Home Fulton Street On Fulton St. and capturing value from transit properties

On Fulton St. and capturing value from transit properties

by Benjamin Kabak

The Fulton St. Transit Hub, seen here in February, will open in June, and real estate developers are eying properties in the area. (Photo courtesy of Metropolitan Transportation Authority / Patrick Cashin)

Here’s an interesting bit from Crain’s New York on the impact the Fulton St. Transit Center is having on Lower Manhattan real estate. It’s transit-oriented development at its finest within the five boroughs of New York, and it makes me wonder if the MTA is leaving some opportunities on the table. Daniel Geiger has this to say:

As the Fulton Center, the oculus-topped financial district transit hub and shopping destination nears completion, and as lower Manhattan gains in popularity among budget-conscious tenants, investors are seeing opportunity on William Street…

Real estate experts say that the area’s mix of both potential and value are driving the sales activity. The Fulton Center promises to bring in new retailers when it opens next year and convenient access to the neighborhood’s myriad subway lines—amenities that could pull in office tenants. Despite those prospect, commercial real estate values along the corridor have hovered in the $300s per square, at least a third of what office buildings go for in other neighborhoods, including midtown, where prices per square foot top $1,000.

“William Street is increasingly becoming recognized,” said Brad Gerla, a broker with CBRE Group who specializes in downtown leasing and is the leasing agent for 156 William St. “You’re very close to the new transit hub, it has an incredible residential community in the area and it’s an easy hop to the FDR. Tenants are attracted to all of those attributes.”

The Transit Center will open in June after years of setbacks, budget increases and construction, and already, it’s serving as an anchor in an neighborhood low on anchors. Although the Lower Manhattan area isn’t lacking for transit access, it hasn’t had a cohesive focal point, and the Transit Center seems poised to deliver. We’ll know at some point what the retail spaces will deliver, and the MTA has simplified getting to and around the perplexing Fulton St. complex.

So what’s the missed opportunity? For one, the Fulton St. Transit Center will be a sight to see, but it’s going to be all of four stories tall in a neighborhood surrounded by giant skyscrapers. The MTA could have pursued a development deal that led to the creation of a much bigger building at the spot, but held back in favor of what amounts to a fancy headhouse for a subway station. Imagine the revenue that could have been realized with a comprehensive plan to develop a Time Warner Center-like building with high-end retail on the lower levels and residential higher up atop a very popular subway station.

If this sounds familiar, well, perhaps it is reminiscent of what Jay Walder said of Hong Kong a few weeks ago. In a speech at the Kennedy School, Walder spoke of the MTR’s approach to development. “The development of Hong Kong’s rail system,” he said, “has largely been supported by the granting of development rights for the properties that are adjacent to the railway.” For an agency short on cash, the opportunities are staring it in the face.

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Walt Gekko October 30, 2013 - 12:43 am

I was thinking the same thing:

A 45-50 story residential or office tower on top of the Fulton Transportation Center would have made much more sense. It might have delayed the opening by a year or so, but long-term would have potentially brought in revenue to the MTA in more rents or other values.

Stephen Smith October 30, 2013 - 1:09 am

The MTA absolutely should have sold off the air rights, but I actually think this is the perfect example of why value capture will never, ever be more than a rounding error in the MTA’s finances – certainly nothing even near what it is in Hong Kong.

Some numbers are in order. Fulton Center costs $1.4 billion. People who aren’t in real estate always imagine land in Manhattan is extraordinarily expensive, but it’s really rather cheap compared to US transit construction costs. The Drake Hotel site uptown, where CIM and Macklowe are now building 432 Park, sold for $440 million in 2006. Fulton Center is a smaller site, and in nowhere near as nice of a neighborhood (432 Park is a stone’s throw from 57th & Park, which is pretty much the highest-value patch of dirt in the Americas…FiDi is, on the other hand, one of the cheapest residential neighborhoods below Harlem). Plus, construction costs are a lot higher on the Fulton Center site since you essentially have to deck over an active, cramped subway hub to build a building of any appreciable height. I’d be surprised if they could get $100 million more for the land than what they’re getting now (remember, they are building some retail, so they are getting something for the land).

$100 million is practically a rounding error compared to a $1.4 billion project. Putting a tiny bit of energy into keeping costs down would yield much more money than building a skyscraper.

