When Denver International Airport was under development in 1990, planners knew that the 53-square mile site presented many unique opportunities beyond gargantuan terminals and abundant runway expansions. What they envisioned was a vibrant commercial district surrounding the nation's largest airport by land area.

The grand plan is coming together. Seventeen years after being completed, Denver International hosts a growing constellation of commercial developments centered on the airport's complex of tent-like terminals.

Meanwhile several other U.S. airports with excess land are working with commercial developers to diversify their revenue base through retail, industrial, and hotel uses, among others. Some recent examples:

  • Detroit Metropolitan Airport officials are exploring more than $35 million in retail and hotel developments on roughly 25,000 acres of woodlands and open fields surrounding their airport.

  • Last year, El Paso International airport razed an old manufacturing property located on airport land. Two new hotels are planned for the 9.3-acre site.

  • The Piedmont Triad International Airport in Greensboro, N.C. is seeking to buy roughly 500 acres of land adjacent to its 3,000-acre airport. In 2009, a third runway will be completed to accommodate FedEx's growing mid-Atlantic hub.

These airports have plenty of company. More airports issued requests for qualifications (RFQs) between June 2005 and June 2006, according industry sources, up from the preceding 12-month period. All of the requests were seeking response from commercial developers.

Mile High momentum

“There really is no airport better suited to take advantage of commercial development opportunities than DIA,” says Mary Rose Loney, president of the Denver International Airport Partnership. The public-private partnership was formed in 1995 to foster development in Denver's northeast metro region. But in 2007, the partnership revamped its mission to focus exclusively on airport and aviation-related job growth.

“Airports around the country are really starting to look at their land as more of a viable asset than simply a place to expand their terminals or runways,” says Loney.

One example is the 500-acre mixed-use village known as The Landings at DIA. The ambitious project, which will be completed in phases over the next four years, includes a 200-room hotel, 60,000 sq. ft. of retail space and many additional sites for retail development.

Phase one of The Landings at DIA was awarded to Denver-based Redwood Real Estate Partners. Redwood leases a 17-acre site roughly two miles from the main terminal. Marcus Phillips, an acquisitions specialist with Redwood Real Estate Partners affiliate Dunton Commercial Real Estate Co., says that Redwood will develop the 200-room hotel on the site.

The company also has leased nine potential retail sites, roughly one acre each, adjacent to the hotel pad, says Phillips. Several existing properties already occupy some of the pads: a high-end wine cafe and restaurant currently occupy two sites. And in late September, Phillips began negotiating with a day-care center operator that is eyeing one of its sites.

Phillips expects to generate roughly $30 to $35 per sq. ft. on future retail rents at DIA. He says that these rates are comparable to quality retail space in Denver.

“The most appealing part of this development is its location near DIA,” says Phillips, adding that rental income has been strong at all of Redwood's airport properties. “The reason is that you have nearly 40,000 employees and 50 million passengers passing by this site every year.”

The Landings is Redwood's first foray into airport development. But Phillips is interested in similar opportunities to the south at Dallas Fort Worth International Airport (DFW), where commercial developers have been working closely with airport officials since the late 1970s.

Economic powerhouse

When the Dallas Fort Worth airport opened for business in 1974, it was marooned in the sagebrush between two growing North Texas cities. But as strip malls and subdivisions encroached on the airport during the following two decades, the value of some 18,000 acres of undeveloped land began to climb.

“We've been leasing properties to industrial warehouse developers since the 1970s,” says Jerry Baumbach, assistant vice president for commercial development at Dallas Fort Worth airport. “But within the past decade, we have really revamped our vision of how to work with developers on airport land.”

Earmarking land for future development is part of that vision. In 2006, for example, airport managers set aside 3,200 acres for retail, restaurant, industrial and office uses.

Most of these three- to four-acre sites are located roughly four miles from the runways, making them somewhat less exposed to the noise of arriving or departing airliners.

As of mid September, Baumbach had signed roughly 21 leases on 350 acres of land. Rental income from these tenants will be sizeable: These leases should generate more than $5 million of annual rents, according to airport management.

“We understand that we are an airport,” says Ken Buchanan, executive vice president of revenue management, DFW Airport. “But we're really more of a diversified city based on the types of revenues we generate and how many people we employ. It's basically a central business district.” (See sidebar, p. 92)

The airport and its associated businesses provided 305,000 jobs and roughly $7 billion in payrolls to the North Texas economy in 2005, according to the Texas Department of Transportation. Several massive air cargo facilities, two 18-hole golf courses, seven private warehouse distribution centers and two Hyatt hotels generated many of those jobs.

More commercial projects also are planned. In 2006, for example, officials issued multiple RFPs for a 600-acre mixed-use complex anchored by a 125-acre retail center. The development, which will feature a 10-acre restaurant plaza, will occupy the southern tip of the airport. These planned developments will continue to diversify the airport's revenue stream away from aviation uses.

