Airports today are engaged in a game of risk. But unlike the popular board game of the same name, the race to build non-aeronautical revenue doesn’t end in laughter whether you win or lose. In this game of airport strategy, the stakes are high, the risks are real and it’s no laughing matter when a bold move fails to pay off.
In recent years, Dallas/Fort Worth International Airport (DFW) has emerged a clear winner in the non-aeronautical revenue game. With nearly 65 percent of its revenue coming from non-aeronautical sources, it’s safe to say airport officials in the Dallas/Fort Worth metroplex have learned to successfully navigate land use, leases and sealing the deal.
In fact, the ink is barely dry on the largest commercial land-use agreement in the Big D airport’s history—one that is expected to generate up to $2.4 million in revenue annually, reports John Terrell, DFW vice president of Commercial Development.
According to Terrell it took plenty of moves and countermoves to arrive at this point. The land these new developments will rest on was not available for lease until the airport entered a tax-sharing, inter-local agreement with the City of Coppell.
“This agreement allowed us to finally put the property on the market,” says Terrell, who explains the tract located off Interstate 635 and Royal Lane had long been of high interest to industrial developers who appreciated its proximity to both the interstate and the airport.
Renewing conversations with developers who had expressed interest in the past quickly led to a leasing agreement with Fresenious, a distributor of kidney dialysis machines and head of an international kidney dialysis training program. The firm sought a location for a 500,000-square-foot distribution and training center, and found one on 36 acres of airport real estate. This development soon led to a second 40-year lease for a 120-acre plot. Here the developer plans to construct Logistics Center I and II, two 1-million-square-foot warehouse-distribution centers, side by side.
“The Fresenious building is already under construction and will be completed within three months,” says Terrell. “Construction will start on Logistics 1 in the next couple months and will take 10 to 12 months to complete. Work on the second building, depending on market conditions, could begin within six months.”
“DFW has been one of the more aggressive and successful airports in planning and implementing plans for things like warehouse distribution centers, retail space, office buildings and other uses,” says John Lynch, director at Ricondo & Associates, an aviation consultancy based in Chicago that assists airports in developing land-use plans.
Land Lookout
Lynch, a one-time real estate developer who joined Ricondo & Associates to help airports with commercial development, remarks that the shift to build non-aeronautical revenue began in earnest in 2009, during the Great Recession. “Folks started talking about airport cities, the aerotropolis concept, and how to drive more revenue out of their land as other revenue sources began drying up,” he says.
In the years that followed, airport cities began to sprout up in Amsterdam, Dubai, Athens and Bangkok to name a few, and airports, such as DFW, began viewing them as viable concepts in the United States too.
“What really drives non-aeronautical development is the airport’s quest to maintain a low-cost structure for airlines,” stresses Ken Buchanan, executive vice president of Revenue Management at DFW, a role where he is responsible for the airport’s strategic direction to maximize non-aeronautical revenues. “Non-airline revenues help off-set costs so that we can maintain a low-cost structure that helps us retain airlines and attract new ones. The more non-aeronautical revenues you can generate the lower your airline fees can become.”
But non-aeronautical development doesn’t just happen. It requires careful consideration and thoughtful planning, Lynch says. While DFW is in an optimal position to boost non-aeronautical yields because of the sheer acreage it has at its disposal, many airports are landlocked or only own enough property to meet their operational needs. Before seeking out commercial developments, Lynch believes every airport must critically examine its land to:
1)Make sure it won’t be needed for aeronautical purposes in the future, and
2)Evaluate it as a real estate developer would.
“An airport cannot be myopic in regard to their land,” he explains. “They have to look at it in the context of what’s around them and really assess what opportunities exist. I’ve seen airports going down a path thinking they had opportunities that weren’t really there because they hadn’t taken the time to properly evaluate their land assets.”
Location, location, location?
The old real estate adage about location, location, location may be true, but Lynch stresses location cannot be the only reason for developing by an airport. Developments based on this presumption are destined to fail, he says.