Which isn’t to say that they shouldn’t have done it. But we’re kidding ourselves to think it’d make much of a difference. The real scandal is that it costs them $1.4 billion to renovate a subway hub, not that they didn’t squeeze a 60-story condo tower onto the site to pay for a little of it.

Stephen Smith October 30, 2013 - 1:21 am

Oh wow, here’s an even more damning comp: the land beneath 56 Leonard cost just $140 million, zoned for half a million square feet. 56 Leonard may be close to Fulton Center, but the difference in prices between Tribeca and FiDi is night and day. Mark the price down for the inferior location and again for the tough construction site, and they wouldn’t have even hit $100 million.

John-2 October 30, 2013 - 6:43 am

As with the Calatrava PATH hub, what was unique above the ground was always of more interest to the political types than what was below it. The connecting tunnels are in essence the frills to get to what was important, which was having a unique exterior building they could say they shepherded to reality.

A 30-50 story condo with two lower floors of retail and a bunch of subway entrances at street level might have been more cost-effective, but it also would have been more nondescript. I suppose we should just be happy the MTA did show enough budget restraint to cut out the glass egg part of the Fulton project instead of barreling ahead like the Port Authority did two blocks to the west.

Stephen Smith October 30, 2013 - 11:36 pm

Actually, this was not the case for WTC PATH – the Port Authority under Shorris/Spitzer was going to cut a bunch of underground fluff and save a ton of money (at the time they thought they could keep it within its $2.5 billion budget, whereas now it’s $4 billion), but then under Ward/Paterson the goal became opening the memorial by 9/11/11, and everything else became secondary. So the Port actually spent a ton of money on the belowground aesthetics – way more than on the aboveground stuff, which IIRC was only (“only”!) around half a billion.

Demetria October 30, 2013 - 8:05 am

Yes, the Hong Kong model is a wonderful one, but it works so well in Hong Kong because of a few Hong Kong unique factors.

1. All land in Hong Kong, with the exception of one church, is owned by the Hong Kong government. It is theirs to lease out and land leases are a massive source of revenue for the government (income tax rates are only 15%) because Hong Kong has one of the world’s hottest property markets. New York State doesn’t own large swathes of land a few miles from Midtown Manhattan that it can sell to the MTA to develop into apartments, and to build subway lines to. Yes there are pockets of land that can be rezoned or upzoned, and the associated tax revenue is helpful, but this land lacks the scale to really generate the revenue for new subway lines to be effectively self funded.

2. Only 25% of Hong Kong’s land is developed, and yet it is one of the most densely populated places on earth. Why? Because they build tall residential towers with tiny apartments. This density , and the miniscule rates of car owensership (cars are massively taxed), ensure that people will use public transport, and that the system can be efficient enough to run every 2/3 minutes, on time. Hong Kong’s population is similar to New York City’s, yet its subway system is a fraction of the size, yet sustains similar ridership numbers. That’s a whole lot less of a system to staff, repair, maintain etc. Hong Kong’s MTA is self funding; that is simply not possible with the MTA.

An excellent example of the MTR’s land acquisition project in action is Hong Kong’s “Area 86” – land that, prior to 2002, was farmland, yet facing Hong Kong island and close to Hong Kong’s business districts. The MTA entered into an agreement to buy the land at a steep discount, build a spur of an existing line to it, build a number of enormous residential towers on it that can house 57,000 people. The property market got lots of new apartments, these new apartments have excellent public transport connections, a number of these new apartments were sold under an affordable property scheme, alleviating (to a very small extent) Hong Kong’s lack of affordable property.

AG October 30, 2013 - 11:16 am

Yeah – comparing Hong Kong to NYC doesn’t do much justice. As Hong Kong gets re-integrated back into mainland China it will be interesting. They are already doing an engineering exercise to build roadways to connect Hong Kong – Macau – mainland China together in a triangle. I’m pretty sure there will be new rail infrastructure as well. Must be “fun” to be an engineer out there will all those capital projects.

Justin Samuels November 4, 2013 - 9:46 am

NYC owns a lot of land in Manhattan. You have the housing projects. There are lots of housing projects not just in Harlem, but in the Upper East Side, Upper West Side, Chelsea, Lower East Side, and Downtown. The city could develop the housing project land and use that to subsidize the creation of new subways. Mind you, this might be politically difficult. But already NYCHA has leased out land on the Chelsea projects to allow the construction of luxury housing. There are proposals for other NYCHA sites. Also, with government subsidies to NYCHA being cut, NYCHA will be forced to pay rents and operate on a more for profit basis anyway (it currently is seriously in the hole as government subsidies are being cut). NYC can make a lot of money off its Manhattan housing projects.

