Non-aeronautical Revenue Play by Play

In the early 2000s, Pittsburgh International Airport (PIT) was forced to revisit its playbook. At a time when the bustling hub sat at the top of its game, the airport found itself blind-sided by its top carrier, US Airways, when it announced plans to reduce flights coming through Pittsburgh. But even with such a loss, PIT couldn’t afford to fumble. An airport can’t trim runway maintenance or let its infrastructure crumble away. The game must go on.

PIT officials rallied to develop a new game plan, and hit upon a winning strategy that included developing land around the airport to help drive new revenue in order to make up for the revenue it had lost.

Today 16 buildings, offering a total of 2.4 million square feet of space, stand on what was once rolling topography and wetlands on the medium-sized hub’s northwest side. And the results have been tremendous, says Randy Forister, PIT senior director of development. “We have received approximately 40 million in economic development grants from the state in the last decade and we’ve created nearly 6,000 jobs.”

The feather in this Pennsylvania airport’s development cap might very well be its $500 million drilling lease that gives CONSOL Energy the right to drill for natural gas and oil on airport lands. Under the deal, CONSOL paid a signing bonus of $50 million and will pay 18 percent royalties expected to total approximately $450 million over the next 20 years. The airport, which serves approximately 8 million passengers annually, plans to use the funds gained by drilling to tackle needed capital improvement projects and recently lowered fees paid by airlines as a means of attracting more flights and new carriers.

Todd Lehmacher, spokesman for US Airways, Pittsburgh’s largest carrier, says the fee decrease won’t result in an immediate boost in flights but stresses the importance of competitive fees in an industry with such high fixed costs. “We applaud the Allegheny County Airport Authority for lowering them,” he says. “It’s something we’re very mindful of.”

PIT has done some very nice development on its lands, according to John Kasarda, an airport strategist and leading developer of the aerotropolis concept. “When you consider the shock that airport took losing its hub, because its terminals were designed for a major hub and it still had to pay for them, they have done quite well.”

He adds PIT is one example of a growing trend to develop around the airport; a strategy that can tremendously impact an airport’s financial picture. ACI-NA reports in “Facts About Airports & The 2013 ACI-NA Membership and Media Directory” that non-aeronautical revenue puts an estimated $7.5 billion to the bottom line annually at the nation’s airports; a number that can and should grow as more airports follow the lead of airports such as PIT, Dallas Fort Worth International Airport, and Hartsfield Jackson International Airport. “For many airports, non-aeronautical revenue, which is basically commercial involving everything from parking to retail and concessions to real estate development on airport property is generating larger and larger percentages of total revenues,” Kasarda says.

On the flip side, Kasarda cautions that while some U.S. airports have done quite well with this concept, just as many haven’t had the idea of an airport city cross their minds, let alone their unused lands. “None of the airport cities in the United States made the Top 25 [in the latest Skytrax survey],” Kasarda says. “However, amazing strides being made and U.S. airports are beginning to catch up. Over the last decade, U.S. airports have become increasingly aware ... that their land is very valuable.”

 

Develop a winning Strategy

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.

“Our next step was: How can we get this done? We need $720 million in grants and there’s a lot of competition in that area,” says Forister. “It took a lot of time to get everyone convinced that we could do the first project. But once they saw its success, it made it easier to secure additional funding.”

One of PIT’s first sites was at Clinton Commerce Park, where 14 acres of deep coal mines required excavation as did 30 acres of mine spill. The airport cleaned the deep mines, brought in utilities, and updated the storm water system with a $14 million grant. Only then did a local developer agree to build two facilities, totaling 625,000 square feet. Shortly after that another opted to build on the site. “To date we have 725,000 square feet on that property and we’re looking to expand that project,” Forister adds.

To secure funding, Forister says airports need to “think like an economic development agency” and do their due diligence. Leave no stone unturned, he says, and talk to state and local development agencies, seek out grants and loans, and consider TIF or CRA programs too. “You need to forge relationships and think like a real estate developer,” he says. “You have to be able to convince others to invest hard-earned dollars into this.”

Never underestimate the power of your message and who you know; networking, educational and marketing efforts may tip the scales in a project’s favor, according to Forister. PIT received money from the state for site improvements and funds from tax increment financing districts established specifically for the project. “If your plan is well thought out, you stand a good chance of getting financial help,” he says. “Jobs. Jobs. Jobs. If you can show that you’re going to generate jobs, it helps a lot.”

 

Bring in Key Players

“As metropolitan functions increasingly locate on and immediately around airports, a range of businesses that have historically been concentrated in downtown areas have moved in, even museums, art galleries, wedding chapels, things you would never think of as airport activities,” says Kasarda. “Basically the airport that services the city is slowly transforming into a city itself.”

Business parks, hotels, entertainment options, distribution centers and shopping complexes rank highest among businesses that seem to make sense near airports. “But even technology companies, consulting and marketing firms, financial institutions, and office headquarters are navigating closer to airports,” he says.

The primary advantage an airport location brings is speedy connectivity to suppliers, customers and enterprise partners, he says, noting these things have been the top attractors to the most common businesses found around airports: manufacturing and distribution.

PIT focused its landside developments in five key areas: (1) Warehouse/Distribution, (2) Industrial, (3) Research & Development, (4) Office Space, and (5) Hospitality. Forister adds, “We do not chase retail developments or allow strip malls, shopping malls or anything like that — we just do not see the benefit to the community. We will react to infill types of things, such as we might allow a hotel development, and then a restaurant that wants to build next door. But we won’t allow residential developments because housing and airports do not mix well.”

Kasarda says to perform a careful demand analysis that considers the land’s value to businesses and the region’s demand and need for a specific type of facility, then perform a risk and competitor analysis. If there is a major convention center in the city already, it may be a poor risk to build a second convention center, he explains.

Overall anything goes, as long as it makes sense for the community. “We’ve found in our review of the 25 largest airports a few years ago, that areas within 5 miles of the airport have virtually the same mix of functions as areas within 5 miles of the traditional downtown,” he says.

While they are making money, Forister says it’s coming in slowly. He is quick to add that this is perfectly OK. “A wise man once told me in real estate, you can make a lot of money very slowly or you can lose a lot of money very, very quickly,” he says. “Our strategy has been to make money very slowly.” But from the looks of things, the payoff is coming more quickly than expected and PIT is winning the non-aeronautical revenue game.

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