RAILROADS, PERHAPS MORE THAN ANY other force, shaped the way America developed in the last half of the 19th Century. Where spikes were driven, Main Streets were soon to sprout.
In the middle of the 20th Century, the automobile usurped the train`s role as the driving mechanism for growth in the United States. Where asphalt was laid, suburban malls were soon to follow.
Now the railroads are once again an engine of development, reshaping both the cities and the suburbs. But the action is not occuring where the railroads are coming through; instead, growth is happening where the railroads are getting out.
”In many cities, some of the last undeveloped or redevelopable land is in the hands of the railroads,” said Harold Jensen, a partner in Metropolitan Structures, which co-developed Illinois Center. The project is built on former Illinois Central railroad land east of Michigan Avenue.
”If you go to Seattle or New York, you see the same thing: railroads with key properties in key locations that have become extremely valuable,”
said Theodore Novak, head of the land use, zoning and condemnation department at Rudnick & Wolfe, a Chicago law firm that works extensively with railroads. That land once bustled with activity, home to railyards teeming with engines and boxcars. But after World War II, the operations of the railroads declined, especially in city centers, as airplanes lured more of the passengers and trucks hauled more of the freight.
”The nature of the railroad business changed, and that has produced a large amount of available land,” said Wence Cerne, vice president of real estate for Whitman Corp. (formerly IC Industries, parent of the Illinois Central).
And a lot of that land is for sale or being primed for redevelopment by the railroads themselves.
”All railroads today are trying to maximize the value of their assets. They`re all looking for cash and most are looking at their real estate to get it,” said Bill Carter, a partner in the appraisal group at Arthur Andersen & Co.
”Outside of the United States government, railroads are the largest landholder in the country. They are sitting on an incredible potential and they are just starting to realize it,” Carter said.
Two reasons: Railroads, which are expensive to run, need new sources of revenue. And the demand for land in urban areas has skyrocketed, making railroad holdings a critical part of the balance sheet.
”The railroads historically have not been dynamic investors. But there is a point at which land the railroads owned became so attractive they couldn`t ignore it,” said Kurt Weissheimer, managing director of real estate for the Chicago Union Station Co.
That firm has taken an aggressive approach to development, seeking active partnerships for projects on its land. A subsidiary of Amtrak, it owns most of the land between the Chicago River and Canal Street, from Carroll Avenue south to Roosevelt Road.
Land-lease, air rights-lease or joint-venture development deals have resulted in the construction of more than 4 million square feet of office space along that corridor, including the four Gateway office buildings (a fifth is planned) and the recently completed Morton International building.
That philosophy is in line with those of railroads such as the Chessie & Seaboard, the Chicago Milwaukee and Santa Fe, all of which formed their own real estate development arms-CSX Realty, CMC Corp. and Catellus Development, respectively-to take advantage of their railway land holdings.
But it is in contrast to other railroads such as the Illinois Central, Union Pacific and Chicago & North Western, which are selling off most of their real estate.
”Most railroads use a variety of strategies in real estate,” Jensen said. ”They sold some, developed some or retained an interest in what they let somebody else develop.
”It depends on the financial strategies of the railroad. To sell or participate in the development is the fundamental dividing line.”
Until the 1970s, the railroads` traffic departments generally marketed their land, seeking industrial parks or piggyback trucking operators for their large parcels, said Craig Smetko, an attorney with Rudnick & Wolfe and former vice president of real estate for Santa Fe Land Improvement Co., once a subsidiary of the railroad.
The railroads looked at criteria such as how good a customer the buyer was or how many carloads might be shipped from the developed site, rather than what was best for the land from a real estate development perspective, he said.
”The railroads` view of real estate was of its value for operating purposes or for future operating purposes or for putting in a shipper who would add to rail traffic,” Smetko said.
”Anywhere they could acquire a huge chunk of land that was available, they did. They didn`t mind having the extra acreage because they could afford it.”
There are still projects that are developed under that philosophy. Santa Fe has plans to build a rail/truck facility on former railyard land in west suburban Hodgkins, adjacent to the planned United Parcel Service distribution center going up on the old GM Fisher Body plant site.