Stephen Smith November 13, 2013 - 1:15 am

No, NYCHA did not lease out the land at the Chelsea-Elliott Houses (I assume this is what you’re referring to? the one right next to Christine Quinn’s building on 9th Ave?) for luxury housing. It was upper-middle-income housing, and it netted them a very tiny sum of money (I think something like $1 or $2 million a year). When the city tried to do what you’re suggesting earlier this year, it got howled down. They’re still suing about it, even though Bloomberg basically dropped the plan and is on his way out! That’s how contentious it is.

paulb October 30, 2013 - 8:53 am

I suppose a tower could have been constructed, but I agree with other contributors its budget contribution would have been, compared to what the MTA needs, pocket change. I don’t know how to deal with this. Some NYers who use the bus/subway could afford a much higher fare, but many, sincerely, couldn’t. For example, the security guys at the store where I work, many of whom make the long commute from the projects in Rockaway. I don’t see any way out but for a whopping access fee for driving into the CBD in Manhattan.

LLQBTT October 30, 2013 - 9:17 am

When I first read this, I thought and agreed with the direction of the article, but after some reflection, there is plenty of office and residential space available downtown with more coming on the market primarily from the WTC down the block. Building yet another high rise will serve to glut the market that much more. Plus, the MTA is offering a retail pavilion (hopefully to be privately managed!).

As long as the place is kept in good shape, and the original plan is realized, this is a win (albeit an expensive, delayed one, but what else is new!?)

Bolwerk October 30, 2013 - 12:09 pm

Well, there’s always the chronic housing shortage in this city.

Ben October 30, 2013 - 2:55 pm

It is literally not possible to glut the housing market in NYC. At an extreme number, you might cause market rents to drop noticeably (as they did in 2009 when demand dropped somewhat), but that’s not really a glut given how high rent is now.

The office market, yes. Building an office building would have been stupid.

3ddi3 B October 30, 2013 - 9:36 am

I think people are focused on the wrong end, obviously, I think it would be really hard to build vertical now since project is almost completed; what we should be focused on is what other MTA property is in a great location and can be developed.
As to all the comments saying that downtown is not developed and the land is not worth it, that’s why people become developers, like Ratner, they see blight as an opportunity to create change. So, right now downtown is not as expensive as midtown, so that’s a big opportunity to create change and it will foster the change.

Alex October 30, 2013 - 10:19 am

Totally off the main topic, but this stood out to me: “It’s an easy hop to the FDR.” Maybe I’m ignorant of how wealthy Manhattanites live, but is this really much of a selling point to people looking to move to that neighborhood?

Eric F October 30, 2013 - 11:06 am

It is a key benefit for both people who live in the area and those who work there. The FDR access provides relatively quick airport access and the ability to reach midtown quickly as well. Think of a top billing lawyer at $1,000 per hour toting a 25 pound case file, replete with a case or transaction team. The FDR access is a nice times saver.

That said, once you get a couple blocks from the FDR, the “access” isn’t actually all that great.

Larry Littlefield October 30, 2013 - 10:26 am

The MTA gets a piece every time a commercial or residential building sells, and every time someone buys something, in the entire MTA region.

Just because all the MTA’s future tax revenues have been spent in the past (through borrowing) doesn’t mean they don’t exist. It is capturing more value on an ongoing (as opposed to one off) basis that perhaps any transit agency in the world.

AG October 30, 2013 - 11:18 am

good point

g October 30, 2013 - 10:30 am

With a system as sprawling as the MTA’s it would seem that selling FAR increases in proximity to transit with the money getting split between the municipality and the MTA would be a more workable solution. In the city the possible FAR increase (and price) should be a lot higher when it’s within a set radius of a major transit investment (2nd Ave subway, ESA, 7 extension, Fulton, etc).

Ben October 30, 2013 - 2:58 pm

Look at how hard it’s been to get the Midtown East rezoning through! Politicians talk about lowering rents, but they’re not interested in what actually needs to be done to accomplish that. Because NIMBYs.

Just not politically feasible.

