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  Official magazine of ACI
Friday, 25 March 2011 09:38

Land of Opportunity

Written by  Matthew Taylor


landofopportunity
Are airports making maximum use of their available land? Matthew Taylor considers how an airport can leverage its commercial real estate.

Global economic challenges and changing airline industry dynamics are intensifying fi nancial pressure on the world’s airports. One effective source of relief leverages one of the airport’s most visible assets – land.

While the concept of deploying land to generate revenues is not novel, a renewed focus by airports on this sometimes under-utilised, but mostly hibernating asset is particularly attractive today given funding constraints and emerging market opportunities.

Leveraging an airport’s real estate portfolio offers numerous benefits beyond just a new revenue source. Airport real estate values are improved and residual assets are created while also expanding the community’s property tax base and job market.

For these reasons and others, airports continue to assume an everincreasing role of importance in their communities.

The question is generally not if commercial land development can occur on airport, but rather what should be developed, where and when.

Whether an airport was originally sited on the exurban fringes at a greenfi eld site or in a more urban infi ll context, the private market has come, and is coming, to the shores of these economic gateways.

From professional offi ce and industrial uses to retail, restaurants and hotels, airports have historically attracted compatible land uses to their perimeters, effectively creating transitions to community neighbourhoods expanding outward from the centre city.

Commercial corridors have become the market’s preferred transition zones between airplanes and residential rooftops, creating opportunities for airports.

To date, much of the commercial development has occurred external to airport lands along access corridors and airport boundaries. Now, the market’s growing demand for both larger tracts and smaller key development sites closer to the airport itself affords airports the ability to generate new revenue by leveraging land assets.

At Orlando International Airport and Orlando Executive Airport in Florida, Orlando-based RERC Strategic Advisors has worked with the Greater Orlando Aviation Authority (GOAA) to identify and leverage commercial property opportunities from among more than 15,000 acres (6,070 hectares) at the two locations.

In 2009, Orlando International Airport ranked 27th in the world in total passengers and currently has the third largest land holdings of any US airport.

During the past two decades, RERC’s assignments have resulted in positioning airport assets totalling nearly 4,000 acres (1,620 hectares) of existing and/or planned commercial development.

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At Orlando Executive Airport, revenues to GOAA from commercial development – which includes retail shopping centres, movie theatres, outparcel restaurants and other commercial uses – now comprise approximately 73% of total revenues.

At Orlando International Airport, 11.5% of total revenues come from commercial leasing activity.

To keep GOAA’s real estate portfolio relevant, RERC is now identifying redevelopment strategies for older, underperforming commercial areas constructed more than 30 years ago to extract the current highest and best use for revenue purposes as ground leases approach expiration.

So where do you start? Experience suggests fi ve essential steps to leveraging an airport’s commercial property within an overall master real estate strategy.

First, what do you have to work with? Conduct a portfolio review of existing land assets including an inventory of aviation and non-aviation lands to identify possible available vacant or redevelopment parcels for the marketplace.

The process recognises that airports intrinsically require adequate land for operational areas and future aviation-related growth and development.

Your goal in this process is to understand the relative advantages and limitations of the commercial land. An airport’s locational advantages are usually balanced by restrictions placed on its lands by regulatory agencies.

Are airports making maximum use of their available land? Matthew Taylor considers how an airport can leverage its commercial real estate.

Airports must typically receive fair market value and complete multiple reappraisals. These requirements can pose challenges for private developers who need predictability of lease costs over the entire ground lease term for a given property.

These issues become more salient depending on the availability of off-airport substitutes to accommodate the same targetted land uses that the developer can purchase. Regardless, lease terms can be negotiated to address and overcome these limitations.

Second, ask how your land is unique and who wants it? Conducting a local and regional market analysis for targeted commercial uses brings into focus the market context and identifi es what is possible.

Analyses of the relevant trade area including prevailing market trends and local demographics will suggest what potential opportunities exist and at what value or price. Because property ground leases favour landlords, here airports, lease terms must be long enough for developers to amortise their upfront investments.

This need generally requires a minimum 30-year base term with two or more 10-year renewal options for most commercial uses.

It is important to recognise that ground leases place a market constraint on property use. However, in today’s marketplace and fi nancial environment, commercial tenants are willing to consider ground leases in key locations having few substitutes.

In general, the more urbanised an area becomes, the greater acceptance of ground leases as real estate instruments.

You must acknowledge what your airport is, as well as what it is not, both from aviation and non-aviation aspects. The insight provided by market analysis will clearly indicate prevailing commercial trends surrounding a particular airport, further suggesting the uses, which should be targeted to extract the highest and best use of the airport’s commercial property.

