Marc Fogel, CPA and Jon Scalzitti, CPA
04.11.2018 | Berdon Industry Insights
In recent years, the boom in the NYC Metro real estate market has been aided by a surge in transit-oriented-development (TOD), making the relationship between real estate values and the levels of state and federal spending on transportation-related infrastructure projects abundantly clear.
A Lack of Federal Funding
The lack of federal funding for large-scale infrastructure projects over the past three decades has resulted in cities and states contributing funds for large scale infrastructure projects, such as the $4.5 billion Second Avenue subway.
Such large scale infrastructure projects are proving to have positive knock-on effects on real estate values. The Corcoran Group recently found that co-op and condominium prices in a 10-block stretch near the Second Avenue subway have risen 6% since it opened in January 2017.
Another study, cited by The New York Times, found that in “Manhattan’s main business corridors, from 60th Street south, the benefit of being near a subway adds $3.85 per square foot to the value of commercial property.”
Yet, while there has been a noticeable uptick in infrastructure investment on the state and municipal level, according to the American Society of Civil Engineers (ASCE), federal spending has a lot of catching up to do.
Last March, the ASCE gave US infrastructure an overall grade of a D-plus, and it estimated that the US would need to invest $4.59 trillion by 2025 to bring America’s infrastructure to an adequate level.
The ASCE reserved its lowest grade, a D-minus, for transit infrastructure which, it pointed out, had long been chronically underfunded and faces a $90 billion rebuilding backlog.
Changes on the Horizon
Last month, President Trump signed, and both houses of Congress passed, a new spending bill for fiscal year 2018, which includes billions of dollars in infrastructure spending.
The massive 2,232 page, $1.3 trillion dollar spending bill, which sets aside $21.2 billion for infrastructure projects, “makes major investments in infrastructure across the board, whether it is transportation, energy, water or cyber,” said House Appropriations Committee Chairman Rodney Frelinghuysen of New Jersey. According to a report in Pensions and Investments, “The $21.2 billion in new infrastructure funding in fiscal year 2018 represents a $12.6 billion increase over fiscal-year 2017 requests. That includes $8.7 billion for highways, roads and bridges, and another $1 billion for discretionary airport improvement grants targeting small and rural airports.”
What does this mean for the NYC Metro Area and its real estate market in particular?
One thing it does not mean is that the bill, while a sign of progress, will serve as a panacea for all of the NYC Metro Area’s infrastructure challenges. The ASCE’s Infrastructure Report Card on New York noted that “Upstate and suburban transit systems require $1 billion over the next five years to maintain infrastructure in a state of good repair and add capacity to address ridership demand, [while] New York City’s transit system needs $68 billion in the next twenty years along with new technologies to replace aging system components and improve the quality of transit service.”
While the bill will not solve all of the NYC Metro Area’s transportation challenges, it is certainly a step in the right direction. One current project that is covered under the bill and will benefit the region includes the $541 million set aside for the Gateway Project, a major Hudson River tunnel project. The Gateway Project will double the capacity of the Amtrak and New Jersey Transit line between Newark and New York City, while improving overall rail and freight capacity all along the entire Northeast corridor.
Commercial Real Estate Investment Soars
It has long been recognized that there is a link between levels of infrastructure investment and commercial real estate expansion. Real estate investment firm Transwestern, which undertook a study of the effect of infrastructure investment in nine of the top real estate markets in the US, found that “the presence – or absence – of suitable infrastructure can have a dramatic effect on the commercial real estate that surrounds it.”
In New York, a number of high profile projects are expected to lead to rent growth and increased occupancy in the commercial office, retail and multifamily sectors.
The Gateway Tunnel Project will be accompanied by the development of the new Penn-Farley Complex—on the site of the Farley Post Office across from the current Penn Station and Madison Square Garden— which includes the proposed Moynihan Train Hall, a $1.6 billion, 255,000 square foot facility expected to open in 2020.
A few blocks west, there is new development and ongoing revitalization of the Hudson Yards, a 28-acre mega-development stretching from 30th to 41st streets and 10th and 11th avenues on Manhattan’s West Side, which will feature 6 million square feet of office, 750,000 square feet of retail, 5,000 apartments, 2 million square feet of hotel and 14 acres of public space.
Transportation Comes into Play
Given the success of the $1.4 billion Fulton Street Transit Center, which was completed in the Fall of 2014 and connected nearly 300,000 daily visitors to a combined 620,000 square feet of retail—90% of which was reportedly leased prior to opening—the development of transportation hubs has undoubtedly had a positive effect on commercial real estate.
The role infrastructure spending played in the Hudson Yards project was also critical—most observers believe that the extension of the New York City Subway’s 7 Line played an integral part in the redevelopment of the area. While the subway extension is already complete, the entire Hudson Yards redevelopment is expected to be completed by 2024 at a total cost of $20 billion.
Across town, the Long Island Rail Road (LIRR) East Side Access project, a massive $10.8 billion infrastructure project linking the LIRR to Manhattan’s East Side, is expected to boost the overall office market around Grand Central Station.
Meanwhile, New York State’s plan to invest $5.6 billion on the transformation of the LIRR is also underway. According to the MTA, the $2 billion LIRR Expansion Project will add a third track to 9.8 miles along the Main Line of the LIRR between Floral Park and Hicksville. The planned LIRR extension is expected to result in a flurry of transit-oriented development along the line. According to one forecast, the improved rail service to and from Manhattan is projected to attract up to 35,400 new residents to Long Island, thereby increasing the value of the housing market on Long Island.
However, Long Island is not the only suburban area seeing a boost from infrastructure spending.
In Westchester, several new transit-oriented developments are also underway. In New Rochelle, construction is underway at 587 Main Street, a $120 million, 28-story mixed-use complex within walking distance to the New Rochelle Metro-North Railroad station. Other projects, such as the Harbor Square luxury complex in Ossining; the Larkin Plaza mixed-use complex in Yonkers; and The Modern, an 81-unit multifamily development in Mount Vernon are all recent transit-oriented development success stories.
In summary, the new spending bill out of Washington, replete with billions in new infrastructure funding, is not only good news for commuters, but also for the NYC Metro Area real estate market—serving as a boost for future development and growth.
Questions: Contact Marc Fogel 212.331.7568 | firstname.lastname@example.org, Jon Scalzitti 212.331.7579 | email@example.com, or your Berdon advisor.
Berdon LLP, New York Accountants