Build a new highway and rooftops will surely follow. In real estate, that has been a bankable truth since the advent of the interstate highway system. But does it also apply to tolled highways? Toll roads are becoming an increasingly popular way to serve transportation needs in fast-growing U.S. metropolitan areas, but the extra expense to use such roadways can deter the very drivers who developers hope to lure to subdivisions, shopping centers, and office parks.
It turns out that actual development trends along newer toll roads in the United States are decidedly mixed. In metropolitan areas where toll roads have been built in high-growth corridors—and where they constitute the only highways built recently—the tollways have been a magnet for real estate investment. But in metropolitan areas where toll roads have been built in low-growth corridors and in competition with free highways, the tollways have usually struggled to attract interest from developers.
Related: ULI: When the Road Price Is Right
These contrasting experiences are playing out across the country. Dallas cannot build new toll roads fast enough, and they have not hurt its booming growth. In North Carolina, a new tollway is credited with reviving development outside Raleigh. But for every Dallas and Raleigh, there are outer suburbs in places like Chicago and Washington, D.C., where the views along toll roads remain much the same as they were the day the roads opened.
Sometimes both types of experiences have occurred in the same metro area, such as Austin, Texas. There, developers are investing and building near a new toll road that cuts through the thriving northern suburbs. But when the highway reaches the more wide-open spaces of the southern suburbs, construction activity dwindles.
“If the demand is out there, the toll road will accelerate it,” says John McKinnerney, assistant chairman of ULI’s Industrial & Office Park Development Council (Gold flight) and a partner with Castle Hill Partners, an Austin-based commercial investment firm.
Thirty-three states now allow tolling, but that does not mean toll roads have been created wherever they are allowed. Public toll roads still do not exist in 20 states and are particularly rare in the Upper Midwest, the Mountain West, and the South, according to the National Conference of State Legislatures. Yet, tolling is ballooning in metropolitan areas: from 1998 through 2010, tolled miles =in urbanized areas jumped 36 percent, according to the Federal Highway Administration (FHA).
Overall, annual capital expenditures on toll roads throughout the country have soared more than 20-fold, from $155 million in 2000 to $3.65 billion in 2011, the latest year for which FHA statistics are available. In metro Dallas alone, the North Central Texas Council of Governments unveiled a new 20-year plan that calls for nearly $50 billion of new tollways, highway toll lanes, and other roads, spread across eight counties.
Now even the federal government—which traditionally prohibited federal funding for toll roads—is offering new opportunities. The latest federal transportation bill, MAP-21, passed in 2012, permits the conversion of non-interstate free highways to toll roads and, for the first time, authorizes federal participation in tolling projects.
Tolling is growing because traditional sources of transportation funding are increasingly under pressure. At the federal level, the Highway Trust Fund—the main source of federal transportation funding for states—is constantly facing insolvency because the federal gasoline tax has not been raised in two decades. At the state level, tax revenues declined when the Great Recession began, forcing years of budget cuts that delayed new transportation projects. In this funding environment, tolling provides a new revenue source, and in many cases it is allowing projects to proceed that otherwise would not have funding.
As investment bank UBS stated in a 2012 report on highway funding: “More tolling for existing roads and new roads seems inevitable as state and local governments search for additional revenue sources to fund transportation projects.”
Still, tolling’s effects on real estate are not well documented or understood.
Surprisingly, given the historical connection between highways and real estate development, few studies have actually investigated the relationship between toll roads and land use. But the studies that have been done have found that toll corridors had higher real estate values. A 2001 study, “New Highways, House Prices and Urban Development,” by professors at the University of California at Irvine, found homebuyers were willing to pay a premium for closer access to two Orange County, California, toll roads. Likewise, a 2007 study, “Toll Roads and Economic Development: Exploring Effects on Property Values” by Sharada Vadali at the Texas Transportation Institute at Texas A&M University, found that prices for homes within one mile (1.6 km) of suburban Dallas toll roads climbed faster than those in other areas.
