Right of way, access, and road construction
Compare costs, savings of early right-of-way acquisition
In an era of scarce resources, transportation agencies are eager find ways to lower their construction costs. One option under consideration, said Gary Barnes, a fellow at the University of Minnesota's Humphrey Institute of Public Affairs, is advance right-of-way acquisition. But does early purchase make sense?
Advocates for early purchase cite the following advantages:
- Cost savings if the land is developed or rises rapidly in price
- Minimized impacts, disruption, and displacement
- Better local planning and development
- A simplified political and public involvement process because of a clear plan
There are potential costs, however:
- Opportunity cost: the money cannot be used for other purposes
- Lost productivity of the land
- Possible constraints in future project design due to sunk costs
- Lost property-tax revenue
- Risk/uncertainty about the amount of savings or loss and the eventual timing of the project, and what land is needed or how much
In his research, Barnes studied three situations: land already developed, undeveloped land that will stay that way, and land likely to be developed. The last type is not controversial, as it will almost always be cost-effective to buy undeveloped land rather than wait until after it is developed. Thus, the research focused on land that is not likely to change use, to determine if price appreciation in general justifies early purchase as a cost-saving strategy.
To do so, Barnes first looked at housing prices, which have risen at varying rates decade by decade, averaging 5.8 percent. This contrasts with government bonds, which have averaged 7.4 percent over the same period. Investing the money in bonds, which unlike land have a safe rate of return, would actually yield enough money on average to buy the land even at the higher price, with some left over. Recent housing, however, has appreciated much faster than the return on other investments such as stocks and bonds. "This atypical situation is extremely rare and short-lived historically," Barnes said. "In the 1980s, states with the fastest appreciation in almost every case had the least appreciation or even declines in the 1990s."
If land may not be a good investment generically, he said, there may be specific locations or time periods when it is. Determining this involves two basic issues: Do high-return places happen often enough—and beat the average by enough—to be good investments, and second, is it possible to accurately predict where and when these high returns will occur? On both accounts, the answer is no, he said. For a county to beat the statewide average by a significant amount over a five-year span is very rare—in fact, beating the average by more than five percent occurred only two percent of the time. And the predictive ability of even the best model—reflecting population, job, and wage growth—was very poor.
Farmland without buildings, however, does show expected patterns of large price increases in developing counties. Many counties see sustained increases of more than 10 percent annually, especially those on the metro fringe such as Scott and Washington. "This could be an artifact of this period in history framed by a bad farm market at the beginning and a very strong development market at the end," Barnes theorized. "Even this return might not be good enough to justify the risk."
From these findings, Barnes believes purchasing land early as a general strategy does not make financial sense for properties that are already developed. Cases of rapid sustained price increases are rare, although farmland in developing areas may be worth acquiring. Purchasing specific parcels, however, is probably worthwhile if they are in clear danger of being developed into much higher value uses. In general, he concluded, agencies need to be careful to notice not only the apparent savings but the opportunity cost of early acquisition as well.
Do access changes affect business success?
Howard Preston of CH2M HILL presented another aspect of road construction: the impact on local businesses.
Business owners often suggest that any change to their existing street network will result in reduced property value or retail sales, or even the failure of their business. Very little information is currently available regarding economic impacts associated with highway improvements, however, and none of the previous research was local. In response to this information gap, Mn/DOT decided to conduct a systematic analysis of the economic effect of highway improvements. The study looked at I-394, a major project with 10 miles of urban freeway. "No Minnesota project ever changed as much access," he said.
Preston shared key conclusions of the study:
- Employment in the corridor is up.
- Land values are up.
- Business turnover is less than average for Minnesota.
- Land use trends are positive.
- Auto dealers, restaurants, and specialty retail had very low turnover rates compared with Minnesota's average turnover rate of 10 percent per year.
- Personal and business service firms went out of business (or moved) at rates higher than the state average.
These conclusions are very consistent with the results of studies in Texas, Kansas, Florida, and Iowa, he said. "Changes in roadway access appear to have less influence on business vitality than either regional/national economics or the skill of the individual business owner," he concluded.
A final report will be available from Mn/DOT.