Sunday, March 25, 2012

A possible contributing factor to All Aboard Florida

The announcement about All Aboard Florida has led to quite some confusion among rail fans and others watching the industry, mainly resolving around the question of why. After all, passenger rail operations, even when profitable, do not have a terribly high profit margin, and it's unlikely that it would earn back the one billion dollars that they've stated they plan to invest in it. Given that businesses do not tend to be altruistic, what gives?

A clue lies in the initial press release itself. While it would run on Florida East Coast Railway track, the announcement was made by their holding company Florida East Coast Industries which describes itself as a major real-estate owner and developer in the state of Florida. Looking into their holdings, we find one very prominent eight acre parcel in downtown Miami that is especially interesting. This used to actually be the location of the FEC Miami station and skirting the northern edge of the property there remains a single tracked FEC line. It also currently possesses an entitlement for up to 2.5 million square feet of mixed use development.

While this area is certainly valuable enough as is, both due to its inherent location as well as its proximity to Metrorail and Metromover stations, the addition of easily accessible intercity rail connections to the rest of the state greatly boosts that value, especially if developed with an eye towards the tourist trade. Of course, the increase in value to this location does not mean that it will come anywhere near completely recouping the investment costs of All Aboard Florida. Additionally, I was unable to identify additional properties in cities to be served by All Aboard Florida whose value would be similarly enhanced. However, I believe that using passenger rail service to enhance real estate values and incomes, the original purpose of the Florida East Coast Railway in fact, is a significant contributory reason for the All Aboard Florida announcement.

7 comments:

  1. If you're betting on Miami not sinking under the waves, they might actually be able to make back a billion bucks in rent from that parcel. However, I wouldn't be inclined to bet on that....

    ReplyDelete
  2. I think Alon's run the numbers before – in East Asia, private railroads are generally profitable even without the real estate investments.

    ReplyDelete
    Replies
    1. Sure. But in US history there's a lot of precedent for rail subsidizing development: Pacific Electric was one example.

      The hope I have for this case is that, unlike Pacific Electric, the value of the property will depend on continued rail access, which means FEC won't have an incentive to skimp on maintenance. The difference is that previous cases of development-oriented transit were about outward development, both nationwide (i.e. transcontinental railroads) and regional (e.g. PE, the Chicago L, Coney Island), and once car ownership became high enough, the loss-leading rail became unnecessary after the area was already development. In contrast, this is downtown development, and unless FEC can maintain the accessibility of the location by alternative transportation, property values may decline.

      Delete
    2. I'm not sure about this, but I've also noticed a link between real estate investment and price controls. In theory, you'd think that a railroad would be sufficiently different in terms of operation and expertise needed that rather than recoup the investment indirectly (and poorly, given that that they only own a few parcels, at most) through real estate, they'd just raise the fare, capturing the benefit directly. But if there are price controls – as there were for Coney Island (five-cent fare) and there are today in Japan (no matter how much economists have told me that the rates are perfectly calibrated and regulated by the government, I'm not quite so sure I believe it, especially considering the crowding) – then real estate (speculation and continued ownership) could be a second-best way to gain revenues. Even before WWI inflation totally devalued the 5-cent fare, I think the very early subway fares were in some ways restricted. Not sure about the L or the Pacific Electric, though…

      Anyway, I'm not really that opposed to the idea that they'll recapture some of the investment in real estate – kinda just playing devil's advocate.

      As for the transcontinentals, they were political rather than economic enterprises – unless FEC goes full hog after subsidies (the All Aboard spokeswoman I talked to today left open the possibility for construction financing/subsidies, but said the "overwhelming majority" of the cost would be privately paid), I'm not sure how many parallels there really are.

      Delete
    3. Coney Island predates the five-cent fare. If you read the history section on nycsubway.org, you'll see that the excursion railroads serving Coney Island offered 25- and 30-cent fares. The regulation mandating a 5-cent fare came only in 1913, and by then the purpose of the lines was to connect to bedroom communities all over Brooklyn rather than to shuttle people to the Coney Island terminal. The BRT did not engage in development in Brooklyn, and the IRT did not engage in development in the Bronx and Upper Manhattan.

      The main advantage of combined real estate and transit conglomerates is that those two operations support each other. Raising the fare alone won't do it, especially not in a competitive environment. Besides, as the railroad operator, your goal is to spread demand evenly and bidirectionally, giving you more incentive to develop the outer end than anyone else. Likewise, as the developer, your goal is to make your property in high demand, giving you more incentive to provide good transportation than anyone else.

      Delete
  3. I ran the numbers myself when I looked at their operating profits. But America isn't East Asia, the density, rate of car ownership, and affordability of driving are vastly different, although I imagine that Florida, with its large tourist and elderly populations, probably comes closer than any other American area. It's not that I'd be surprised by the rail line being profitable, it's just that I'd honestly be surprised to see it be able to recoup a billion dollar investment and do so at a better yield than normal investments would. Between some freight use of the line and the increased value of current real estate investments, however, it looks rather better.

    ReplyDelete
  4. Paulus, I've been checking that book on the history of the FEC (Speedway to Sunshine), and there may be other FEC associated company names with real estate. You may want to look under Gran Central and also under Flagler Development.

    ReplyDelete