For more than 40 years, we’ve seen failing infrastructure throughout the United States. From bridges and roads to internet service and the electric grid to public transit and the more, the robust funding needed to fix and replace infrastructure has been a can kicked down the road by many administrations.
With the country’s infrastructure spending lagging far behind other countries — the U.S. spends about 2.3% GDP on infrastructure down from EU countries spending an average 5% and China spending 8% — the current bipartisan draft proposal, which totals $1.2 trillion in spending, would significantly increase spending. It allocates:
- $110 billion to shore up bridges and roads
- $65 billion to expand broadband access
- $48.5 billion to improve public transit
How does this bill affect commercial real estate? Experts estimate the industry will benefit from many of the changes and improvements. For example, neighborhoods and cities that increase electromobility will become prime investment locations as they attract environmentally conscious individuals, companies, and tenants.
Larger communities choosing to adopt electric mass transit like busses, rail and taxis will see lower pollution and be quieter. Buildings offering electric car charging hubs—or are located near hubs—will benefit, too. CRE owners keeping tabs on these changes, embracing them, and taking advantage of them sooner rather than later will reap strong profits.
Other potential areas of CRE investment include properties associated with last mile deliveries, which have:
- Accelerated creation and modification of delivery systems
- Impacted inventory storage and distribution requirements
- Significantly increased demand on information systems
What the Experts Say
Economist Hugh Kelly, also a curriculum chair at the Fordham Real Estate Institute, says, “The CRE industry should see the massive spending bill as ‘deferred maintenance’ in buildings. It’s something the real estate should understand [this need] really easily and support [it] enthusiastically.”
According to the Commercial Property Executive, other multifamily and commercial industry leaders worry about where the funding will come from to pay for these proposals, which also include spending $12 billion for community colleges, $25 billion for childcare facilities, $300 billion for manufacturing, and $180 billion for R&D.
The current administration proposed raising corporate taxes from 21% to 28% and increasing the global minimum tax to 21% for U.S. corporations. Some CRE leaders have expressed concern that the administration could consider removing or reducing tax-related incentives upon which multifamily and CRE investors have relied. One example includes raising capital gains taxes for anyone with incomes of $1 million or higher and eliminating the 1031 exchange.
CGI Real Estate Investment Strategies’ director of acquisitions for the West Coast, Andre Soroudi, said, “Transaction volume would drop. [The administration’s proposal to remove the 1031 exchange] would really alter the industry. [Many] private investors want a 1031.”
Associated General Contractors of America’s CEO, Stephen Sandherr, disagreed, however, with this assessment. He believes financing the proposal via corporate tax hikes would “likely undermine many of its economic benefits” and limit employers’ abilities to invest in capital improvements. Fewer capital improvement investments could adversely affect the U.S.’s global competitiveness.
The consensus appears to be that most CRE owners and investors should welcome an infrastructure bill. Whether the 1031 exchange rules and carried interest tax treatment is eliminated, or capital gains increase is something to watch and could affect the decision to invest in CRE.
Investors willingly risk their capital when they make CRE investments. Banks, developers, and other groups financing or putting equity in deals need those tax benefits to offset the risks they’re taking. Without a tax advantage, fewer might feel inclined to take risks which could affect commercial real estate prospects.
However, a joint study by EY and the Urban Land Institute concluded that when influencing CRE and development decisions, traditional infrastructure spending on telecommunications, transportation, and utilities is the most important factor.
National Association of REALTORS® president Charlie Oppler said, “Commercial real estate has been one of the industries most significantly impacted by the pandemic, and NAR is encouraged to see proposals in Washington intended to rebuild roads, improve energy efficiency, modernize transit, and enhance other critical infrastructure systems in ways that will attract investment and increase property values.”
The bottom line? CRE investors should continue to follow the bill’s progress, because investment has many avenues, like infrastructure real estate investment trusts (REITs) and industrial REITs involved in logistics. Coastal resiliency spending to bolster levees and seawalls could transform areas into prime spots for new multifamily or CRE investments, too.
Whether you’re a CRE investor now, thinking about investing, or want to learn more about the CRE industry, reach out to us at CREA United. Started more than 14 years ago to cultivate and nurture partnerships between successful firms and individuals, our members represent all disciplines within the CRE industry.