An Infrastructure Deal Is Finally Close, And It Could Have Huge CRE Impacts
A bipartisan infrastructure spending bill introduced in the Senate Sunday night has the potential to shape America’s infrastructure and real estate landscape for generations.
The Infrastructure Investment and Jobs Act is a $1.2 trillion spending plan that includes $550B of new funding for the nation's aging infrastructure, including roads, bridges, seaports and railways. It also includes an expansion of broadband internet access across the country.
If passed, the bill could spark new developments along improved roadways and transit and provide a steady stream of construction jobs in the wake of massive federal infrastructure spending. The White House projects the bill will create 2 million jobs per year over the next decade.
“I look at it as one of these generational game-changers,” said Ernie Jarvis, a longtime Washington, D.C.-based commercial real estate broker and former development executive. "Developers will certainly follow the path of public investment. You build it and they will come."
The compromise is whittled down from President Joe Biden's initial $2.25 trillion proposal that would have included billions for programs focused on improving schools, housing and buildings, and provided funds for research and development, clean energy tax credits and community and home-based care. Speaker of the House Nancy Pelosi recently said the House wouldn't vote on the bipartisan resolution until it was reconciled with a larger, more sweeping spending package.
“We think that this, on first blush, is a pretty good compromise,” said Brian Turmail, vice president of public affairs with the Association of General Contractors of America. “Should it pass, certainly it will support the industry's recovery coming out of the pandemic.”
Passage of a multiyear federal spending bill on infrastructure could boost construction activity, according to a Moody's Investors Services report from February. Moody's estimated that total U.S. construction spending could grow from its current $1.5 trillion by 5% next year and another 5.5% in 2023. As of now, spending on nonresidential construction is projected to decline by 6% this year compared to 2020, according to the American Institute of Architects Consensus Construction Forecast report.
Such spending will have beneficial ripple effects into other industries as well, from the airlines and railway companies to those that heavily rely on roads and highways, such as Amazon, FedEx and UPS, Bloomberg reports.
Hundreds of billions in federal spending could pave the way for a surge in new commercial development activity as well, especially along any new or improved roads and transit corridors. While the focus on the bill is repairing existing infrastructure, the bill’s chief authors, including Republican Sen. Rob Portman of Ohio and Democrat Kyrsten Sinema of Arizona, have slated $1B to reconnect minority communities divided by the initial rollout of the interstate highway system, according to the White House.
The focus on improving roads and bridges will “dictate the path of development and the path of development within new communities. And within those communities will be every asset class, both commercial and residential development, because you're providing access,” Jarvis said.
The $65B slated for broadband development in both urban and rural communities also would encourage more commercial development, said Scott Muldavin, who co-founded the private equity investment firm Guggenheim Real Estate and is on the board of trade organization The Counselors of Real Estate.
Muldavin, a real estate consultant, said access to broadband internet has become key to retail, restaurants and other service providers. And those who lack access to it — whether through the inability to afford broadband access or those who live in rural areas — are being economically left behind.
“Broadband is so fundamental to equity. You can’t have an economy where everybody can participate without broadband,” Muldavin said. “So it’s essentially fundamental to the economy. And it’s the economy that drives real estate values. That is something the more money that we can spend on that the better.”
Stan Wall, the former head of real estate for the nation’s second-biggest transit system, the Washington Metropolitan Area Transit Authority, said he was pleased with the focus on transit spending and commuter rail in the bill, a move that he said would address economic disparity and promote equity in major metropolitan areas.
“It represents the largest investment in transit ever,” said Wall, now a managing partner at HR&A Advisors.
Expanding transit access, even through modes such as bus rapid transit, helps communities combat sprawl, as well as connect communities that may now be disenfranchised from the overall economic growth, Wall said.
“It just takes a lot of areas that might have otherwise been overlooked and connects them to transit and makes them more attractive,” he said. “As a lot of these areas continue to grow. It creates an opportunity for them to grow in a smarter way.”
The bill was finally introduced onto the Senate floor Sunday evening after weeks of negotiations, and Congress isn't expected to pass a comprehensive infrastructure and jobs bill until it reconvenes in the fall.
The bipartisan compromise is using a variety of methods to fund the various programs, including dipping into unused Covid relief funds, early termination of pandemic unemployment benefits and changing the way cryptocurrency is taxed, CNN reports.
So far, the bill spares reducing or eliminating the popular 1031 exchange program, which allows real estate investors to reinvest proceeds from one real estate sale into another without having to pay capital gains taxes. Biden initially wanted to eliminate the tax benefit to help fund $775B for elderly and childcare, but that proposal didn't make it into the compromise.
“1031 exchanges are an economic engine just by themselves. The economic benefits far outweigh the tax implications,” said Avison Young principal Casey Keitchen, an investment sales broker. “I think the Biden administration is starting to realize that.”
The program isn't necessarily out of the crosshairs — Democrats could target it in the larger package they plan to pass as part of budget reconciliation, which requires just 50 votes in the Senate — meaning no Republicans need to agree to the deal.
“Certainly it’s better for us that it's not in the bipartisan infrastructure bill. But it doesn't mean it's out of the woods,” Investment Property Exchange Services General Counsel Suzanne Goldstein Baker said. “The reconciliation bill is coming this fall, and they will still be looking for pay-fors.”
Joseph Kane, a fellow with The Brookings Institution who has focused on transportation and water infrastructure, said he is concerned about what projects would specifically benefit from any final bill.
“A lot of money can just go to bad things; that's why the ultimate evaluation of this is going to be five, 10, 15 years from now,” Kane said. “I certainly think there are huge challenges ... that we're choosing the right projects and needs for today.”