How to pay for large scale infrastructure projects, particularly public transportation in cities like New York, has been a historically vexing proposition. It is both a problem of funding capital expenses, such as expansions and improvements and of operating revenue. The Interborough Rapid Transit Company, which built and operated the first subway in Manhattan, fed real estate speculation by building lines, such as the 7 in Queens, essentially to nowhere.
“When it opened in 1915, it was meant to spur growth in Queens and expand the city eastward. It did just that, and in a really big way. The population of the borough increased from 284,000 in 1910 to 1,079,000 in 1930, 25 years after the launch of the 7 train.”
This attitude of “if they build it they will come” worked out well for these early subway pioneers. The Queens Boulevard viaduct pictured above surrounded by empty fields was quickly filled in by the dense, midrise apartment buildings that characterize the Sunnyside and Woodside neighborhoods today. Though initial capital construction may have been achievable through cooperation with real estate developers, the IRT lines fell into disrepair by the 1930s. City policy to depress fares decimated the finances of the IRT and of the competing Brooklyn Manhattan Transit Company (BMT), which eventually led to their purchase by the city and consolidation with the Independent System.
Aside from fares that were kept below inflation by city policy, why else did these private companies fail to remain profitable and cede to purchase by the city after only a few decades? Not unlike the NYC Subway today, outside of farebox revenue, our public transportation systems have no guaranteed revenue source and are beholden to state lawmakers (often those that live hundreds of miles away from New York City) for vital capital dollars. It is almost cliché to say that the NYC Subway is the backbone of the city; the great circulatory system of the greatest city in the world. Yet, private employers reap enumerable benefits (and dollars) from the presence of the NYC Subway, a one way relationship that attracts employees and investment to gleaming office towers, while the subway rots in its 100 year old hole.
The decay of the NYC Subway, a victim of its own relative success and the success of New York City in the past 25 years, is not an uncommon story for American transportation systems. Chronic problems stemming from lack of capital investment in equipment improvements with sometimes deadly consequences plague BART in California, MBTA in Massachusetts and most painfully, Metro in Washington DC. However, in other cities, most notably Hong Kong, transportation systems are models of efficiency, capability and financial strength. “How can Hong Kong afford all of this?” asks The Atlantic’s Neil Padukone, “The answer is deceptively simple: “’Value Capture.’”
Hong Kong recognizes the value that its subway operator MTR offers businesses, and in exchange receives a cut of their profits. Hong Kong MTR is also a developer and a landlord, which generates profits just like a normal developer or a landlord; except that money is put towards the good maintenance and technological improvements that make the Hong Kong subway so clean, fast and reliable. By capturing the value that the Hong Kong subway lends to private entities in an incredibly dense metropolis of over 7 million people, it is not subject to the same political whims nor is it as depending on farebox recovery as other systems (although fares in Hong Kong do cover an almost unfathomable 185% of operating expenses compared with just 41% in New York).
The New York City Subway has in the past decade attempted to leverage the value it provides to the real estate sector in two notable ways. To build the 7 Line extension to Hudson Yards, the city floated almost $3 billion of bonds, which were expected to be paid back in full by the massive commercial and residential development on Manhattan’s Far West Side, which was only achievable with such a subway link. However, the taxes to be collected on Hudson Yards developments could fall hundreds of millions of dollars short of paying the New York taxpayers back. Separately, developer SL Green has committed to $200 million of improvements to the Grand Central Subway station, one of the city’s busiest, in exchange for allowance to build a 1,500 foot office tower. Though these improvements are not unnecessary, they do not tip the scale in the grand scheme of transit improvements that the NYC Subway needs.
What is stopping the New York City Subway from capturing some of the value it lends to private entities? The MTA is already a huge real estate presence in the city, with hundreds of stations, many with stores, newsstands, coffee shops and barber shops. The TURNSTYLE mini-mall, which was built in an underutilized corridor of the 59th Street-Columbus Circle station is a great example of what could be. However, what is stopping it from expanding into more substantive real estate development that could provide a consistent revenue stream? How does the NYC Subway avoid missing out on the benefits of the value it adds to the city and on real estate and investment booms that would not be possible without its existence?
Answering those questions to be the topic of a future blog post, but until then, your comments, ideas and opinions are welcome! Thanks for sticking with me on my first blog post.