Quirk October 30, 2013 - 10:31 am

It’s the MTA. Of course they would never have thought of such a brilliant idea.

Eric F October 30, 2013 - 11:10 am

– The MTA will in fact get retail rents out of Fulton Center. In a counterpoint to my point, however, the creation of the center required condemning a bunch of mom and pop retail in the area, so I’m not sure there’s a net gain there in terms of aggregate area retail.

– I thought the big selling point of the Center was the “oculus” funneling light down to the tracks. You can’t have that with an opaque building straddling the site. Also, this is another reason why Corbin should have been demolished.

– The footprint of the center is probably too small for a modern office building. Big floors are now the in thing. So, you;d be basically forced to build a residential building, which is a great bet, but only in retrospect. In 2001-2003 people weren’t thinking of 2 blocks from ground zero as being a smart spot to put up a residential tower.

Jeff October 30, 2013 - 3:16 pm

I am not sure the Corbin is tall enough or close enough to the oculus to cast a shadow on it though.

Simon October 30, 2013 - 3:53 pm

And it looks a hell of a lot nicer than what they’re putting up.

Eric F October 30, 2013 - 5:23 pm

I hope not. I thought it blocks the southern exposure, but I’m happy to be wrong on this.

Stephen Smith October 31, 2013 - 12:03 am

An office building would’ve been a bad idea because there’s no demand for it (notice how WTC and Hudson Yards are struggling), but the large floorplate thing a remnant of a time when big financial firms were the biggest users of new, class A office space. Nowadays, financial firms are still the biggest users, but they’re boutique hedge funds (not that any of these want to be on Fulton Street anyway…hard to get to from Connecticut!), not big firms, so they don’t care about floorplates (notice how small the floorplates on 425 Park are going to be).

AG October 30, 2013 - 11:22 am

Lower Manhattan has been scene as a “discount” to midtown for a good while now (even prior to 9/11)… for more than one reason. Aside from the fact that lower Manhattan is much older (tighter roads) and smaller geographically… Midtown has connections to NJ Transit – LIRR – Metro North. That makes a big difference to big companies who have many workers that live in the suburbs. Lower Manhattan has the PATH to NJ… but that is comparatively limited in a geographic sense.

lawhawk October 30, 2013 - 12:36 pm

There’s direct capturing of value from transit properties – selling air rights over Sunnyside or Atlantic or Hudson Yards for instance, and capturing the benefits from higher demand in areas served by MTA capital projects going forward – like with the Fulton Center or 2d Avenue line.

Direct capture – from the selling the rights to build on decks over the rail yards is easier to do than trying to capture the value from rising real estate ventures near existing MTA assets. The MTA has more direct control over this, and it’s an area where the MTA hasn’t excelled.

The trick for the MTA is to see how the city and state can devote more tax revenues – particularly the various real estate taxes – to MTA capital projects to invest in further development and upgrade/maintenance.

Meanwhile, Gov. Cuomo is looking to cut roughly $3b in taxes statewide, and yet if he took that $3b in revenue and directed it at mass transit and infrastructure around the state, we’d not only be able to realize mass transit on Cuomo’s pet project Tappan Zee replacement instead of just building with the option down the road, as well as put a down payment on the next phase of the 2d Avenue subway – and that’s just with 1 year’s worth of tax revenue he’s going to cut.

Chris C October 30, 2013 - 9:21 pm

“The trick for the MTA is to see how the city and state can devote more tax revenues – particularly the various real estate taxes – to MTA capital projects to invest in further development and upgrade/maintenance.”

But isn’t the city contemplating giving the Hudson Yards development a tax exemption – 40% for 20 years at a loss of income of getting on for $350 million? (think I got those figures right there was a thread on here about it recently)

even if the city devoted only 25% of that lost income to the MTA it could do a lot with that amount of money in terms of lots of minor capital projects or paying for additional services.

Stephen Smith October 31, 2013 - 12:05 am

The problem with selling air rights over rail yards (or train stations like Fulton Center) is that it costs a lot of money to deck over them, and that cost ends up coming out of the land value. A rail yard zoned for 2 million square feet of space is a lot less valuable than terra firma zoned for a similar amount of density.

lawhawk October 31, 2013 - 9:59 am

Except this is development rights over highly valuable areas with clear access to transit, and the cost to deck over is miniscule over the long term profits and revenue to the developer, which is why doing these projects makes fiscal sense for all involved.

