In the Boston metropolitan area, walkable urbanism adds value. On average, all of the product types studied, including office, retail, hotel, rental apartments, and for-sale housing, have higher values per square foot in walkable urban places than in low-density drivable locations. These price premiums of 20 to 134 percent per square foot are strong indicators of pent-up demand for walkable urbanism.
Walkable urban places are now gaining market share over drivable locations for the first time in at least half a century in hotel, office and rental apartment development. This is good news for people moving to those locations, since households in walkable urban places spent less on housing and transportation (43 percent of total household budget) than households in drivable locations (48 percent), primarily due to lower transportation costs. In addition, property tax revenues generated in walkable urban places are substantially higher than in drivable locations on a per acre basis.
Previous research has demonstrated the correlation between walkable urban places and both the education of the metropolitan work force and the GDP per capita. The current research confirms this finding: for example, since 2000, 70 percent of the population growth of young, educated workers has occurred in the walkable urban places of the Boston region.
Despite the strong momentum toward a more walkable urban future for the region, there are challenges and causes for concern. In many walkable urban places, proximity to transit is a major requirement for households and employers. However, increasing congestion in the core transit system and system fragility in the face of extreme events (such as was experienced during the blizzards of 2015) diminish the value of the system and present substantial risks that may deter investors. As a result, public sector investments in [Metropolitan Boston Transit Authority] capacity and resiliency are prerequisites for the billions of dollars of private sector capital seeking to flow into walkable urban places over the coming decades. Public transit, especially rail transit, activates walkable urbanism’s potential for adding real estate value, and as this report demonstrates, that potential is ample. Therefore, policymakers must weigh the costs of funding transit against its power to increase tax revenues. With the right value capture tools in place, the increased value that transit supports could be used to fund at least a portion of the system’s maintenance and future expansion.1
It is fitting, in beginning this introductory chapter, to Asset Classes in general and to asset categories within the real estate asset class in particular, to consider whether the twenty-first century will mark the advent of an entirely new classification of real estate development: walkable urban places or “WalkUPs.” Just as a neighborhood retail center is not the same as a regional mall – despite the fact each falls within the “Retail” category of real estate asset classification – it would be equally wrong to characterize a downtown office building with ground-floor retail as the same thing as a Mixed-Use development project, occupying one or more full city blocks, with a broad mix of commercial office, residential (rental and for-sale), retail, entertainment, and hospitality uses. In addition to offering an in-depth exploration of real estate as an asset class, and the many classifications of real estate product within that single asset class, this chapter proposes that the WalkUP should be considered as its own classification, particularly when examined through the prism of The Development Process.
Real estate as an asset class
Asset classes in real estate
Walkable urban places (WalkUPs)
“Ownership” of real estate: estates in real property Types of estates in land
1. Fee simple
2. Fee simple determinable with possibility of reverter
3. Fee simple subject to or on a condition subsequent
4. Fee simple subject to a shifting or springing executory interest
5. Fee tail
6. Life estate for the life of the tenant
7. Life estate for the life of one other than the tenant
8. Life estate created by fee tail after possibility of issue extinct
11. Life estate by and during coverture
12. Estate (or term) for years
13. Periodic tenancy
14. Tenancy at will
15. Tenancy at or by sufferance
“Ownership” of real estate: concurrent estates
Joint tenancy with right of survivorship (JTWROS)
Tenancy by the entirety
Tenancy in common (TIC)
The Development Process
A brief introduction to “The Development Process”
To understand and apply real estate law to The Development Process (see Chapter 2
), one must first understand that not all real estate is the same. Merely because land and the “improvements” (e.g., one or more buildings) thereon may be generically described as “real estate” or “real property,” they are by no means fungible. Different types of real estate are categorized into separate classes by property type, and such classifications impact their treatment under the law.
Similarly, legal mechanisms reflect different ownership interests in real estate. The legal rights, obligations, and liabilities of owners of interests in real estate depend on how such ownership interests are defined under the law. Consequently, explaining The Development Process as a framework for learning about and understanding real estate law requires that the reader first have a baseline understanding of real estate property types, as well as the different ownership interests in real property recognized under the law.
In order to understand “real estate as an asset class,” one must first understand that the classification of investments or investment securities has traditionally recognized only two asset classes – equities (i.e., stocks) and fixed-income securities (i.e., bonds) – with a third class – cash-equivalents – added to the list only in the latter half of the twentieth century.2
Essentially, “asset class” defines a group of financial instruments with similar characteristics – such as an ownership interest, which entitles the holder to a ratable share of a corporation’s assets – that tend to respond in a somewhat similar manner to prevailing market characteristics, and that generally are treated the same under the law. Depending on whom you ask, in addition to what were, by the 1970s, the three main asset classes – equities, fixed-income securities, and cash-equivalents – two or three additional asset classes are recognized by investors and fund managers in the twenty-first century: guaranteed securities, commodities, and real estate.
Asset allocation, as an axiom of investing, has as a principal goal spreading the risk of loss in a portfolio through diversification, as well as optimizing returns from one asset class at a time when the return performance of another asset class or classes may not be as robust. While not among the troika of primary asset classes – stocks, bonds, and cash-equivalents – real estate is an important asset class for investors. The percentage of an investor’s portfolio of assets allocated to real estate will depend on that investor’s tolerance for risk (low, moderate, or high). The risk associated with a particular investment in real estate will be balanced against its potential return to the investor through anticipated, periodic cash distributions, projected increases in the value of the original investment, or some combination of the two.
In his master-work on Value Investing, The Intelligent Investor
, Benjamin Graham, the “Father of Value Investing,”3
describes the advantages and disadvantages of including real estate assets in an investment portfolio:
The outright ownership of real estate has long been considered as a sound long-term investment, carrying with it a goodly amount of protection against inflation. Unfortunately, real-estate values are also subject to wide fluctuations; serious errors can be made in location, price paid, etc.; there are
pitfalls in salesmen’s wiles. Finally, diversification is not practical for the investor of moderate means, except by various types of participations with others and with the specialized hazards that attach to new flotations – not too different from common-stock ownership. This too is not our field. All we should say to the investor is, “Be sure it’s yours before you go into it.”4
Roy Hilton March, a director of Real Estate Roundtable and chief executive officer of Eastdil Secured LLC, a subsidiary of Wells Fargo & Company, offers this perspective of the emergence of real estate as a separate asset class.
With the advent of Modern Portfolio Theory in the 1950s and its subsequent adoption by institutional investors in the 1960s to 1980s, commercial real estate went from cottage industry to bona fide asset class. But the obstacles to its ownership (including capital intensity, lack of transparency, operational requirements, geographic specificity and illiquidity) made real estate largely inaccessible to all but the largest investors. Twenty years ago, a remarkable transformation occurred: liquidity in real estate brought on by the rise of public REITs, CMBS, real estate private equity funds and the abundance of capital sources. Today, real estate competes directly with stocks, bonds, currencies, commodities and other financial assets. The evolution of the sector occurred much as evolution does in nature: life-threatening conditions forced inhabitants to adapt or perish and introduced new entrants to the ecosystem. As Charles Darwin famously observed, “It is not the strongest of the species that survives, nor the most intelligent … it is the one that is most adaptable to change.” The creative destruction of the late 1980s and early 1990s forged a new species of real estate industry – more resilient than its ancestors but, as recent years attest, still vulnerable to threats old and new. Understanding the factors that catalyzed the i...