Expectations should not exceed market realities absent of any focused economic development initiatives such as special development districts or business attraction grants that seek to push market dynamics to more intensive development.

Should the commercial frontage of your airport be predominantly developed with one-storey retail shopping centres and outparcel restaurants, for example, it may be diffi cult to intensify the development pattern to multi-storey development.

Typically, developers want to deliver specifi c proven products having fi nancial institution support. In many cases, strategically selected outparcel uses such as banks, pharmacies and restaurants can produce higher rental revenues for airports than single story uses having larger footprints or multi-storey buildings with mixed uses which do not share the same market
timing and support.

With regard to aviation uses on airport property, an airport must clearly embrace its business model, whether primarily passenger versus cargofocused, Origination & Destination versus connecting, business versus tourism-oriented.

Each model has specifi c real estate implications for passenger terminals, airfi elds and commercial land, not only for long-term growth but more importantly the community’s vision. A master real estate strategy must align with and complement an airport’s master plan.

The master planning process provides a venue for stakeholder engagement (your third step in the process) and solicits input regarding the airport’s commercial development plans.

This dialogue is especially pertinent as airports continue to balance economic sustainability with perceptions about competing with private landowners. Engaging local planning and government representatives, private developers and the community at-large, while challenging, typically produces outcomes with greater viability.

Absent other external infl uences, an area will capture its fair share of total available demand according to the proportion of the market it already represents.

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Occasionally, stakeholders are concerned an airport trade area will outpace the growth and development of a central business district (CBD) and therefore lead to decline in that CBD.

Unless that CBD makes a conscious decision to disinvest in its own future, both employment centres will continue to attract demand and a more favourable investment environment,  which promotes market development within the corridor and thus a link between the two commercial centres will likely exist.

The fourth step focuses on positioning property for the marketplace once the airport identifi es its land development opportunities through selfintrospection and external market and stakeholder realities.

This step includes conducting due diligence related to property surveying, site conditions, infrastructure availability and needs, environmental assessment and cost estimating.

It also investigates whether the available property meets the specific site requirements of the marketplace, which may include access, utilities, site  configuration and topography, among others.

Conceptual site planning and securing land use regulatory approvals must also be completed. Upfront investment costs become evident as a result of these due diligence activities.

A development strategy must then be evaluated as to what investments will be made by the airport, versus a selected private developer, and what anticipated cash fl ow and returns are reasonable for each party.

This cost-benefi t analysis informed by market timing is crucial to support an airport’s decision whether to pursue a specific project.

As a fi nal step, an implementation strategy must be selected now that acommercial development site and concept have been defi ned by market and stakeholder realities and calibrated by due diligence activities. An airport may choose to self-perform or partner with the private sector.

While self-performing provides more control for the airport, it comes with greater inherent risks. For those assumed risks, the airport typically has a greater potential financial upside.

This ‘do it yourself’ strategy offers the potential to achieve a prevailing market rate of return, but given that airports have limited capital, a publicprivate initiative leveraging private equity may be a more balanced approach.

A public-private initiative creates shared risks and control for both an airport and private developer. The rate of return for the development project is negotiated in advance and the airport is able to leverage outside private equity to achieve its goals and objectives for deploying its land asset more optimally.

To enter a partnership with an airport, commercial developers require, among other things, market support for the project, a defi ned review and approval process, timelines, minimum lease terms to meet the financing criteria of lending institutions, and predictability in future land value (and therefore tenant rents).

Should an airport choose to self-perform a development project, then outsourcing the marketing of such a project to commercial brokers active in the marketplace can leverage existing broker networks to gain greater exposure to commercial tenants at a fraction of the marketing time and costs.

To work with the commercial brokerage community, an airport should adopt a formal broker compensation policy and commission structure matching the prevailing local market and standard practices.

A clear understanding of the airport’s leasing process and timelines for successful negotiations as well as opportunities for brokers to be in both exclusive and non-exclusive roles are keys to a mutually benefi cial relationship.

For aviation development sites, airports retain a competitive advantage for marketing those on their own given these sites are central to an airport’s core mission and in-house expertise.
Recent global economic affairs have prompted airport leaders to rethink under-utilised commercial land under their control.

With signs that real estate markets are beginning to thaw, now is the time to activate your airport’s land assets to capitalise on evolving market forces.

Today’s financial constraints in the aviation industry require innovative thinking to find non-traditional revenue sources to stabilise and secure the successful operation of your community’s greatest asset. What are you waiting for?

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