Stephen, the issue is that developers know there simply aren’t many places left in the city that allow for new development of millions of sf of space. Decking over rail yards is one of the few places where that’s easily done. To rezone other parts of the city and building out would require significant legal costs and time to purchase properties from their current owners – and you’re dealing with many potential owners. Here, the developer deals with the MTA. There’s time and value considerations at play that favor developers putting up with the added hassle of decking over a rail yard.

But even with the Hudson Yards – Related is spending nearly $800m to build the deck as part of their $20b building on the site. All those costs are built into their cost considerations when they bought the rights.

Tal F October 30, 2013 - 12:49 pm

The Fulton transit center is a great start to improving FiDi, but to see some real gains we need to pedestrianize large swaths of FiDi, as they do with old town centers in Europe. Most of the streets are so cramped and narrow they hardly add to car mobility. Why not close them off to cars completely and let people get around on foot and by bike? Then the entire area will become much more attractive as a retail destination.

Eric F October 30, 2013 - 1:23 pm

Parts of lower Manhattan have been pedestrianized. Fulton Street itself is one example. Pedestrianized Fulton Street is an absolute low rent pit, by the way.

Tower18 October 30, 2013 - 2:54 pm

Which part of Fulton St is pedestrian-only? Except the very foot at the seaport, it’s all open for traffic, and the seaport isn’t exactly low-rent, though it is low-class chain stores from anywheresville, but that’s what the people want.

Eric F October 30, 2013 - 3:18 pm

It’s been a while, I might be thinking of Nassau Street. It’s an ugly streetscape, whichever one has no traffic allowed. I believe it may be only pedestrianized during certain times of day.

Larry Littlefield October 30, 2013 - 3:56 pm

It was fine in the 1990s, before 9/11. Perpetual re-contstruction has wrecked the whole area, and the extremely long period spent building this project is a big part of it.

I once worked around there and my wife still does. She hasn’t spent any time there other than working in years.

David Brown October 30, 2013 - 4:55 pm

If there is a classic example of an ugly streetscape, with depressing buildings and even worse stores in them (those that are occupied anyway), and a dark environment (at 10:00AM), it might be Broadway between 25th-29th Streets (I was just there today, and it is more dank then walking on Jamaica Ave past Eldrets Lane under the (J) Train). I am sorry that area is not part of the East Side rezoning, because it deserves the same treatment as the neighboring “Flatiron District.” Compared to that section of Broadway, Nassau Street is 57th Street.

Ryan 6 train October 30, 2013 - 8:39 pm

Ah yes the upper 20s on broadway and its wholesale perfumers and drug dealers. That area just never cleaned up. You’d think it would have by now. Transit is easy and nearby are high end hotels and restaurants.

I find it sketchy in broad daylight and I used to live in the east 100s across from vacant squats.

Ben October 30, 2013 - 6:07 pm

Oh–the area around NYSE. I always assumed that was ostensibly for security rather than to promote a pedestrian streetscape. It is unpleasant, but I don’t think it’s the pedestrian plaza’s fault.

Tal F October 31, 2013 - 10:03 am

That area was pedestrianized for security reasons only. For much the same reason, they also do not allow much retail. I’m talking about pedestrianizing some of the relatively nice areas that already have some capacity for retail. Far too many of the buildings in FiDi have blank walls facing the street. A good pedestrianization effort for these streets must be accompanied by street vendors. And I’m not just talking hot dogs and peanuts, but hopefully some real high quality street food with chairs and tables provided out in the plaza.

anon_coward October 30, 2013 - 4:13 pm

didn’t they capture the value of the old penn station by tearing it down and building on top of it and now people want to rebuild it?

Ben October 30, 2013 - 6:09 pm

I don’t think we’d be having this conversation had there been an attractive and perfectly functional train station already on the site of Fulton Center!

Dave November 2, 2013 - 10:00 pm

The retail will fail… Just like the empty curved glass stores at Columbus Circle or the dreary shops at 42nd st. Port Authority.

David P November 5, 2013 - 2:39 pm

I commute through the Fulton Station daily. From the progress (or lack thereof) I see on this project, I am EXTREMELY sceptical that this project will complete in June of next year.

Benjamin Kabak November 5, 2013 - 2:41 pm

To be technical, I believe June is the revenue service date. It may not be 100% completed by then.


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