Mass transit ridership in the United States recently hit its highest level since 1956, creating demand for new service and providing fertile ground for transit-oriented development (TOD) projects, including joint development—the use of land owned by transit agencies for development by real estate developers.

The growth in ridership has been driven by a number of factors, including enhanced public transportation services, smartphone technology that cannot be safely used while driving, and changing lifestyle preferences. Although this TOD trend has been hot for some time, there appears to be room for additional growth.

According to research for the National Association of Realtors by American Strategies, 50 percent of Americans prefer communities that have elements supporting use of mass transit, such as upgraded pedestrian access or parcels with mixed-use development. However, only 45 percent of Americans have access to public transportation of any type. Far fewer have access to the frequent public transportation service that attracts riders who have the financial means to primarily use an automobile but choose transit instead.

Demographic trends driven by some of the fastest-growing segments of the U.S. population are undergirding this increase in ridership. Polling conducted by Technometrica for the American Public Transportation Association found that 39 percent of Latinos and 34 percent of millennials took public transportation last summer, significantly higher than the overall use rate of 21 percent.

Millennials, a group with still evolving tastes, prefer walkable communities with diverse mobility options, even if they live in more suburban-oriented settings. Work by Latitude Research indicates that millennials are taking these preferences with them as some move into suburban areas as they form families. ULI’s Emerging Trends in Real Estate® 2015 echoes that assessment, noting that suburbs with “sufficient density to support live/work/play interactions, and a combination of transit and walkability” have “good bones that will serve them going forward.”

Other demographic trends back up the move toward suburban transit-oriented development. The Brookings Institution’s Elizabeth Kneebone notes the growth of low-income communities in the suburbs. “Between 2000 and 2008–2012, the number of suburban poor living in distressed neighborhoods grew by 139 percent—almost three times the pace of growth in cities,” Kneebone wrote in her 2014 research brief “The Growth and Spread of Concentrated Poverty, 2000 to 2008–2012.” These communities will need access to public transportation, along with a built environment that makes using mass transit a viable option.

Because of these trends and demographic changes, TOD, including joint development projects, is becoming a major part of a developer’s toolkit.

According to the Federal Transit Administration (FTA), TOD should have the added benefit of helping transit agencies reach their public policy goals, including increased ridership, a diversified customer base, increased fare revenue, better integration of transit facilities into the surrounding built environment, and progress toward regional economic development goals.

However, accommodating the goals of the public sector and adhering to the regulations developed by multiple levels of government can add layers of complexity to a project and require specialized knowledge. A variety of federal regulations and local political considerations ensure additional complexity, particularly for joint development projects.

Funding Trends

Though federal funding for public transportation has fared better than other spending categories during recent belt-tightening, infrastructure spending in the United States continues to lag needs.

According to a survey for the ULI report Infrastructure 2014: Shaping the Competitive City, improved public transportation infrastructure was rated as the top infrastructure need, with 78 percent of those surveyed rating it as a top priority.

Voters are increasingly willing to increase state and local taxes to fund improvements; in fact, more than 70 percent of transit ballot referendums are approved in a given year. However, FTA officials say there is an $87 billion backlog of funding required just to keep existing assets and systems in a state of good repair.

As a result, policy makers are moving toward innovative financing. This financing is distinctly different from traditional government grant programs in that it seeks the engagement of the private sector to help finance and fund construction and operation of mass transit.

One concept, known as value capture, uses of a portion of enhanced real estate values near public transportation to help fund transit improvements. Value capture is enshrined in the latest federal policy guidance on joint development projects. The FTA guidelines, known as the “Joint Development Circular,” set the rules public transportation agencies must follow when seeking federal assistance on joint development projects or when pursuing joint development on land acquired with FTA funds.