But as corporate America began taking stock of its assets in the takeover frenzy of the 1980s, railroads were forced to see their real estate in a new light.
”The leveraged-buyout guys really opened the eyes of everyone as to what the railroads` land was worth,” Smetko said. ”Also, the railroads saw how other real estate developers were making profits in the same areas they owned land, and they wanted in on it.”
In Chicago, U.S. Equities Realty Inc. was one of the developers to show the way. The firm`s One Financial Place and Midwest Stock Exchange project in the South Loop was built on land acquired from the Rock Island Railroad and Metra.
”The properties the railroads have are becoming prime development properties, and as we get each one done, there is getting to be a critical mass,” said Martin Stern, vice president of development for U.S. Equities.
”Chicago being such a railroad town, you are able to find this kind of land in every direction except due north,” Stern said. ”Within the major expansion area of the Loop, it is almost impossible to go anywhere without running into railroad land.
”I think we`re at the beginning of a lot of activity involving railroad land, and every project will add to the momentum.”
And that gives railroads, which helped shape Chicago more than 100 years ago, an opportunity to help rebuild the city as it moves toward the next century, said Louis Masotti, an urbanologist at Northwestern University`s Kellogg Graduate School of Management and a real estate consultant.
”The railroads have a tremendously important role to play because they are sitting on land that they`ve owned for probably 100 years. It doesn`t cost them a lot to hold that land,” Masotti said.
”If we continue to grow-and we will; it`s a question of how fast and how big-that will continue to be a terribly important part of the city`s future,” Masotti said.
A boxcar-load of real estate developments are underway or planned for railroad land.
– U.S. Equities Realty Inc. is working with the Chicago Union Station Co. on the renovation of Union Station, including construction of twin office towers over the station, redesign of the concourse retail space and passenger facilities and restoration of the Grand Hall waiting room.
If the success of other train stations, such as the Musee D`Orsay in Paris and Union Station in Washington, D.C., both of which have been renovated and transformed in part into shopping centers, are any indication, Chicago`s Union Station promises to become a popular tourist attraction, developers say. – The Northwestern Atrium Center, designed by architect Helmut Jahn, is on the site of the old Chicago & North Western Station at the corner of Madison and Canal Streets. The station, built in 1911, was torn down in 1984 to make way for the new steel-frame and glimmering blue-glass structure.
In the early 1980s, Tishman Midwest Management Corp. entered into a contract with the railroad, acquiring the station but allowing the railroad to reserve rights within the depot structure for its commuter operation.
”With our New York roots, we were relatively familiar with Grand Central Station and its relationship to the Pan American Building,” said Dean Lampros, executive vice president of Tishman Midwest. ”We saw no reason that the same concept couldn`t survive in Chicago nicely.”
Metra has scheduled a $150 million renovation of the commuter terminal and train shed. Work is expected begin this fall and take five years to complete.
– Dearborn Station, the nation`s oldest railroad terminal building prominently located where Dearborn Street stubs into Polk Street, has been renovated into an office and retail complex.
– CSX Realty`s Franklin Point mixed-use development is located on former railyards on the northernmost eight-acre chunk of CSX`s 43 acres along the river. CSX has not decided on uses for its other nearby riverfront holdings, a six-acre parcel between Taylor Street and Roosevelt Road and a 29-acre parcel between Roosevelt and 16th Street. The Franklin Point site formerly housed B&O Railroad`s Grand Central Station, which was demolished in the late 1960s.
– Walsh, Higgins & Co. plans a project just east of Franklin Point on approximately 30 acres over rail lines that are still used by Metra. The Walsh Higgins land formerly was part of joint holdings of the Chicago, Rock Island & Pacific Railroad and the Penn Central Railroad.
– Fogelson Properties Inc. and Forest City Enterprises Inc. are ready to start construction on Central Station, a $1 billion mixed-use development on 72 acres of former Illinois Central railroad land and air rights along Lake Shore Drive north of McCormick Place.
