Road Rent – On the Opportunity Cost of Land Used for Roads

There are a number of ways to view the cost of automobile travel. For instance

  • We can look at the congestion costs imposed [link].
  • We can allocate infrastructure costs [link].
  • We can assess full costs to consider internal costs, subsidies, and externalities [link].

This post looks at the idea of road rent. At the margins, what is the value of road space, and how might that cost look on a per vehicle-km traveled basis?

Real Estate

Land has value. Land used as roads has value both as a road and potentially for other uses. What if the value for other uses was higher than that for use as a road?

In Greater Sydney land values range from to $AU210,000 per m² in Barangaroo on Darling Harbour to under $AU1000 per m² in Western Sydney [link].  In Minneapolis, we estimated a few years ago that average assessed land value as $144 per m² for roads and $30 per m² for highways. [Junge, Jason and David Levinson (2013) Property Tax on Privatized Roads. Research in Transportation Business and Management. Volume 7. pp. 35-42.] It seems that assessed value is about 2/3 of market value in Minneapolis.

In some places it is much higher, in some places much lower, the examples used herein are simply an illustration.

The idea is that there is land holder (such as a government land agency) that has to decide whether to allocate land to road uses or for other purposes.

Parking Rent

Consider a typical suburban residential neighborhood with `free’ parking in front of houses. The land is valued at $1,000 per m². Each house requires one parking space out front, and parking is permitted 24 h per day. Conservatively, a car takes 10 m² when parked (the road is the access lane, we consider that separately). It would cost $10,000 for the land owner to purchase the land equivalent of the parked car. The annual rent on that would be $400 (at 4% interest).

In this example $400 is how much the car owner should pay annually  to their municipality for a permit to park their car to cover the cost of land (not the cost of infrastructure, or any other costs of roads and mobility, just the cost of land). This is a bit more than $1/day (more precisely $1.095/day). In more expensive neighborhoods, this would be higher, in less expensive neighborhoods, lower.

For Minneapolis, I have previously estimated about 220,000 on-street spaces. At $400/space per year, this would raise $88,000,000 per year, a not inconsiderable share of the city’s $1.3B annual budget. Instead it is mostly given away free.

Consider the implications if property taxes were reduced by up to $88M in total, and parking permits sold at $400/year (payable monthly with the water and trash bill). People would realize the cost of on-street parking, and there would be less of it, and less vehicle ownership at the margins, and fewer trips by car. Space freed up could be re-allocated.

Alternatively, $400 per year is the value of public subsidy from publicly-owned land to private car owners who get `free’ on-street parking. In short from the car-less to the car owners.

Alternative Uses of Road Space

The economic idea of opportunity cost is important here. Opportunity cost is value of the next best alternative. The next best alternative to road space might be renting it out. So for instance an urban US freeway that destroyed blocks of extant development when it was built has an opportunity cost associated with the value of that real estate.

So the question arises as to what other uses  could be made of the road; for if there were no other uses, you might as well store cars for free. Here are several other uses that could be  considered to replacing a parking lane:

  • Park or parklet,
  • Bike lane,
  • Bus lane,
  • Paid parking, via meters,
  • Shared car parking (rented to the car sharing company),
  • Shared bike parking (rented to the station-based or dockless bike sharing company),
  • Taxi or ride-hailing stand,
  • Bus stop,
  • Shared scooter parking (rented to dockless scooter sharing company),
  • Food truck or ice cream vendor,
  • Road for moving motor vehicles (a parking lane could be another moving lane),
  • Sold off for development.

The last item deserves some discussion. Consider that our road with two parking lanes (one on each side) is maybe 10 or 12m wide (~32 to 40ft). This is wider than some houses are long. The city could in principle retain the sidewalks and sell off the roadbed for townhouses or single family homes. Given the houses are already serviced by alleys, and so long as not all roads were sold off, some roads could be. An illustration of this is the Milwaukee Avenue in Seward in Minneapolis, as shown in the figure. You will see there is no paved street in front of the houses. This could be tightened up further or realigned should there be demand.

Milwaukee Avenue, Seward. Source: http://maha2014.dreamhosters.com/history
Milwaukee Avenue, Seward. Source: http://maha2014.dreamhosters.com/history

This is not appropriate for every street. However, (1) there are places this can be done, where roads are in excess and housing scarce, and (2) this illustrates that land currently used as asphalt to store and move cars has value, and that houses have value even in the absence of streets for cars in the front.

There are always excuses — utilities may need to be relocated, fire trucks would need to go slower down narrower sidewalks. But these excuses can be overcome, there are numerous examples of narrow paths that function as roads.

Driving Rent 

Note: 1 are = 100 m² and 1 hectare  (ha) = 10,000 m²

Typically each car is in use 1 – 1.5 hours per day, and parked for the remainder. In the previous section, we considered parking, the `remainder,’ in this section we look at the time in motion.

When in use, the car is occupying not simply its area (the 10m² = 2m x 5m), but also is preventing the use of other space around it. On a freeway with a capacity of 1800 vehicles per hour traveling at a freeflow speed of 100 km/h, (i.e. just before the speed and flow drop due to congestion sets in) there is a critical density of 18 vehicles/km.

18 vehicles per km is 55.5 meters per vehicle. Lane width is 3.65 meters, so the area occupied is 202 m². Let’s round to 200 m². Each moment  a car is in use, it is using 200 m², on which it should pay rent. So for an hour a day, this is 720,000 m² s or 72 ha s.  (The meter-squared by second (or hectare second) is a new unit of measurement (a time-volume) that needs a catchier name).

