New York real estate soaring in value near Second Ave. subway points to new MTA funding model

As officials prepare to break ground in East Harlem for the next leg of the Second Avenue subway, a big question looms: Is there enough money to pay for it?

After all, revenues at the Metropolitan Transportation Authority, which is on the hook for more than $6 billion, have plummeted during the Covid-19 pandemic as remote work and crime concerns have depressed ridership.

The MTA is forecasting a budget deficit of $1.4 billion in 2025, a date by which construction of the new subway—a continuation of the Upper East Side’s Q line—is supposed to be in full swing.

One promising funding strategy worth a look, often described as “value capture,” has a simple enough premise: Those who benefit the most from newly arrived subway service should pay the most. The biggest winners from subways are often building owners and developers, who calculate the value of their properties based in part on ease of transit access.

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That premise is borne out by a new Crain’s.analysis comparing price patterns in buildings along the new Q corridor with similar ones along the 1 line on the Upper West Side. Values rose by about a third on average, controlling for broader market factors.

But those millions of dollars of newly created value did not contribute proportional financial support toward the cost of service expansion, according to critics of the existing financing model, which often instead asks taxpayers as a whole, and commuters who use the trains, to shoulder the bulk of the cost.

“We know there is a real relationship between increased transportation access and increased property values. We just need to be more intentional about how we can capture that value,” said Thomas Wright, president of the Regional Plan Association, an advocacy group, which found that every minute saved in drives to New Jersey train stations was worth an extra $3,000 in home value in the Garden State—and that was based on prices at the time of the study in the early 2000s.

Potential approaches

There are two main ways to get landlords to chip in more, according to economists, transit advocates and urban planners.

Under the first model, developers would pay explicitly for the privilege of building in subway-served zones, similar to the approach used by the city’s business-improvement districts, which charge landlords fees for sidewalk-cleaning and other services.

That fee model, which has been used to pay for transit projects overseas, might be controversial, however, since it can be hard to calculate which buildings actually benefit from a new subway stop. Are you on the hook if your building is four blocks away?

The second option likely is more appealing: Don’t charge landlords fees. Instead, harvest the extra tax revenue the subways help bring in (when they boost property values) to underwrite the project’s cost.

As the value of transit-adjacent properties goes up, so do property taxes. But instead of pouring that newfound money into the typical all-purpose pot, officials would funnel it to one specific place: paying off debt from the subway’s construction, likely by retiring bonds.

That kind of “tax-increment financing,” or TIF, which emerged in California in the 1950s, was used to extend the 7 train to the Hudson Yards development in 2015, and it might be the key to finally finishing the Second Avenue subway, a project first proposed a century ago.

The approach is not always considered a win-win, because TIF essentially siphons away money that officials want to spend on other priorities. The structure also can be risky. A market-crushing pandemic, say, could depress real estate values to the point where the financial upside of the new buildings evaporates.

Before focusing on worst-case scenarios, it would be helpful to quantify just how much value a train can add. There’s not a lot of research about the exact size of property gains, and what does exist does not seem to have been conducted methodically.

Part of the problem is that New York so rarely builds subway lines. And when it does, as in 2017 with the Q in Yorkville, analysts often study only gains in prices in buildings along the line. But it stands to reason that prices in Yorkville, as in other parts of the city, might have improved in the past decade for reasons that have little to do with the subway.

Without having a control group—a neighborhood with similar characteristics that already had subway service in place—it can be tough to know if Yorkville’s gains were merely the product of a booming real estate market.

So, a new Crain’s analysis took a broader look, comparing price patterns in the Q corridor to those along the 1 line on the Upper West Side—making sure to look at a similar lineup of buildings in both places.

Relying on statistics over anecdote, the never-before-attempted study concludes that value is indeed tightly tied to subway proximity. And when that value goes up, it’s significant: by about a third, on average.

Breaking it down

The results seem clear and convincing.

Along the new Q’s path—a 28-block stretch in Yorkville from East 68th to East 96th streets, and from First to Third avenues—values jumped an average of 32% after the subway opened, according to the analysis, which relied on sales data compiled by StreetEasy, the residential real-estate listings website. (Office buildings hug subway lines, too, but the Crain’s study was interested in costs on the residential side. Most of what lies along the Q is apartments.)

