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MetLife Investment Management Examines Impact of Transportation on Future of Commercial Real Estate

Seattle, MetLife Investment Management, Lyft, Uber, ride-sharing, autonomous vehicles, San Francisco, Boston, Los Angeles
Image courtesy of MetLife Investment Management

By Jack Stubbs

The evolution of transportation networks across the country continues to impact the trajectory of the commercial real estate market, as traditional public transit systems are being supplemented by increasingly prevalent technologies like ride-sharing services, self-driving/autonomous vehicles and electric cars. The preponderance of these transit systems and new technologies is both impacting the value and premium of residential properties in core markets and influencing commercial office users’ strategies.

In a report written by MetLife Investment Management, “On the Road Again: How Advances in Transportation are Shaping the Future of Real Estate,” the company looks at how technology is starting to play a major role in not only transforming how public transportation is utilized but also how these innovations are impacting the value of real estate today and in the future in major cities across the nation.

In a broader historical context, transportation has profoundly shaped the way that cities expand and grow: the invention of the steam engine and the expansion of the railroads opened the Western U.S. to mass migration in the 19th century—allowing cities to grow and expand. Public transit systems were introduced at the turn of the 20th century and remain heavily-utilized today in major metropolitan centers and cities around the globe. Now, almost two decades into the 21st century, the simultaneous advent of ride-sharing, autonomous vehicles and electric vehicles will have a myriad of impacts: ride-sharing and ride hailing services will make transportation more local; and self-driving cars and autonomous vehicles will impact how and where renters, consumers and businesses across the country will build.

There are two major impacts that the report has already identified as a result of the vastly expanding ride-sharing network. One of the consequences is the negative impact that ride sharing has had on traditional public transit systems. The company’s analysis of public transit ridership is based on the six largest metropolitan areas that consistently report public transit ridership: Boston, Chicago, Los Angeles, New York City, San Francisco and Washington D.C.

Over the last couple of years in particular, ride sharing has become an increasingly viable alternative to public transportation systems, according to William Pattison, associate director at Metlife. “Ride-sharing became cost-competitive [with public systems] in San Francisco in 2017; more recently it’s become cost competitive with public transit services in cities like Boston and Chicago. We expect that cities like New York and Washington D.C. are next as their ride-sharing networks expand.” And as ride-sharing is set to become more prevalent across the board, public ridership in the six major metropolitan areas has declined as well, according to the report: from 2015 to 2017, U.S. public ridership declined by 4.6 percent.

The pioneers of the ride sharing revolution were Uber and Lyft, who launched in San Francisco in 2011 and 2012, respectively. The report estimates that Uber and Lyft rides are approximately 25 percent cheaper than traditional taxis. Uber and Lyft launched their rise sharing services and carpool option in 2014 and MetLife estimates that, as of 2018, the carpooled rides are between 30 and 80 percent cheaper than traditional taxi rides.

The presence of these companies means that the Bay Area city serves as a bellwether for the changing transportation networks in other major cities across the nation, according to Pattison. “San Francisco has the largest and most mature ride-sharing network from companies like Uber and Lyft. We also think San Francisco is leading other cities in commercial real estate changes as a result of changing transportation networks,” he said. “What we’re seeing there today, we’ll probably see in other markets in future years.” The six markets that MetLife looked at represent around 40 percent of the institutional real estate value in the U.S.

The second major impact identified in the report is the effect that ride sharing and changing transportation networks are having on property values and premiums. Due to the increasing prevalence of ride sharing, the preferences of renters are changing. MetLife compared demand for “on-transit” apartments (those within five minutes of a transit stop) to “off-transit” apartments in San Francisco, and found that on-transit apartments commanded significantly higher rents than the off-transit apartments. San Francisco’s on-transit apartments commanded a 21 percent higher asking rent in 2013 than off-transit apartments, but in 2015—after Uber and Lyft announced their carpooling services—this premium began to decline, and now sits around 15 percent, according to the report. The report notes how ride sharing is being to complement, rather than substitute, public transit, and ride sharing services are being used as an intermediary transit system between on- and off-transit locations.

Ride sharing services, electric vehicles and self-driving cars have also led to a broader shift towards cheaper transit, according to Adam Ruggiero, head of real estate research at MetLife.

For example, MetLife compared the cost of a trip from San Francisco’s Lower Haight submarket to the Financial District, and found that the ride cost about $12 with a traditional taxi, $2.75 via public transit and $3.25 using Uber or Lyft’s carpooling service. The report aso estimates that a total fare paid to an Uber/Lyft driver would be $10 ($5.80 going to the human driver, $1.80 for gas and maintenance, and $2.40 in Uber/Lyft fees), versus the $7.10 paid for the same ride in an autonomous vehicle. For a ride from San Francisco’s Haight neighborhood to the Financial District, the fare in a self-driving car would be $2.19.