Revenue renaissance

Most airport revenues are still generated by traditional functions such as fees from parking and rental car concessions. These two segments respectively generated 41% and 20% of all airport revenues in 2005.

The percentage of revenues — including commercial lease payments — drawn from adjacent land or non-terminal facilities more than doubled between the end of 2000 and 2005 (see chart).

Despite the advantages of operating commercial projects on airport land, some developers are still hesitant to build projects inside the fence. But buying and holding property within striking distance of an airport does remain a priority for these developers.

The world's largest industrial REIT, Denver-based ProLogis, is a prime example. ProLogis owned roughly 446.9 million sq. ft. of industrial space worldwide as of early September. Many of those facilities were located near international airports with active freight operations.

“Being near an airport is fine. But the problem with operating on airport land is that you have to lease it from the airport,” says Mike Peters, first vice president of global solutions at ProLogis.

The REIT prefers to own the land beneath its warehouse facilities. Master leases may extend for decades.

Ownership also enables ProLogis to liquidate its control through a sale rather than going through the trouble of subleasing the property to another tenant.

Conflicts of interest can also make negotiations with airport authorities tricky. Every airport in the U.S. is owned and managed by the FAA, which requires its managers to file Airport Layout Plans (ALPs) every few years.

Most plans designate large chunks of acreage for future runway or terminal expansions, says Brett McAllister, senior vice president at trade association Airports Council-North America.

“As far as the FAA is concerned, the primary goal of airports is to move passengers,” says McAllister. “So they often want their airports to keep enough land reserved for runway and terminal expansions as the passenger volumes increase.”

Striking a balance

Maintaining the ideal ratio between pure aviation and non-aviation uses will likely get more challenging. For example, in September, a Torrance, Calif.-based company was hired to study safety and other potential risks associated with a proposed development near the Camarillo Airport. Real estate and airport sources believe commercial development will increasingly occur at U.S. airports.

Kurt Little, managing director of the public institutions group at Chicago-based Jones Lang LaSalle, says that non-aviation revenues are increasingly becoming an integral part of most airports.

He should know, too. Little has coordinated several deals between commercial developers and airport authorities. He's currently helping both John F. Kennedy International Airport in New York and New Jersey's Newark Liberty International Airport lure hotel developers onto their property. Both airports are seeking additional revenues.

“I think the trend will certainly continue to gain momentum,” Little says, “and in the long term you will see airports become hubs of commercial activity since most airports have land that they're not using.”

Parke Chapman is senior associate editor.

‘Aerotropolis’ becomes a household name

Air travel is bending the rules of urban planning in several Asian countries as airports become the centerpieces of master-planned cities. Hong Kong, South Korea and Malaysia are developing myriad commercial uses around their snazzy new airports.

In Thailand, officials are building a massive city and industrial district on adjacent swampland that surrounds its $4 billion Suvarnabhumi Airport outside Bangkok. As many as 3.5 million people are expected to reside there by 2036.

“What drives real estate value today? The answer is connectivity and the ability to move quickly between locations,” says John Kasarda, University of North Carolina professor who first coined the“aerotropolis” concept in the late 1980s.

Kasarda believes that global economic growth fueled by jet travel will continue to shrink the world. As a result, he believes that quasi-airport cities will support more than just transient passengers and freight.

He also foresees strong prospects for commercial real estate development within these hubs. Kasarda maintains that office space near Amsterdam's Schiphol Airport commands higher rents than similar space in the city center.

In 2006, prime office space in central Amsterdam rented for up to €33 per sq. ft. But similar space located near Schiphol rented for up to €37 per sq. ft., according to Dutch brokerage DTZ Zadelhoff.

Within the past three decades, Kasarda says that the value of global air cargo has increased by 1,395%. And roughly 40% of the economic value of all goods produced in the world was shipped by air in 2005.

“The aerotropolis will become the connecting node of the global economy. And people will live in these cities because they will be the job centers of the future,” predicts Kasarda.

Indeed, a broad range of businesses now call airports home. Hong Kong's International Airport has more than two-dozen designer clothing stores on its property.

Singapore Changi airport houses swimming pools, movie theaters and even spas. And the Munich airport has its own hospital on-site.

If the aerotropolis has more fans abroad, Kasarda isn't shocked. He believes that a “fragmented” planning process in the U.S. driven largely by the Federal Aviation Administration has quelled interest in his model. He notes that many more foreign airports are privately managed or operated through public-private partnerships.

“It just makes sense that the aerotropolis model will take hold in this highly competitive global economy,” says Kasarda. “This is the combination of urban and airport planning.”
Parke M. Chapman