For this reason, every airport needs a land-use plan before the first shovel breaks ground. Ricondo & Associates helped DFW craft its strategy for commercial land development. Buchanan says this plan identifies the space the airport needs for aeronautical use over the next 50 to 60 years. “We set aside the land we believe we’ll need to cover our operations in the future, leaving 6,600 acres out of 18,000 for commercial development,” he says.
This blueprint for the future needs to look out at least 20 years. Lynch explains it’s not unrealistic to map out 40 to 50 years in a land-use plan. “Anything we do on the non-aeronautical side has to be subservient to the airport’s future aeronautical needs,” he explains.
Long-range plans also need to be flexible, Lynch adds. “Markets will change a lot over 50 years, and you have to be able to respond to that,” he says. “We want to be sure we are not precluding positive projects because they don’t fit into the exact plan in mind.”
This fact, he says, is particularly true for small- to mid-size airports lacking the pockets of development around them that DFW, Chicago O’Hare or Dulles airports have. “Sometimes it takes smaller steps to get things going,” he says. “You need to look at realistic projects, even if it’s just a service plaza or small office/retail building.”
The plans also must identify appropriate uses for the land—ones that are compatible with the airport’s aeronautical needs. “Anything going in on the non-aeronautical side can’t conflict with aeronautical operations in terms of proximity, noise, air space issues and things like that,” Lynch says.
This is where many airports go wrong, he adds. They consider their future aeronautical needs and declare the rest of their land appropriate for non-aeronautical uses and then “build stuff on it.” “The mistake is they are not really looking at the land they are dealing with,” Lynch says. “They are assuming it can be developed and that’s not necessarily the case.”
Even if the property can be developed, its uses may vary. “We didn’t just put distribution and warehouses around because of the land’s proximity to the airport,” explains DFW’s Buchanan. “We identified the highest and best use for each segment of land. Some of it has highway frontage, and easy access to and from the highway. That made it appropriate for one kind of development. Some of it is landlocked and not easily accessible to the general public, that land has been identified for a different use.”
Land-use policies, he explains, must take advantage of the property’s natural layout and the synergies that exist in and around the airport. Logistics centers need to be located near road transportation but away from locations already designated for hospitality or entertainment purposes. Geological features and impediments to building must be considered, as must its visibility from the roadway.
These plans also must consider the ability to service the area with roadways and utilities. Terrell draws a comparison between DFW and Denver International Airport (DIA) to emphasize this point. While DIA has twice the land as DFW, it is considerably removed from the downtown area and municipal infrastructure, thus its uses are different and its ability to add infrastructure differs as well. “DFW is surrounded by infrastructure, and we have our own utility plant on site,” he says. (See www.dfwairport.com/landhere/useplan/index.php for more information on DFW’s land use plan.)
Local Interests At Play
Airports also cannot plan their futures in a vacuum.
“You do not want to compete with your neighbors,” says Buchanan, explaining that it was extremely important that DFW maintain good working relationships with the cities of Grapevine, Coppell, Irving, and Euless as it developed its land. These key stakeholders were included in the planning process and kept abreast of the airport’s development plans, how utilities and roadways would be impacted.
“We didn’t want to develop in a way that would be contrary or have a negative impact on the surrounding community. We wanted to build something that added to the community,” Terrell explains. So after gathering community input, DFW went back to the drawing board, crafted a plan then took it to each of the communities’ city councils for comments and suggestions.
DFW then launched a marketing effort to engage developers, many of whom had expressed concern about the plans giving the airport an unfair advantage. DFW centered their educational efforts on the fact that in most cases the airport wouldn’t be involved in vertical construction but rather in installing necessary infrastructure to make building feasible on this incredibly visible and accessible land.
“Since we got that message out we have worked with at least 12 developers who have all developed on airport land,” Terrell says. “This land is now generating revenues for developers, tax dollars for the city, and land rents and increased cargo traffic for the airport.”
