Welcome to the first edition of Outlook and Review, a bi-monthly newsletter of analysis and news from Metropolitan Research and Economics (MR+E). Each issue will provide you with actionable information that will help you to navigate the complex planning and policy questions confronting our communities and the economy at large. I look forward to opening a dialog together on these topics and to be a continuing resource for you. If you have any questions or would like more information please contact MR+E at david.bergman@mrpluse.com or by visiting the web site at www.mrpluse.com

Yours,

David Bergman, AICP

Transit Initiatives: A Key to Economic Revival

The aggregate value of real estate in the US economy as a component of GDP has followed a 4.6% long-term growth trend over 25 years. This was for the most part a constant and sustainable component of the national economy. In the late 1990s, however, investment in the built environment rapidly accelerated above historic trends. The aggregate value of US real estate peaked at $24 trillion in 2007 and then began to fall, dropping to $20.6 trillion halfway through 2008. The latest figures will show a significantly lower value for 2009.

This deviation from historical trends is the indicator of the "real estate bubble". The effect of this is that the US economy of the last decade has borrowed a significant amount of growth and investment in the built environment from the future. The next three to five years is likely to see an unwinding of this over leveraging and 'borrowed' growth.

The investment in real estate was driven by factors such as the creation of excess finance capital that originated in tremendous growth in productivity and commodity prices in the global economy, while wages simultaneously stagnated or decreased. Real estate became an excellent vehicle for converting finance capital into fixed capital.

Money also poured into the residential real estate market as a result of a loosening in underwriting criteria, which allowed surplus capital to flow into the US residential market from around the world. However, there are real limits to how much capital can be absorbed by development. Demand for real estate is largely inelastic. Unlike demand for a consumer product, demand in the built environment cannot be stimulated through forces such as advertising. Demand can only be stimulated to a very small degree, so, in the long run, there cannot be more dwelling units than there are households to occupy them; or more non-residential square footage than there are jobs or economic activities requiring this space.

Is time the only remedy?

The American Recovery and Reinvestment Act, or "the stimulus package", was introduced to spur economic activity and combat the effects of the current global economic crisis. By modernizing health care and infrastructure, improving schools, and investing in clean-energy technologies, it aims to provide long-term, sustainable solutions while at the same time stimulating short term aggregate demand.

The Act was intended to help by investing up to $111 billion in infrastructure and technology development, especially in the energy sector. However, in reality, most of the money has been allocated to other priorities, and while the financial system has essentially been bailed out with programs like TARP and the actions of the Federal Reserve, the stimulus has not been the boon that cities expected.

Transportation investments were included in federal stimulus spending, but most of these funds have been aimed at roadway and highway transportation, with $30 billion allocated for their maintenance and repair. About $10 billion has been set aside for urban transit. This includes just $750 million for urban rail transit projects across the entire United States; and $8 billion for intra-city high-speed rail planning. In the long run, local expenditures will have the most lasting effect on the urban environment and are likely to spur more innovation than federal programs.

Competition Yields Innovative Transit Solutions

A year before the worst of the current economic crisis, the voters of Los Angeles County approved an additional sales tax assessment for transportation improvements. Known as Measure-R, the assessment will raise up to $40 billion over the next 30 years. Measure-R, which incorporates investments aimed at reducing traffic countywide, improving safety measures and enhancing the quality of life in Los Angeles County, will have much more impact over the short and medium term than any of the current federal interventions.

In the long run, transit will drive change in cities such as Los Angeles, and create new conditions for investment and opportunities for development - especially in the current environment where development financing and market conditions are unfavorable. Transit offers the ability to completely transform the value and opportunity of a site by increasing accessibility and by allowing new land-use programs.

In early 2009, the SCIFI (Southern California Institute for Future Initiatives) program at the Southern California Institute of Architecture (SCI-Arc) and The Architect's Newspaper sponsored an open ideas competition for architects, engineers, urban planners and students to propose new ideas for LA County's transit infrastructure. The focus was on how the transportation infrastructure could stimulate growth and development, and ultimately change development patterns in Los Angeles.

