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Commercial Real Estate’s Future Depends on Infrastructure Improvements

Buildings are only as good as the infrastructure around them; without roads, ports, bridges, energy, and water, the world’s real estate becomes effectively worthless. Improving infrastructure should thus be a priority for the industry that builds, manages, and transacts the world’s buildings. 

The U.S has lagged behind the rest of the developed world when it comes to investing infrastructure. But now, for the first time in two decades, infrastructure scores in the United States have improved. The American Society of Civil Engineers, which rates America’s infrastructure every four years, upgraded their assessment from a D plus to a C minus. That means that we now have a passing grade, but barely. Unfortunately, our nation has only just begun to bridge the gap. 

“While that is an incremental, small improvement, it still is not something to write home about. It’s certainly not a grade that you’d be proud of,” ASCE Executive Director Tom Smith told CNN.

Signs of America’s weak infrastructure are all around us. Two weeks ago, millions of Texans were left without power and running water during the worst winter storms the state has ever seen. The American west saw its worst wildfire season in history, largely due to downed power lines. Jackson, Mississippi has been without running water for weeks—let us not forget Flint, Michigan. Delayed public transit, unsafe schools, crumbling bridges and a million potholes plague practically every major American metro. The looming climate crisis bearing down on the United States is testing America’s infrastructure, with no end in sight. Despite receiving a barely passing grade, for millions of Americans, our infrastructure has already begun to fail. 

America’s rail system received the highest marks, earning a B Grade. Marks for aviation, drinking water, inland water, and ports all went up while just one category went down: bridges. Which seems surprising based on America’s love of the automobile. 

Surprisingly, America’s energy rating also improved, despite rolling brownouts throughout California during a scorching summer and complete blackouts in Texas during a frigid cold front. ASCE says the energy sector has invested significantly to meet overall demand but struggles with reliability. America’s electrical grid is practically ancient, 70 percent of transmission and distribution lines are greater than 50 years old, their average life expectancy. The real issue lies in distribution lines, which run from substations and energy retailers to domestic users and businesses. The distribution system accounts for 92 percent of all electric service interruptions, a result of aging infrastructure, severe weather events, and vandalism, according to the annual report. 

All of this is costing us dearly. The Department of Energy found that power outages cost the U.S. economy anywhere between $28 billion to $169 billion annually. The country has made important investments in renewable energy, which now represents the lion’s share of new power generation for the first time. But more is being asked of our grid than ever, US energy production exceeded consumption for the first time since 1957. There needs to be investment made in making these systems more resilient as well as more efficient in order to prevent the kinds of losses that we have seen in recent years.

Our worst grade was in transit, with a pitiful D minus. Approximately 45 percent of Americans have no access to public transit, those that do are too often left unsatisfied. The COVID-19 pandemic has hit public transit hard, leading to a 70 percent average decrease in ridership across the country, according to the American Public Transportation Association. Underinvesting in repair and replacement of aging stock has increased delays due to service disruptions, which will cost passengers an estimated $1.2 billion over the next 10 years. By 2029, more than $250 billion in transit improvement projects will be backlogged. 

Solutions require robust government funding. After all, infrastructure is one of the things that we all expect from our governments. Plus, infrastructure improvements pay for themselves directly and indirectly. Failure to invest in infrastructure leads to high costs for business and manufacturers who provide goods and services that are passed on to workers and families. By 2039, a continued underinvestment in our infrastructure at current rates will cost America roughly $10 trillion dollars. Today the funding gap stands at roughly $2.6 trillion. ACE recommends increasing infrastructure investment from 2.5 to 3.5 percent of GDP by 2025. 

That level of funding will require action on Capitol Hill, where lawmakers are drawing battle lines in what is expected to be a contentious debate over infrastructure spending later this year. Once the Biden Administration is done asking Congress for nearly $2 trillion in pandemic relief, they’ll have to go back for more to fix America’s derelict infrastructure. A price tag for the proposal is still a long way off, but during his campaign, Biden floated a $2 trillion estimated cost. Goldman Sachs analysts expect the package to be at least that much. Bank of America’s own researchers found a package similar to what President Biden has been promoting would lead to a 2 to 9 percent boost to GDP in the short run with considerably more positive long-run impact. 

“We are so far behind the curve,” Biden told labor leaders at a meeting last month. “We rank something like 38th in the world in terms of our infrastructure—everything from canals to highways to airports.”

Inventors seem to love the idea of an infrastructure spending spree. Analysts have been factoring in President Biden’s infrastructure plans into estimates, leading to a 25 percent surge in projected 2021 earnings for companies in the S&P 500 machinery sub-index, the primary beneficiary of infrastructure spending. A major reason Wall Street analysts are bullish on infrastructure spending is its ability to produce jobs. The large number of workers needed to build massive public works projects is a shot in the arm for local economies struggling to cope with a pandemic-related economic downturn. 

Of course, it all comes down to how it will be paid for. Treasury Secretary Janet Yellen has 

indicated that tax hikes on corporations and high-income individuals will likely be needed to pay for at least part of a big infrastructure bill. The new administration’s tax policy has a number of important repercussions for the commercial real estate industry. Experts and researchers have pointed out the cost of tackling America’s growing infrastructure problem is immense, but the cost of not tackling the problem is far greater. Biden will urge lawmakers to remember the words of founding father Benjamin Franklin, that “an ounce of prevention is worth a pound of cure.” 

Fixing America’s decaying infrastructure is a classic collective action problem, a type of social dilemma in which all individuals are better off cooperating but fail to do so because of conflicting interests—a tragedy of the common interests if you will. But what is good for business is good for commercial real estate and good infrastructure is good for all business. Nationwide infrastructure projects will inevitably boost the demand for real estate across all sectors. It will require a monumental effort by states, lawmakers, and industry leaders to get on the same page and find ways to incentivize and finance improvements to our energy grids and transit systems. As the United States has proven time and again, putting our differences aside and investing in America pays dividends.

Associate Editor
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