In some cooperatives and condominiums, the gains were even more striking. At 225 E. 79th St., a prewar cooperative near Second Avenue where units had been trading at a median price of $470,000 in the years leading up to the Q’s debut, the median shot up to $1.35 million. At 345 E. 81st St., a 1960s 20-story high-rise, the pre-subway median was $508,000, compared with a post-subway median of $942,500.

All told, median sales prices increased at eight of the 10 apartment buildings in the time frame period analyzed by Crain’s, while values declined at two buildings.

The West Side, which had similar traits but existing subway service, fared much differently. Prices mostly declined there from 2014 to 2020. Median prices in apartment buildings in the 24-block corridor between West 72nd and West 96th streets, between Amsterdam and West End avenues, were down by an average of 8%, according to the data.

Within that group, some decreases were notable. At 220 W. 93rd St., a tawny-brick prewar condominium at Broadway, for instance, the median sale price in the pre-Q period was $2.6 million. After 2017 the median tumbled to $2.07 million —a 20% loss.

At 255 W. 90th St., a brick-and-limestone prewar cooperative at Broadway, the median tumbled from $2.59 million to $2.09 million.

Of the 10 buildings in the 1 train corridor, medians declined in six and increased in four—a scenario that might have befallen Yorkville had the Second Avenue subway never been built.

“I’m always a bit wary of comparing different places, but I wasn’t expecting to see such clear results,” StreetEasy economist Nancy Wu said. “This is the most compelling cut we can have of this kind of data.”

In defining the “before” time, Crain’s chose the span from 2014 to 2016 because it represented a time when the subway went from being a project that seemed capable of failing to more of a sure thing.

There had been reasons to be doubtful. The Second Avenue subway broke ground several times since being proposed in 1929, but none of the earlier efforts were seen through to completion. Even the most recent go-around was clouded by doubt. Soon after the Q’s 2007 groundbreaking ceremony came the Great Recession, which delayed the project while sapping its budget.

For the “after” period, the analysis went with the period from 2017 to early 2020, in order to exclude the pandemic, which scrambled property values.

It also was important to ensure the selected buildings were reflective of their market—which produced a broad cross-section: co-ops and condos; prewar and postwar units; apartments in boutique buildings and units in amenity-rich high-rises; apartments on busy avenues and units on quiet side streets. But there was a constant: Every building had to have at least some sales activity before the Q came along.

To be fair, not every building in Yorkville, whose previous closest subway was the 6 line on Lexington Avenue, benefited from having a closer train stop. At 1760 Second Ave., a skinny condominium that opened about two decades ago, the median sales price between 2014 and 2020 actually sunk, from $1 million to $952,500.

Conversely, not all the Upper West Side experienced downsides. At 2373 Broadway, a large 1990s building, the median climbed from $963,000 to $1.15 million.

Some of the selected buildings turned out to have little in the way of sales, for whatever reason. Those addresses got less attention in the overall results.

For people who have watched Yorkville be energized by the Q, the positive correlation between proximity and value makes sense.

“The subway has brought better accessibility but also a better vibe,” said John Patrick Hanley, 33, who bought his apartment on East 81st Street, near First Avenue, in 2015, when tunnels for the Q were still being bored.

For morning commutes back then, Hanley, a consultant, would hike seven blocks to Lexington Avenue and East 77th Street to catch a 6 train to Midtown, in a trip that could take 45 minutes. But since 2017, he has been able to grab a Q at Second Avenue and East 83rd Street, cutting his commute in half.

That time savings might have given a boost to his apartment, a two-bedroom co-op with a balcony. In 2015 it cost $620,000. But today it might fetch $835,000, based on an appraisal done in 2020. To wit: in seven years, his apartment is about 35% more valuable.

“It used to be taboo to be all the way east,” said Daniella Leon, an agent with Compass who has worked frequently in Hanley’s building. “Now you are paying a premium to live here.”

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