Non-aeronautical Revenue Play by Play

Pittsburgh International Airport new development strategies get it back in the revenue game


In “Airport Cities: The Evolution,” Kasarda identifies six criteria that must be considered in planning a successful airport cities’ project: (1) Airport land availability, (2) Improved surface transportation access, (3) Growing air traveler consumer demands, (4) Airport revenue needs, (5) New business practices, and (6) Site-specific commercial real estate opportunities. Careful study of each of these factors with key stakeholders must be undertaken before the first shovel ever strikes the ground.

Consider that on the surface, PIT appeared to have an excess of developable land. The airport owns 8,800 acres of property. However, not all of the land is suitable for development, according to Bradley Penrod, president and chief strategy officer of the Allegheny County Airport Authority.

“We have a highway system on two sides, a hilly topography, and infrastructure challenges that had to be overcome before we could do anything,” Penrod recalls. “Then we had to figure out how to focus the development and where to get the funding for it.”

PIT first needed to pinpoint the areas that made sense to develop. To that end, the airport launched an in-depth economic study of present and future development opportunities to determine the appropriate course of action. This study analyzed the topography, considering slopes, wetland areas and natural corridors; existing development; available utilities; zoning restrictions; and roadways to calculate a preliminary building development area. It also factored in the airport’s primary needs for the next 50 years, because as Forister says, “we needed to think like an airport first.”

“Considering what the airport would need for the next 50 years left us with 3,800 acres,” he says. “Out of the 3,800 remaining acres, we had to consider the challenges we had in developing the infrastructure. Topography was a big one. Coal mines and strip mines were also big issues. Wetlands factored in too. And only 10 percent of the land already had infrastructure in place.”

Fashioning a master development plan as PIT did is key to the success of any real estate development plans, adds Kasarda, who stresses, “they can’t sell the land; they have to develop long-term ground leases with investors.”

He explains, “If you have a 30-year ground lease, and then you need the land, you have to wait the 30 years. That’s just the way it is.” But even when airport lands are few or may be needed sooner rather than later, development can still occur. While distribution centers and other types facilities may have a 25- to 30-year life, shorter-term opportunities exist, for instance a solar farm which takes less acreage and has a shorter life-cycle than say an office building.

Finally PIT officials needed to study infrastructure needs and costs, according to Forister. This is a factor that determines a successful project outcome, adds Jason Stewart, executive vice president at Jones Lang LaSalle, a global real estate services firm that is leading the marketing efforts for a planned 350,000 square foot office development called Pittsburgh International Business Park. The park has two buildings that were recently completed and occupied by a publically traded financial services firm, plus an additional building that construction where construction commenced in October.

“When developers are evaluating sites, one of the first things they look for are the existing improvements: roadway improvements including curb cuts; utilities, including water and sewer; storm water management; and graded pads for shovel-ready construction,” Stewart says. “The airport authority had that in place and we were able to deliver new construction with a ‘speed to market’ promise to our clients.”

Stewart also issues a word of caution, stating “all pre-development improvements should be market based.” Airports do not want to be in a position where the costs to improve the property exceed what the market will bear in terms of land-lease rents. “You want to strike a balance between what’s required in terms of attracting a developer’s interest and what would be over-improving the site,” he says.

 

Craft a Game Plan

PIT is a residual lease airport, meaning it is limited to what it can spend and where. The residual cost approach guarantees that an airport will break even, i.e. after the airport deducts its non-airline revenue from its total expenses, the airlines front the remaining amounts. It also means that none of the airport’s money could be used for this type of development, states Penrod.

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