It is the density that is the relevant number here, since vehicles are occupying space that we are charging rent for in this thought experiment. Though they are moving, and so the space they are occupying moves with them, there is always some space being occupied for the duration of their travel. Each of those vehicles per hour is occupying a moving window of space.

Roads are a Time Share

When roads are less congested, cars are consuming more space per vehicle. So uncongested urban are much more expensive per traveler than congested rural roads.  When traffic breaks down, they are consuming less space, but presumably are occupying that space for more time, since they are going slower. Induced demand [link] and travel time budgets [link] negate that to a significant extent.

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Illustration of space occupied by cars. Note that most cars do not have 2 occupants. This particular layout is, surprisingly, in somewhat congested conditions. Cars often take up more space at higher speeds. Screen still from a 2002 Saturn car company TV commercial. Image source:  The San Francisco ad agency Goodby, Silverstein & Partners.  Article: Raine, George ‘Goodby, Silverstein agency celebrates 25 years’ SF Chronicle.

George Raine https://www.sfgate.com/business/article/Goodby-Silverstein-agency-celebrates-25-years-3285120.php#photo-2434077

In this example, the hourly rent on 200 m² is what we are interested in. Though cars move, over the course of 1 hour of travel in these conditions, they are claiming that much space. The specific space they are claiming moves with the vehicles, but this all balances out as other cars claim the space they vacated.

Empty roads still have to be paid for, and paid for by actual road users. Even when a road is not being used, it is available to be used. Travelers have the option of traveling. Pavements cannot be easily be rolled up and allocated to other purposes on the fly, particularly purposes like buildings. (Roads can occasionally be closed for special events, but this is rare during business hours.)

 

Example

Consider a car trip that uses 3 roads:

  • Road section 1 (suburban residential): l=5 km, w=3.65, v=30 km/h, q=1000 veh/h, k=33.33 veh/km, AADT=10,000 vehicles/day/lane, p= $1000/m².
  • Road section 2 (motorway): l=10 km, w=3.65, v= 100 km/h, q=2000 veh/h, k= 20 veh/km, AADT = 20,000 vehicles/day/lane, p= $5000/m².
  • Road section 3 (downtown): l= 1 km, w=3.65,  v=40 km/h, q=1600, k =40 veh/km , AADT=16,000 vehicles/day/lane, p= $10000/m².

where: l = length (km), w= lane width (m), v=velocity (km/h), q=flow (veh/h), k=density (veh/km), AADT = Average Annual Daily Traffic, p= land value ($/m²), i=interest rate = 0.04, r= land rent ($/year/m²), d = days/year

Consider each road section to be a homogenous pipeline. (With heterogenous traffic, this is obviously far more complicated, and we would make use of the q, k, and v variables to compute an area-time.)

The annual rent (R) for  each road section is the R=p*i*l*w

  • Road 1: R=$1,000/m² y * 0.04 * 5,000 m * 3.65 m  = $730,000/y
  • Road 2: R=$5,000/m² y * 0.04 * 10,000 m * 3.65 m = $7,300,000/y
  • Road 3: R=$10,000/m² y * 0.04 * 1,000 m * 3.65 m = $1,460,000/y

This annual rent is paid by the road agency to the land owner for the use of land as a road. The road agency then wants to recover this cost from its customers, the travelers.

The question of how to allocate always has some subjectiveness to it. Another way of thinking about it is based on elasticity of demand. Peak hour work trips are perhaps the least elastic (least sensitive to price), and so from an economic efficiency perspective should bear the greater cost.

In this example, we take a simpler tack.

The allocation is R/AADT to get cost per year per daily tripmaker, and divide by 365 to get cost per trip, and by section length to get cost per km. In this example:

  • Road 1: $730,000/10000 = $73/y = $0.20/trip = $0.04/km
  • Road 2: $7,300,000/20000 = $365/y = $1/trip = $0.10/km
  • Road 3: $1,460,000/16000 = $91.25/y = $0.25/trip=$0.25/km

The total is thus $529.25/year or  $1.45/trip to cover land rent. `Your mileage may vary,’ as the saying goes.

Implications

The implications of this are several.

  • At an additional $1.45/trip, travel by car (and congestion) will diminish.
  • Road rent is essentially additive with annualized infrastructure costs, which generally does not consider the cost of land (rather, land is often implicitly considered `free’ or a sunk cost).
  • If travel by car diminishes sufficiently, road space can be clawed back and redeployed for other public purposes.
  • Narrower lanes impose less road rent. But not necessarily proportionately so, as the throughput on narrower lanes (with human drivers) may be lower as drivers are less keen to be immediately adjacent to nearby high-speed vehicles.
  • Slower moving vehicles take up less space, but take that space for longer.
  • While pedestrians and bicyclists use space as well, they use much less space. (See discussion of flux.) Sidewalks (footpaths) are often considered part of the adjacent private property, and are thus already paid for with property tax.
  • Land used for roads instead of development is not on the books for property taxes.
  • The revenue raised can be used for many transport purposes or redistributed back to taxpayers through some other means.
  • We expect the additional road rent reduces the effective land rent that landowners can charge. If people have to pay more for travel, they will pay less for real estate.
  • Rural areas have much lower, perhaps negligible, road rent. Though the number of users drops significantly (so there are fewer travelers who must pay the burden of road rent), the cost of land drops even more significantly.
  • Were there no (fewer) roads, land would also have very little (less) value, since it would be difficult to access and egress.
  • If roads were fully built on, views would be terrible and the existing buildings would diminish in value. But none of that is to say we have the correct amount of roads now. Clearly urban roads are undercharged in a real estate sense.