“Toll roads do work. That’s why people like them,” says Denise Casalino, a senior vice president for transportation consulting firm AECOM and a member of a ULI panel convened last year to begin exploring toll roads and land use. “They are generally faster, and they are generally less crowded. They do what they’re supposed to do.”
Interestingly, because of where toll roads have and have not accelerated development, a case can be made that tollways are more likely to promote compact development than sprawl because the tolls add to the expense of long commutes. Indeed, in the case of Austin’s Whisper Valley—a mixed-use community with 7,500 planned housing units and the largest project now under construction along a stretch of State Highway 130 toll road completed in 2007—the site was chosen because of its proximity to the airport, which is also along the toll road, as well as the short commute to downtown using a different, nontoll highway.
“That was a very fundamental reason why we felt a desire to buy this land,” says Douglas Gilliland, president of Taurus of Texas, Whisper Valley’s development firm.
“Given the state of transportation funding in this country, there will be a lot of different tools on the table, and value capture may be one of the solutions.” – Kristi Lafleur
In the right places, toll roads have proved to be catalysts that drive additional growth and development. In the 1990s, when the San Joaquin Hills toll road was completed in Orange County, California, Parker Properties developed an office park nearby, with the company’s then-CEO telling the Los Angeles Times, “Without the tollway, that would never happen.” Elsewhere, parcel delivery service UPS a decade ago chose a site for a distribution center just south of the Indiana Toll Road in South Bend because of the east–west access. “If it weren’t there, we probably wouldn’t be there,” a company spokesperson told the Indiana Economic Digest.
Indeed, in an anecdotal examination of development clusters along selected toll roads, one common element is exclusivity: the toll road is the only kind of highway being built and available for development, or it is the main access to or through a metro area’s primary growth corridor.
Nowhere has this been the case more than in metro Dallas, where three toll roads—the Dallas North Tollway, the President George Bush Turnpike, and the Sam Rayburn Tollway—fan out across the northern suburbs, the metro area’s primary direction of growth. One 2006 study conducted for the North Texas Tollway Authority determined that more than $28 billion in new development, measured by appraised property values, had occurred within one mile of the north–south Dallas North Tollway and the newer east–west Bush Turnpike. The authors, from the University of North Texas, concluded, “Absent these thoroughfares, the northward expansion of the Dallas area would still have occurred—but certainly at a much slower pace.”
The large, booming suburb of Plano is the quintessential example of this. It is bordered on three sides by the three toll roads, and commercial development—from offices to light-industrial space—has gravitated to all three. For instance, Ross Perot started the Legacy master-planned community before the Dallas North Tollway reached Plano, but with that access and the adjacent Sam Rayburn Tollway, Legacy has mushroomed to become a place where 50,000 people live and work in apartments, office parks, and shopping malls.
So when development locales in Dallas are considered, “the choice isn’t a free road or a toll road. It’s a toll road or nothing,” says Michael Dardick, a vice chair of ULI’s Industrial & Office Park Development Council (Gold flight) and president of Dallas-based office developer Granite Properties.
Elsewhere, toll roads have been credited with accelerating growth in a metro area’s primary growth corridor.
In Austin, the direction of growth has primarily been toward the rolling hills north and northwest of downtown. Interstate 35 goes straight north out of the city and bisects the suburb of Round Rock, where the Dell computer company established its headquarters, bringing with it thousands of jobs. Next to Round Rock is Pflugerville, a bedroom community that doubled in population between 2000 and 2006, when the area’s first toll road, which runs right through the town, opened, setting off a wave of commercial construction. A Walmart and a movie theater opened; a shopping center with a Home Depot and a Target was developed at a toll road exit. As a result, the city’s sales tax revenues have jumped 10 percent every year since 2007, says Floyd Akers, executive director of the Pflugerville Community Development Corporation. “It’s almost entirely due to the tollway,” he says. “The tollway is where all the growth in Pflugerville is occurring. It’s been a gift.”