– CMC Corp., the former owner of the Chicago Milwaukee Railroad, wants to turn the northern half of Goose Island on the city`s North Side into a residential neighborhood of 1,280 homes and apartments, a small pocket park, 50,000 square feet of retail space and 400,000 square feet of commercial space. But the city is intent on preserving the area as a manufacturing center, proposing that Goose Island be declared a Planned Manufacturing District and that commercial projects such as that proposed by CMC be forestalled.
– Catellus Development, the real estate arm of the Santa Fe Railroad that will be spun off into an independent firm, has broken ground on the Internationale Center in west suburban Woodridge.
– Developer and rehabber John Marks is putting down $20 million to renovate the old Soo Line Freight Terminal at Roosevelt Road and Canal Street- a 16.2-acre, 750,000-square-foot complex, which he bought for $6 million-into the South Loop Marketplace and Distribution Center.
– The project to revamp the Chicago Transit Authority`s Howard Street Station and integrate it with some 50 new stores and restaurants, 200 new apartment units and some 1,500 parking spaces involves a number of community groups and government agencies plus a private developer.
Railroad projects are not peculiar to Chicago.
Santa Fe has 314 acres south of San Francisco`s financial district where it plans a massive mixed-use office, residential and light industrial center. Santa Fe also has plans for waterfront developments in Berkeley and Albany, Calif.
CSX Realty has about 70,000 acres for sale in 2,800 locations east of the Mississippi. The company plans to develop another 5,000 acres itself or in joint ventures, including mixed-use projects in Hagerstown, Md., downtown Baltimore, Vandalia, Ohio, outside Dayton, and on Gasparilla Island in Florida.
CMC Real Estate Corp., a subsidiary of CMC Corp., is working on a 162-acre office/industrial park in Tacoma, Wash., and a 217-acre site adjacent to Milwaukee County Stadium on which it plans a retail, office, hotel and light industrial development.
Union Pacific is sitting on 350 acres in downtown Las Vegas, which Carter of Arthur Anderson said is valued between $100 million and $150 million. The railroad, which refuels trains there, is looking at alternative plans for the site, Carter said.
”There is a lot of opportunity out there for the development community,” Carter said. ”But the developers have to be the savvy ones and take it to the railroads because loooking for that opportunity is not their main priority.”
Developers generally find railroad projects attractive.
”Railroads make wonderful joint-venture partners for developers because of their long-term stability,” said Cheryl Stein, a U.S. Equities vice president working on the Union Station project.
”The big difference in developing railroad land is if the tracks remain and you`re developing on air rights. Otherwise, the surface land is like developing anything else,” Jensen said.
”Air rights” simply refers to the space above the ground holdings. Land owners have the legal ability to sell or lease the air rights above a parcel while maintaining the land below. Thus, railroads have been able to participate in redevelopment projects without giving up their rail operations altogether.
”That`s why you see air rights development, because it preserves the core of the routes the railroads so jealously guard,” Jensen said.
”There is nothing magical about air rights,” Weissheimer said. ”The value of the land reaches a point where it is so high that it is no longer prohibitive to pay the premium necessary to build a platform over the tracks so you can build on it. And that premium is not so big as you might think.”
Railroad projects do present a few difficulties. Environmental concerns can be greater on railroad land, some of which has been unused and unprotected for years, said Michael Elam, of Rudnick & Wolfe`s environmental division.
”It`s not just the things along the line-creosote on the logs, fuel depots or coal and oil reserves. A lot of times when they built a railroad, it was pretty much like building a dam, and now there might be wetlands all around,” Elam said.
The bureaucracy surrounding railroad land also can be an obstacle.
”When dealing with railroad land, it is very difficult to get to the bottom of all the title, utility and easement deals,” Stern said. Some records date to the city`s 1913 Railroad Terminal Ordinance and others must be researched to the original land grants given in the 1850s. ”There are easier ways to make a living than dealing with the railroads.
”But the locations are so good and the projects so challenging and the results so important to the city that it`s worth it.”
