J-diversification

Two video games that I spent much time with during high school suddenly make so much more sense — after wandering around Japanese cities for a few days. A-Train and SimTower, both of which were published in the USA by Maxis (creator of SimCity), have at their hearts urban and business models that respond to conditions quite unique to Japan — a society that, despite its considerable automotive might, practically defines “transit oriented development.” Both games were fascinating looks into the integrally interlinked role that transportation, both horizontal and vertical, plays in a densely populated society.

In A-Train, the game player is put in charge of a for-profit commuter and freight railway system serving local travel within a growing metropolitan region. As with Japanese rail systems, the lion’s share of potential profits stem not from railway operations but from the two “ancillary” businesses also in the simulation: property development and stock market speculation (based on the “keiretsu” cross-holdings model that was an integral part of the “Japan Inc.” business model).

Indeed, a 1997 study by Takahiko Saito comparing Japan’s “major private railways” found that 55% of operating profits (aka EBITDA, an earnings figure that excludes capital spending) stem from non-transportation operations. In most cases (and in the much larger case of Hong Kong’s MTR) property development, management, and operations were the largest contributor to profits — oh, and note that buses are usually run at a loss, presumably because they support profits elsewhere in the operation. (Even in U.S. regions with privately operated commuter buses, like Coach USA’s lines in New Jersey and Wisconsin, public subsidies play a key role.)

Ratings and Investment Information, a financial research firm, confirms that is still the case for the private railway sector: “transport’s contribution is… just under 50%” of EBITDA cash flow. The mainline railway business is just not that profitable, despite the railways being in a uniquely ideal profit-generating situation, with uniformly high densities across huge urban areas, and very aggressive management. Saito writes:

The fact that railway companies engaged in commuter transport in large cities could maintain sound management without government subsidy is remarkable to managers of railway companies in other countries. The traffic market in large Japanese cities is extremely favourable to railway management.

One strange “bug” that the game’s Wikipedia entry notes results from an anti-trust situation: the human player competes against the simulation to develop property, but only the player can place certain high-value developments (particularly recreational facilities like stadia, golf courses, and ski resorts). Since the player has a monopoly on these facilities, their market value is bid up tremendously, and their construction offers a ready source of cash and/or leverage opportunities. Indeed, winning the game seems well nigh impossible without exploiting this loophole; in particular, the capital cost of building new rail infrastructure simply cannot be recovered solely through railroad profits.

The game curiously omits the notion that freeways would compete with the rails for intra-urban traffic. The cost of driving in Japan — despite the lack of a Singapore-style conscious price-rationing system for road space, a combination of high tolls (a crosstown roundtrip can easily cost $40, as the expressways are also privately owned) and high prices for imported gas — discourages single occupant car trips.

(Of course, long distance rail companies in Japan still cheerily accept government subsidies for capital costs and to cover operating deficits in rural areas — a formula that could serve Amtrak well, except that almost all of America is “rural” by Japanese standards.)

SimTower gives the player a blank slate of land upon which to build a mixed-use skyscraper. Here, the transportation challenge is vertical, rather than horizontal: arranging a menu of wildly varying mixed uses (offices, condos, shops, hotel rooms, ballrooms, fast food, restaurants, cinemas, lobbies, a wedding chapel, a subway station, parking) around various circulation elements (local and express elevators, stairs, and escalators). Many of the simulated occupants were assumed to never leave the tower in the course of a day.

Mixed-use skyscrapers certainly aren’t unheard of in the USA, but the degree to which uses are mixed together and shoehorned in is far greater in land-short Japan: dozens of blocks in even small cities are lined with three-to-ten story buildings, perhaps on 3,000 square foot sites, stacked high with shops, fast-food joints, and bars. Underground retail concourses, second-floor shops, even food courts high inside skyscrapers and department stores don’t just exist, they thrive. One particular thing that surprised me about the game was the occupants’ seemingly insatiable demand for restaurants; true to form, Japanese shopping malls often have as many (or more!) eateries as shops — a nation of tiny kitchens and long working hours results in considerable demand for eating out. The main JR train station in Nagoya (one of the first large instances of a post-privatization JR company branching out into property) houses five floors with perhaps 50 eateries (from breakfast through cocktails) high above ground level, in addition to countless more food options at or below grade in several interconnected buildings.

The most ambitious mixed-use complexes surround or surmount railroad transfer stations, which offer the broadest market reach. Tokyo, with its longstanding decentralizing policy of terminating the private suburban railways at the circular Yamanote line (only subway and JR lines extend into the core), offers the most obvious illustration of this concept: each intersection between the Yamanote and a major suburban railway has spawned an urban node that surely rivals Midtown Manhattan in urban energy. And since the terminals are controlled by private railroads, they have a strong economic incentive to fill their station areas with a land-use mix promoting round-the-clock ridership — hence the preference for retail and entertainment over blank, faceless office towers.

To be sure, countless social and economic differences mean that these lessons can’t be transferred directly to America. However, the Japanese experience does demonstrate that private real estate interests — guided, of course, by public policy (e.g., the world’s highest farm subsidies) — can have tremendous success in profitably creating transit-oriented development, and illustrates the stupendous amount of urban value that transit infrastructure can generate.

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