Likewise, in the Raleigh-Durham Research Triangle region of North Carolina, the state’s first toll road, the Triangle Expressway, opened in 2011, stretching to Raleigh’s southwest suburb of Holly Springs. Officials there credit the toll road with reviving development interest coming out of the recession: the town’s building permit numbers rose 47 percent in 2011 and then again in 2012, nearly returning to 2007 housing construction levels.
“I can’t necessarily say it’s the toll road that’s spurring the development, but it’s definitely helping sell major projects,” says Gina Clapp, Holly Springs planning and zoning director. “It’s providing opportunities that we normally wouldn’t have.”
Too Far Out
Every new highway—free or tolled—is built with dreams of economic development. In Oklahoma last year, at the ceremonial opening of a new interchange off the Creek Turnpike in the popular Tulsa suburb of Broken Arrow, Mayor Mike Lester gushed about shopping center plans already announced for a location off the turnpike exit: “I would say in three years you will not recognize that part of south Broken Arrow.”
But highway development dreams do not always come true. Tolled roadways do not always meet traffic forecasts. Financial firm Standard & Poor’s in a series of studies from 2002 to 2005 examined several years of forecasts for new toll roads and found that initial traffic volumes averaged about 25 percent less than forecast. From coast to coast, projects ranging from the Pocahontas Parkway in Richmond, Virginia, to San Diego’s South Bay Expressway have either gone into foreclosure or were sold because of lower-than-expected toll revenues—Pocahontas Parkway being sold in 2006 and South Bay’s owner filing for bankruptcy in 2010 and foreclosure actions being filed in court. Both toll roads are still operating.
Sometimes toll roads are built in locations where developers have little interest—in some cases, because property along toll-free alternative routes is not far away.
Consider Cleveland. Yaromir Steiner, chief executive officer of Steiner + Associates, has been developing and investing in shopping malls and town centers in Ohio for two decades. One main highway through metro Cleveland is the tolled Ohio Turnpike, but Steiner says that when he speaks to department store clients about locations, they do not want a site along a toll road. “If they have only one store to build and can choose between a tolled or non-tolled access road, they’re going to choose the no-toll. It’s more desirable,” he says.
In other cases, developers are not interested because the toll road is too far out on the edge of the metro area.
Outside Washington, D.C., Virginia’s 14-mile (22.5 km) Dulles Greenway is approaching two decades of operations, but it has experienced declining traffic counts for years as some drivers avoid its high tolls—$5.90 for a 14-mile (22.5 km), one-way trip during rush hour—and housing development has slowed in the outlying suburbs northwest of Reston. “If there was a site along the Greenway that was available, would I want to buy it? No,” says Henry Fonvielle, president of the Rappaport Companies, a suburban Washington retail developer. “We’re looking more for existing rooftops and densities than betting on the come. There hasn’t even been demand for pod sites for gas stations, theme restaurants, and the like there.”
Outside Austin, the final leg of State Highway 130 opened last year, and while its northern section fueled development interest—as in Pflugerville—the newest 41-mile (66 km) section south of Austin has been an entirely different story. Drive that southern section today, and most of it is flanked by undeveloped land.
In summer 2012, the town of Lockhart was so excited about the southern section’s impending opening that it held an economic development summit, which organizers dubbed the “Race to Lockhart.” County leader Tom Bonn told the gathering, “We can only imagine what fruits it will bear for Caldwell County. We are ready for industry. We are ready for development. We are ready for jobs.”
Developers have come, they have gobbled up thousands of acres along S.H. 130’s southern section, and their ambitious plans are seen on their websites, but not much dirt has been turned yet. Unlike the northern segment, the southern section is mostly rural. It made a national splash because of its 85-mile-per-hour (137 kmph) speed limit, but it drew only about half the forecast vehicles in its initial months of operation, according to state records obtained by the San Antonio Express-News.
