuter bus system, also has been planning transit-oriented development.

“Transit agencies do not have a hard time coming up with capital project funds. We can all go get grants and money to build out large projects,” said Jessie O'Malley Solis, an agency program manager. “Where we suffer is we don’t have operation and maintenance funds and we don’t have funds to continue to provide and upkeep our service.”

Solis said transit-oriented development offers the agency the opportunity to fund normal operations as well as service improvements and enhancements. “We believe there’s tremendous long-term value,” she said.

The developments will spur ridership at the agency’s stations, Solis said. The authority expects to add 13,000 new riders when its planned projects are completed.

While the agency has lost lots of riders during the pandemic—ridership was down an estimated 53% as of last week, according to American Public Transportation Association data—Solis said it is fortunate because less than 10% of its revenue comes from fareboxes, unlike many other transit agencies, which rely on a much larger chunk.

That fortune isn’t stopping it from making deals with developers to lease some of its 140 acres of land, mainly park and ride lots, however.

The agency developed two sites decades ago but plans to add 25 more over the next 20 years, according to Solis. It aims to have a combination of market-rate and affordable housing as well as commercial use, and estimates that portfolio would bring in $300 million in revenue by 2040.

“If transit agencies are not yet doing it, they really need to move in that direction,” Solis said. “It’s a long-term way of building ridership and generating a new income source.”