How infrastructure investment boosts commercial real estate
The United States’ neglected infrastructure is no secret. Smart investments to improve the nation’s roads, ports, utilities and other vital infrastructure could unlock value for commercial real estate.
The American Society of Civil Engineers (ASCE) gave the country’s vital infrastructure a D+, citing a US$2 trillion investment gap, in its 2017 report. Currently, the United States doesn’t rank within the top 10 countries for efficient and reliable infrastructure, according to the World Economic Forum’s Global Competitiveness Index.
And this is bad news for business. Traffic congestion for employees traveling to and from offices and delays to normal business operations caused by deteriorating infrastructure raise business operating costs, in turn reducing business expansion, job growth and demand for commercial properties. By ASCE’s estimates, the country’s failing infrastructure will lead to US$3.9 million in GDP losses, US$7 trillion in lost sales, and 2.5 million lost jobs by 2025.
Traffic jams from degraded bridges and highways alone cost U.S. businesses an estimated US$27 billion in additional freight costs.
Conversely, infrastructure investments deliver potentially powerful economic benefits. Smart investments to improve the nation’s roads, ports, utilities and other vital infrastructure could unlock tremendous value for the overall economy and commercial real estate, says Ryan Severino, Chief Economist, JLL.
Additional U.S. infrastructure investment of US$18 billion annually would create a US$29 billion increase in GDP and add US$11 billion to the American economy, according to the Economic Policy Institute research. It would also add more than 200,000 jobs, making infrastructure spending a top national job engine over the next decade.
“Infrastructure investment could provide direct economic impact in terms of job creation today,” says Severino. “But, we also can improve productivity in the long run. When airports, railways, bridges and roads work better, we’re greasing the wheels of the economy.”
While it’s difficult to directly connect infrastructure investment to commercial property values, studies show that property investors recognize its influence. A study by EY and the Urban Land Institute (ULI) found that infrastructure—including transportation, utilities and telecommunications—is the most important factor influencing real estate investment and development decisions in cities around the world.
Office buildings near public transit, for example, command rents that are nearly 80 percent higher than those farther away, according to JLL research.
“Numerous factors contribute to property values, but we see a strong relationship between infrastructure and incremental real estate values,” says Severino. “If you make it easier to access a building, the efficiency facilitates the economic activity that happens in that building. Tenants are willing to pay a premium for space, and investors respond to that behavior.”
In the Somerville suburb of Boston, for example, a new subway station inspired Federal Realty to transform a neglected 45-acre former industrial site into a neighborhood of housing, offices and restaurants interwoven with pedestrian walkways.
Uber and Lyft, however, present a wildcard. These services have the potential to disrupt the connection between public transit and investment.
“Ride sharing services are starting to erode the transit premium in some markets,” Severino says. “The advent of driverless vehicles could even further reduce that advantage.”
It’s uncertain whether companies will continue to favor transit-adjacent locations in a world where autonomous vehicles can shuttle employees to and from work. But one thing is clear, investment is needed not only to repair crumbling infrastructure, but to prepare for the future.
“Even cars without drivers need well-paved roads,” Severino says.
President Trump has proposed an infrastructure investment plan encompassing $200 billion in federal incentives and financing to spur $1.5 trillion of additional investment from states, cities and the private sector.
At present, the biggest obstacle to the Trump Administration’s promises to take on infrastructure is that Congress has only authorized $20 billion in infrastructure investment—a fraction of the $200 billion the President proposed the federal government put up in grants and other incentives to attract a total of roughly $1.5 trillion. An analysis from the University of Pennsylvania’s Wharton School said the plan would fall more than $1 trillion short of the investment it would need.
As of late March, President Trump said that any further pursuit of his plan would likely to be on hold until after the U.S. mid-term elections in November 2018.
But even if it were to move forward, critics question whether the model of the plan would be effective. It would limit the federal government’s spending commitment by encouraging the use of public-private partnerships (P3s), in which private capital is used to finance infrastructure projects.
Commonly used in countries around the world, P3s can work well if thoughtfully structured. In addition to the benefit of sidestepping public debt, P3s give governments access to expertise that can help projects proceed smoothly. One obvious barrier, however, is that the P3 model doesn’t work unless a project can generate user fees that cover operating costs and allow a private partner to reward investors. President Trump himself has expressed doubt that P3s are effective, given that some major P3 projects have failed spectacularly.
Some critics argue that private-sector financing is inherently more costly than traditional municipal bond debt. Citizens often aren’t keen on highway tolls and user fees, either.
“Private partners certainly have a role to play in infrastructure investment, but they can’t completely fill the funding gap,” says Severino. “For some projects, especially larger ones, the federal government has to step in.”