By Meghan Hall
This month, President Biden signed into effect the Infrastructure Investment and Jobs Act (IIJA)–a cornerstone of the current administration’s platform and a “once-in-a-generation” investment. The bipartisan, $1.2 trillion legislation has a number of implications designed to increase the nation’s resiliency and accessibility to critical infrastructure. According to a number of experts, this, too, has implications for commercial real estate and development.
“Demand for commercial real estate depends on the smooth functioning of the economy and the movement of people and goods,” explained Paul Fiorilla, Director of U.S. Research at Yardi Matrix, a commercial real estate data and research firm. “In my view, the IIJA’s investments in productivity and people is a good thing. The United States has, for decades, terribly under-invested in infrastructure, and although it is not perfect the IIJA will help propel the economy into the future.”
The ultimate goal of the bill is to rebuild American competitiveness through investment and the shoring-up of the nation’s fundamental facilities and systems. It intends to allocate about $1.2 trillion in total funding over ten years, including $550 billion of new spending in the next five, according to a White House fact sheet. Of the new funding, $284 will go towards surface transportation networks and $266 million will be spent on core infrastructure. The funding is intended to go far beyond just roads, bridges and highway projects. The money will go towards the largest investment in passenger rail since the creation of Amtrak, the deliverance of clean energy sources, the remediation of Superfund and brownfield sites, and more.
The largest projected beneficiaries of the bill’s funding are some of the nation’s most populous states, according to Brokerage firm Newmark. California is anticipated to receive the largest payout, $45 billion. Texas and New York follow behind, with anticipated funds totaling $35 billion and $27 billion, respectively. Florida is likely to see $19 billion come its way, while Illinois and Pennsylvania will each get about $18 million. Other growing states, like Washington, will receive around $8.6 billion in funding.
The IIJA is good news for the commercial real estate industry. In major markets such as San Francisco, Seattle, Los Angeles and New York, the improvement of critical infrastructure is likely to help property values and investment long-term. Both Fiorilla and Newmark’s National Industrial Research Director, Lisa DeNight, agree that while most property types will benefit from the legislation, two in particular will see outsized benefits: industrial and office.
“So much of what powers the nation’s economy is produced, stored and distributed through industrial CRE,” said DeNight. Investment in hard infrastructure promotes efficiency, resiliency and productivity in that process of moving goods to consumers. Something as basic as improving a road could have myriad impacts on a firm’s supply chain in terms of transport safety, and time / cost savings, which in turn may increase the value of commercial real estate positioned in locations where a firm could realize such benefits.”
Newmark notes in its report that for developers and property owners, the quality of a market’s infrastructure is a key determining factor when projects are being considered. About $110 million will be allocated specifically towards improved roads and bridges, a network of connectivity that serves as the backbone of industrial real estate. E-commerce, which has also driven huge strides in the industrial sector, is also expected to expand further thanks to another one of the bill’s provisions: $65 million in funding that has been earmarked specifically to improve internet access, especially in underserved or remote areas.
For office users, said Fiorilla, the IIJA’s impacts are less immediately tangible but are nonetheless straightforward. As accessibility and efficiency increases across public transportation, central business districts and office properties in metros of all sizes are likely to become more appealing. Fiorilla notes that traffic, congestion and lengthened commutes “aren’t just gateway market issues anymore,” as metros like Denver, Austin and Charlotte experience rapid expansion.
However, while the bill has been passed and signed into law, there are a number of challenges that remain. Within the commercial real estate industry–and for local municipalities–recruiting enough hands to complete such projects in a timely fashion may remain difficult. As of September, 89 percent of contractors reported difficulty finding workers, according to the Associated General Contractors of America. 61 percent of interviewees cited that delays were the direct result of workforce shortages.
“Finding the workers to do all these projects may prove to be a challenge. Right now, the construction industry is begging for workers, contributing to slower development times for commercial projects” said Fiorilla. “Adding hundreds of billions of dollars of infrastructure projects means we’ll have to find more workers somewhere or development will slow further. What’s more, the competition for skilled workers could rise and make building more expensive.”
DeNight added, “That trend has only been exacerbated by the pandemic. Public and private partnerships with trade schools or other talent pipelines, or creative thinking around worker transit options may be beneficial to communities—and industrial developers—facing potential labor shortages.”
Another hurdle plaguing the construction and commercial real estate industries is shortages of materials such as steel and lumber. DeNight explains that while many commodities are still experiencing price volatility as a result of the pandemic, spending on materials as a result of the IIJA is unlikely to cause further price fluctuations due to the timing of spending.
“The IIJA will not solve the current supply chain snarls; at the absolute earliest, approval of the first projects to benefit from IIJA funding may happen in 2022,” said DeNight. “But in the long term, this legislation will go a long way towards mitigating potential future disruption to the supply chain.”
Additionally, while several aspects of the bill seek to improve equity through access to clean water, schools and internet, there is no guarantee that the bill will prompt more equity within the commercial real estate industry. According to Fiorilla, much of the juxtaposition between private developers and public interests occurs at the state or local level, far removed from the true influence of federal dollars.
“The key to increasing the amount of affordable housing is at the municipal level, where development is controlled,” said Fiorilla. “To the extent that the federal government can persuade municipalities to reduce onerous regulatory hurdles, that’s good, but the IIJA is only a small step in that direction.”
While about $213 billion has been allocated to help low- and moderate-income renters through the construction and preservation of rental housing, and $40 billion for improvements to public housing, this is only a drop in the bucket compared to the greater needs of the demographic. Affordable and equitable housing developers often need to compete in order to secure ample funds to ensure their projects’ viability.
The impacts of the IIJA will take years to realize fully as money is dispersed and project timelines often extend years into the future. However, the bill remains an important catalyst for growth.
“The impact over time is not consistent. Social spending, for example, has more of an immediate impact than a transportation project that takes years to design and build, or the green provisions that reduce carbon emissions over time,” said Fiorilla. “That doesn’t mean that infrastructure spending isn’t necessary or helpful, just that it will take many years before we can determine the overall impact.”