The competition jury included a number of prominent planners, urban designers, architects, engineers and industry experts. The 75 entries received came from leading architecture, planning and urban-design studios from around the world, including countries such as Sweden, Italy, Japan and Hong Kong, as well as Southern California.

The winning professional entry by Joshua Stein and his associates was a proposal called Más Transit. A regional high-speed rail for Los Angeles, it would diversify the communities in the built environment, reducing the need to travel and making travel easier and more predictable. Más Transit proposed 'twisting' high-speed rail like a belt into a loop that would restore regional mobility by coordinating with MTA and Metrolink along their existing right-of-ways using a raised infrastructure that would bypass roadway congestion. The resulting connection would run through the San Gabriel Valley and the West Valley down to LAX and Long Beach, around Orange County and up through the hub cities and the East Side, back to Union Station.

The winning student entry by Ryan Lovett from University of California, Berkeley was a plan called 'Glocalizing Los Angeles'. It took a very different approach to transit's potential role. Lovett proposed using transit, not as a method of interconnecting the region, but rather to assist with its fragmentation. In conjunction with newer, faster transit systems, his plan proposed a development strategy that collapses the distances between all the elements needed to support our lifestyles. As a result, workplaces, as well as production of food and goods, are within walking distance.

Implementation Issues in transit-oriented development

In Southern California we are just beginning to realize the potential of transit to reshape the urban environment. As we build a track record with successful projects such as the Wilshire/Vermont station, transit-oriented developments (TODs) are gaining acceptance within both the development and the investment communities. Transit-oriented development is likely to be the most dynamic area of interest in Los Angeles in the coming years, and an area that can be leveraged to attract more private investment.

However, there will be associated implementation difficulties. Among these:

Capital markets still tend to view the built environment as a pure commodity rather than an economic/market fundamental.

There is continued neighborhood opposition - while people want transit solutions, they dislike the implied density and don't want the station stops in their neighborhood.

Issues with multi-agency approvals slow down the process.

Vertical mixed-use urban design is appropriate for TOD, but vertical mixed-use is typically harder to finance than horizontal mixed-use.

Higher density does not necessarily work in suburban locations, particularly in LA where they can lead to transit 'islands' without supportive land uses nearby.

Transit-oriented projects have two basic characteristics, which may overlap. They can be either areas that distribute the labor force to employment opportunities throughout the region; or destinations and places of employment.

Market penetration and use/density

Unlike cities such as New York, Boston, Paris or London, with a fully articulated mature transit system, the overwhelming majority of transit users in Los Angeles use the system to journey to work, rather than for discretionary trips. This makes office development the best predictor of ridership in LA, where there is an average 10% increase in ridership for every 100,000 sq ft of office space. There is an increase of only about 50 passengers for every 1000 dwellings.

TODs can be very complicated projects that must be held for a long time to produce a return on investment. As the system expands and becomes more articulated with more nodes and links, increased value can be realized.

While residential-anchored TODs are the most common type in Southern California, the current housing environment makes the realization of these types of projects difficult. Increasingly, non-profits and public institutions are the force that will be driving the next wave of TOD developments. A discussion of this trend and its consequence for transit, land use and development will be included in the next issue of Outlook and Review.

New Web Site

MR+E is pleasd to announce our new web presence. In the future you can find contact information and more news, analysis and project profiles at www.mrpluse.com

Current Projects

MR+E continues to be active across the US and Internationally. Selected recent and ongoing assignments include:

Community Plan Economics

Housing market analysis for the University of Southern California's University Park Specific Plan

Fiscal and Economic Impacts

Tax payer return on investment analysis for the use of New Market Tax Credits in Portland Oregon

Real Estate Feasibility

Market study for TOD development in East Los Angeles

Cultural Industries

Analysis of the Melbourne City Centre Studios for the State of Victoria, Australia

For more information about these projects and services please contact david.bergman@mrpluse.com or visit www.mrpluse.com