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With the Watertown Carhouse still in modest use as a home for the wire crew and for storage, it seems any new construction that happens at the yard will have to leave that building standing. I would imagine that precludes the possibility of building a bus storage facility on the site.
I would think-- if the environmental mitigation issues aren't too great-- that the property would be ideal for residential development. There are several new developments along nearby Pleasant Street. The yard is right on the river, close to the square, the arsenal corridor, the pike, and the river roads, has good public transit connections, and is convenient to Cambridge, Newton, Chestnut Hill, Brighton, etc. If the yard itself isn't serving a critical need, why not sell it? (I'm assuming the wire crew and storage could be moved somewhere else without too much difficulty.)
In any case, I hope the T does make plans to enhance the passenger areas of the bus stop at the Yard-- it's a very busy terminal and I think the T can do better than dropping riders off essentially in a driveway with no sidewalk and not a lot of lighting. The pick up area with it's two small shelters is better. Though it could be a little friendlier, it does the job adequately.