The emergence of electric and autonomous vehicles, also, will contribute to the changing transportation landscape as ride sharing becomes more widespread. Pattison thinks that the new technologies will follow a similar precedent set by ride sharing. “Self-driving cars and battery technologies are more forward-looking, so we can’t say what the effect of those [technologies] are with as much certainty. But we think the effects that have already been observed from ride-sharing offer the best starting point for making those predictions,” he said.

The first self-driving cars available for public use—already available in Phoenix—are owned by Waymo, a subsidiary of Google parent Alphabet that has recently purchased 20,000 vehicles that they plan to upgrade into self-driving cars by 2020. Additionally, various auto manufacturers like Ford, GM, Daimier, BMW and Tesla have all announced plans to begin producing driverless vehicles within the next five years, according to the report.

Advances in technology mean that the biggest benefit of switching from gas-powered to electric vehicles is a reduction in per mile energy costs. According to the Department of Energy, the average passenger vehicle achieves fuel economy of 23.4 miles per gallon, while the electric vehicle achieves better than 120 miles per gallon. In Seattle, the reduction in cost could amount to 75 percent, while in Boston—where electricity costs are high and gas prices are relatively low—there could be a 42 percent reduction in cost. Elsewhere, San Francisco could see a 61 percent reduction in cost; Los Angeles could see a 65 percent reduction; and New York could see a 53 percent reduction.

In broader terms, the design and location of future commercial real estate projects could also be impacted by changing transportation networks, as proximity to transit continues to play a role in companies’ decisions about where to locate. MetLife thinks that development sites with good access to uncongested roadways but limited access to public transit will continue to be in high demand. And in spite of the changes brought forth by these three new technologies, Ruggiero does not think that transit-oriented development will be replaced entirely.“We aren’t saying that transit-oriented development is a thing of the past; we still think it’s attractive,” he said. “What we’re talking about is extending the existing transit system beyond its normal boundaries. This creates a complimentary transit system that will bring transportation to the suburbs in a way that it didn’t exist before.”

Additionally, the long-term consequences of changing transportation systems might be felt differently in the commercial versus the residential sectors. Pattison thinks that the potential implications of changing transportation networks on the office market might not be as apparent as they are on the residential market due to the ever-changing needs of large office users. “In the case of the office sector, the impacts will be further out, in part because office users don’t have perfect information of what their own demands are; they don’t necessarily know where their workers live or how their workers are getting to and from work,” he said. “They therefore might not be able to reflect changing transportation networks in leasing decisions as quickly as an apartment user, who has a better handle on what their own driving or public transit habits are. It’s really a function of the tenants themselves.” One of the main factors impacting companies’ inabilities to reacted more quickly to these changes in transportation is the fact that they are signing longer-term leases, meaning that it might take them longer to make the transition to a new location.

Due to the myriad of advances in the technological field, the future might also be uncertain for the traditional office parks. “The other impact is what happens to suburban office parks as a result of this. I think there are winners and losers. Some have large parking fields and are well-located next to highways,” Pattison said. “These are going to be strong candidates for mixed-use developments. But you only need so much density. We do think the suburbs will grow more dense because people are still attracted to the amenity-rich environment that you can create with dense, mixed-use projects, but not every suburban office park will succeed in that way.”

And while many of the changes occurring in the world of transportation are due to the advent and more widespread application of new technologies, the state of existing roadway infrastructure—and the potential limitations that this infrastructure represents—means that the full benefits of these technological advances might not be felt for some time, according to Pattison. “There are two competing dynamics. On one hand, residents who switch from public transit to ride-sharing are creating more demand for roadway infrastructure,” he said. “On the other hand, residents who switch from driving themselves to ride-sharing reduce demand for roadway infrastructure. I think overall infrastructure changes will vary substantially by market, and by local areas within a market.” Pattison thinks that if congestion does increase, cities and municipalities can continue to implement toll roads and carpooling lanes to encourage more ride sharing, and perhaps even create self-driving car lanes in the future.

Regional differences—and the existing public transportation infrastructure in these different areas—will continue to play a role. “The speed of change will be affected by a lot of things that aren’t technology-related. There are some markets right now that are primarily suburban or they just don’t have extensive transit systems,” Ruggiero said. “In places like Boston and New York that have really good transit systems, [these changes] will have an even bigger impact, because [they] will help reshape the suburban markets of those metros.”

Even with the rise of new technologies that could have potential short-term implications, real estate investors’ awareness of the longer time-frame nevertheless remains paramount, according to Ruggiero. “When we talk about these things, they are relatively long-term topics, but those years pass quickly. So if you’re not thinking long-term about these issues, you risk getting left behind,” he said. “Once the landscape starts to shift, you want to know which way it’s going and be aware of the exit risks when you’re making an investment. That means you have to think 5 to 10 years out.”