Transit-Oriented Developments – Smart Moves for Urban Buyers

Steve Jones wasn’t consciously trying to be part of one of the most significant trends in American real estate when he signed up to buy a four-bedroom townhouse in the new Chelsea Heights neighborhood of Silver Spring, Md.

He just wanted to live close to downtown Washington D.C. — Silver Spring is just over the boundary line — but not necessarily in the center of the city since he’s employed at the National Institutes of Health in Bethesda, Md. He wanted to be within a short walk of a Metrorail mass transit station, within walking distance of a Whole Foods grocery, a sports and health club, lots of retail shopping, plus dozens of restaurants and a burgeoning, multi-cultural arts and entertainment scene, including clubs, the American Film Institute’s Silver Theater and the global headquarters of Discovery Communications, the film and media company.

Jones also wanted to eliminate the need to commute to and from his job every day by car, which he considers a major waste of time, energy and money. Plus, he wanted to own a home that would hold its value in any future economic downturn. During the recession and housing bust of 2008-2011, buyers in newly developed suburbs on the distant edges of metropolitan areas declined in value more dramatically than homes located closer to the workplace cores of central cities.

“Oh yeah,” one other important thing, he added, “I’m green.” So, Jones would only consider purchasing a home that incorporated the most up-to-date energy-conserving systems, from construction materials to appliances, windows, doors and lighting — ideally a package worthy of LEED (Leadership in Energy and Environmental Design) certification.

Transit-Oriented Development

Given Jones’s detailed list of priorities, it’s no surprise that he ended up in a “transit-oriented development,” or TOD in urban planning lingo. As the name implies, the immediate proximity of mass transit stations — whether rail, trolley or bus — is the key locational factor for TOD projects. The housing units themselves often consist of mixes of single family townhouses, condos and high density multifamily apartments.

TOD neighborhoods are also highly “walkable.” Residents can walk to shopping, recreation and sometimes employment centers. The housing design patterns encourage people to get out and meet one another. They actively discourage heavy reliance on autos, even though townhouse communities like Jones’ offer garages and off-street parking.

Chelsea Heights is one of 34 projects underway or built in D.C., Virginia and Maryland by The Neighborhoods of EYA, a developer that is nationally known for its fast-selling urban “infill” housing communities. But Washington is hardly the only large metropolitan market that is seeing a strong upswing in transit-oriented projects. There are TOD communities in or near Denver, Boston, Chicago, San Diego, San Francisco, Portland, Ore., Dallas, Texas, and Charlotte, N.C., to name just a handful.

The core concept — connecting people with where they want to work, play and own a home by creating attractive neighborhood environments that make maximum use of existing transit infrastructure — fits many post-recession households’ needs, regardless of age. Older owners of suburban homes are downsizing into townhouses and condo units close to or in the central city, often in locations near transit lines. Younger buyers, fed up with long commutes to work, want to move to places where they can jump onto mass transit and get off the road.

Many of these buyers also have an eye on economics. For example, Bill Locke, a federal contracts consultant in northern Virginia, said that although owning a LEED-certified townhome near a Metro transit stop “is a really big deal” for himself and his wife, he sees the unit they recently purchased in the Old Town Commons development in Alexandria, Va., as a long-term investment that will grow in value “because it makes so much more sense” than competing, traditional subdivisions farther out from the city.

“We shopped the market for a long time,” he said. “We really knew what was out there and we concluded that the location and quality of building and the convenience of (Old Town Commons) will prove to be a wise use of our money long term.”

Academic research tends to support Locke’s view. A study in the Washington, D.C., area used statistical regressions to demonstrate that average property values within close proximity to Metro stations increased in resale value by 19 percent more compared with neighborhoods that were far from transit.

Walkability is also a key factor in TOD communities’ property value performance. A study in 2012 by the Brookings Institution estimated that for every notch up in “walkability score” — that is, the less dependent on autos to access key services and attractions — there was an $82 per square foot increase in home values compared with homes in locations that were dependent on autos.

Are There Drawbacks to TODs?

The immediate proximity of mass transit stations — whether rail, trolley or bus — is the key locational factor for TOD projects. The housing units themselves often consist of mixes of single family townhouses, condos and high density multifamily apartments.Given all these positives, what — if any — are the downsides to transit-oriented housing developments? There are two major issues: start with price. Though some developers take pains to include units for purchase or rental in their projects that are affordable to buyers with moderate incomes and budgets, the underlying costs of land acquisition in close-in locations tends to push up final selling prices for townhouses and condos. This is especially the case in metropolitan markets where home prices already are high. Building high-tech, high-performance new homes on scarce infill sites in such areas is expensive.

To illustrate: Though median home prices in the District of Columbia and most of its nearby suburban counties are among the highest in the country — $450,000 to $500,000 — Jones’ and Locke’s significantly exceeded that amount and cost more than $700,000 apiece.

There’s a related and more socially sensitive issue: gentrification. By their very nature, TODs often introduce wealthier households into areas of cities that historically have had predominantly moderate and lower income households. Though developers and the city authorities who grant them approvals almost always seek to avoid displacing existing residents, it’s inevitable that the arrival of high-priced real estate nearby raises costs for the communities around them. Prices of un-renovated townhouses in the immediate area tend to increase, rents rise and some long-time residents cannot afford to remain.

The Pros

On the other hand, properly designed and phased-in, transit-oriented developments can have huge net benefits for residents and cities — raising tax revenues for government services and attracting supermarkets and retail shops that might not otherwise have located there.

TODs are not for every buyer, of course. Families with young children tend to favor suburban locations where public school systems are better than they are in central cities. Many buyers want bigger lots than are possible in new urban developments where land costs make that impossible.

But for anyone who values walkability, easy connections to inexpensive transportation and cutting edge, high performance, energy efficient housing close to the city’s attractions, buying in a transit oriented development can be, as Bill Locke and his wife believe, a very smart real estate investment.