The guidance states, “joint development is intended to realize value capture from transit” because “the siting and development of transit service adds to property values near transit stations, and that co-location of residential, commercial, and retail establishments with the transit system enhances social and economic returns for the community.” The FTA seeks to gain public value from public investments while ensuring that developers and mass transit agencies can reach mutually beneficial agreements.

The FTA analyzes joint development projects according to four criteria: economic benefits; public transportation benefits; revenue, including whether mass transit agencies receive a fair share of revenue; and tenant contribution to development costs.

“Fair share of revenue” is defined as a revenue stream for the public transportation agency that is equal to or greater than the value of the FTA-contributed asset that is part of a joint development project over the contracted period.

For example, if FTA funding helped a transit agency purchase a property that is now valued at $10 million, assuming a contract term of 20 years, then the average annual fair share of revenue for the mass transit agency would be $500,000. This FTA guidance sets the minimum amount of revenue; transit agencies are expected to gain additional value. The FTA has the authority to approve or deny a joint development project on the basis of fair share.

Travel Times versus Ridership

The primary federal program that funds mass transit construction, known as New Starts, is shifting its focus says Jeff Boothe, a partner and TOD expert at the Holland & Knight law firm. The new focus is on ridership and boardings rather than travel time, “meaning how fast we can go from the suburbs to downtown,” he says.

This is a positive outcome for developers, Boothe says, because projects will more often go “to the heart of where development is located and planned” rather than “to a freeway median or freight railway right-of-way.” This means that for a mass transit project to be competitive for federal funds, place making becomes even more important.

As a result, agency decisions will better facilitate real estate development, Boothe says. “We will see fewer and fewer projects that choose the path of least resistance, because the feds will incentivize those that work with developers to both impact the built environment and positively impact the local political environment around development.”

Transit rights-of-way along freeway medians and freight rail lines are often chosen because of the relative ease of approval; transit projects in such locations have fewer stakeholders to anger and displace and therefore are often cheaper and faster to implement. These regulatory changes that prioritize place making and connectivity will make future projects funded with federal funds more relevant for a greater number of riders and developers.

However, mass transit agencies will still have to respond to community pressure, including that from elected officials who respond to fiscal difficulties. For example, caps on property taxes and increased demand for city services from residents in new housing may encourage elected officials to pursue retail development near transit instead of residential development even when there is greater market demand for housing. Elected officials may make these preferences clear to mass transit agencies pursuing joint development.

Local elected officials have varying presumptions regarding the role of public transportation in their communities. Some may seek to constrain visions and budgets, relegating public transportation to providing a lifeline for low-income people rather than attracting higher-income riders who may create demand for higher-value transit-oriented development. These ingrained assumptions may also affect how elected officials view active participation in joint development projects and the level of expertise and resources devoted to pursuing them.

Moreover, many communities continue to experience fiscally constrained budgets that encourage the pursuit of revenue or the transfer of costs to a private partner early in the project lifecycle—the very time that presents the highest risk to developers.

Even with the increased demand for TOD, some community governments may still oppose meeting the needs of both the developer and the transit agency. Changing this paradigm may require a longer lead time for developers and transit agencies to develop relationships and educate stakeholders regarding the benefits of development and the payoff from investment in public transportation.

Some communities have lost their competitive advantage because they “have not properly organized stakeholders to utilize community assets, and therefore lack a focus on place making,” notes Thomas McManus, an associate at urban design and architecture firm Torti Gallas & Partners in Silver Spring, Maryland.

The new FTA guidance on joint development, along with the changes in the incentive structure for federal grants, should increasingly reward communities that focus on place making and put the time into developing connections with all stakeholders, including those in the development community. These changes should encourage communities to be better stewards of community assets.

However, as FTA’s projection of an $87 billion state-of-good-repair backlog makes clear, additional funding will be necessary to fully address market demand for TOD. UL

Darnell Chadwick Grisby is director of policy development and research for the American Public Transportation Association and a participant in ULI’s Washington’s Regional Land Use Leadership Institute.