“You’re not seeing a whole lot yet,” says McKinnerney. “Maybe it’ll show up. Growth wasn’t going to go out there. Now that there’s a toll road, will it come? Maybe, maybe not.”
Some communities are finding it takes more than the promise of better access to lure developers and tenants to locales along toll roads. Sometimes it takes incentives, too—not just to create investment interest, but also to overcome the additional driving costs.
On S.H. 130, Pflugerville has lured office tenants with six-figure packages designed to cover their employees’ toll costs during their first year or two of operations. In Orange County, Shea Properties found it had to reduce some office rents to offset driving costs on the San Joaquin Hills toll road, according to Bob Burke, who was with Shea and now is a principal at Greenheart Land in northern California. And some 40 miles (64 km) from downtown Chicago, the suburb of Aurora enticed an outlet mall to the sparsely developed Interstate 88 toll road with an incentive package worth almost one-quarter of the project’s cost.
“You’ll see some development at some interchanges along the outer toll roads in Chicago, and that’s because of incentives offered by municipalities,” says Chrissy Mancini Nichols, transportation director for Chicagoland’s Metropolitan Planning Council. “It has resulted in an uneven pattern of development.”
In some states, toll road planning is running into the same hurdle that free highways have been facing—how to afford the projects. In Ohio and Illinois during the past year, studies of proposed toll roads determined that tolls alone would only pay for half the projects. In Ohio, the Department of Transportation responded by placing its proposed road on the back burner. In Illinois, though, the Illinois Tollway is considering a novel financing option to help close the funding gap for its proposed Route 53/120 in suburban Chicago—an option called value capture.
Value capture attempts to use the expected growth in land values generated by transportation investments. Value capture mechanisms include tax increment financing (TIF), in which taxes derived from new development are used to pay off improvements within the TIF district; special assessment districts, which levy an additional tax on property owners adjacent to the transportation investment; and development impact fees, which are one-time charges to develop land adjacent to an infrastructure investment.
The use of TIFs around highways is nothing new, but they generally pay for utility lines or access roads. However, as a financing tool to help pay off a major transportation investment, value capture through TIFs and other tools is still in its infancy. It has been mostly associated with transit projects. Washington, D.C.’s Metrorail expansion to Dulles International Airport, for instance, included a special assessment district that is authorized to raise up to $730 million of the total $5.2 billion cost from commercial landowners with land near the rail line. (The primary source of funding is tolls charged on the Dulles Toll Road, which links the airport with the Capital Beltway.)
Now, some momentum is building to apply value capture as a financing tool for toll roads.
A 2011 study, “Leveraging Land Development Returns to Finance Transportation Infrastructure Improvements” by the Texas Transportation Institute, determined that just during four years, growth in appraised property values along tollways in three counties in that state was enough to support almost $2 billion in bonds to finance toll road construction. The study concluded that “these land development returns establish a new source of funding for these types of projects.”
In Illinois, an advisory council for the proposed Route 53/120 toll road recommended including TIF and a special assessment in the menu of financing options. Its report estimated those fees could cover 10 percent or more of the project’s $2 billion–plus cost. Yet, some communities along the proposed road have balked at the value-capture option because they believe the assessment fees may scare off prospective developers.
“Value capture seems to have some promise, and it’s being explored,” says Kristi Lafleur, executive director of the Illinois Tollway. “Given the state of transportation funding in this country, there will be a lot of different tools on the table, and value capture may be one of the solutions.”
Overall, the future of highway building in America is increasingly moving toward tolling, so the real estate industry needs a better understanding of how and where investments near toll roads can be successful.
Jeffrey Spivak, a senior market analyst at a Kansas City, Missouri–based engineering firm, has been writing about real estate, development, and infrastructure issues for more than 20 years. His firm has played no role in any of the projects named in this article.
For more on toll road development, download the ULI Infrastructure report When the Road Price Is Right.