Will CRE Benefit From the $2T Infrastructure Plan?

April 1, 2021

Development Featured Finance InvestmentMoreNational News

Commercial real estate, clean energy and construction experts assess President Biden’s wide-ranging proposals.

Image by Francine Sreca via Pixabay

Asked about President Joe Biden’s wide-ranging $2.3 trillion infrastructure plan released Wednesday, economist Hugh Kelly said, “It’s way overdue.”

Kelly, curriculum chair at the Fordham Real Estate Institute, said the commercial real estate industry should be able to process the massive spending bill very well, comparing it to “deferred maintenance” in buildings.

“This is something that the real estate industry should understand really easily and support enthusiastically,” added Kelly, a columnist for Commercial Property Executive.

Barry LePatner, a veteran real estate and construction attorney and principal of LePatner & Associates LLP, said the U.S. has had failing infrastructure for 40 years but that the problem has been ignored by politicians. “When the government comes up with robust funding for infrastructure, we should be happy about it, but we have to look critically at the details or we will see how easy it is to make mistakes and the funding won’t go where it’s really needed,” he said.

Some commercial industry and multifamily leaders expressed concern about how to pay for the sweeping proposals that range from $621 billion on improvements for roads, bridges, railways, ports, airports, public transit and the electric grid to $213 billion to address affordable housing issues for low- and middle-income renters. Among other proposals, it also calls $400 billion to expand home care services for the elderly and disabled and increase wages for those who care for them, $300 billion for manufacturing, $180 billion for research and development, $100 billion to build new public schools and upgrade facilities including ventilation systems, $12 billion for community colleges and $25 billion for child care facilities.

Biden said that most of the funding for the biggest federal spending plan in decades would come from raising the corporate income tax from 21 percent to 28 percent and increasing the global minimum tax on U.S. corporations to 21 percent. He also pledged not to tax people making less than $400,000. But some commercial real estate industry leaders worry that the administration could turn to tax-related incentives used by multifamily and CRE investors. During the campaign, Biden had proposed eliminating the 1031 exchange and raising capital gains taxes for individuals with incomes higher than $1 million.

“Transaction volume would drop. It would really alter the industry,” Andre Soroudi, director of acquisitions for the West Coast, CGI Real Estate Investment Strategies, said of Biden’s earlier proposal to take away the 1031 exchange. “We work with a lot of private investors that want a 1031.”

JLL Chief Economist Ryan Severino said the administration may have been looking for parts of the tax code that are the least counterproductive to economic growth. “Marginally raising corporate taxes and marginally raising taxes on wealthy individuals is less disruptive,” he said.

Stephen Sandherr, CEO of the Associated General Contractors of America, disagreed, arguing that the president’s proposal to finance the new investments primarily through a corporate tax hike would “likely undermine many of its economic benefits.” Furthermore, this would limit the ability of many employers to invest in capital improvement and could ultimately America’s global competitiveness. He also criticized Biden’s plan to couple the infrastructure proposal with the PRO Act, which would ban right-to-work laws nationwide.

The U.S. Chamber of Commerce also opposed the tax increase proposals, saying the financing plan was “dangerously misguided” and would slow the economic recovery and make the U.S. less competitive globally. The organization did applaud Biden for making infrastructure a priority and called on Congress to work in a bi-partisan manner during what is expected to be a long process.

Other key parts of the proposal include:

Investing $100 million to bring affordable and reliable broadband services across the country.
Calling on Congress to pass the Neighborhood Homes Investment Act offering $20 billion of NIHA tax credits over the next five years resulting in approximately 500,000 homes built or rehabilitated for families to buy.
Investing $40 billion to address longstanding public housing capital improvements to make life-safety upgrades, mitigate imminent hazards and energy efficiency measures to reduce operating costs.
Allocating $100 billion to workforce development including $40 billion to retain dislocated workers in high-demand sectors like clean energy and manufacturing and offering $48 billion for apprenticeships and job training.
Establishing a $27 billion Clean Energy and Sustainability Accelerator for private investment in distributed energy resources, retrofits of residential, commercial and municipal buildings and clean transportation to help disadvantaged communities benefit from clean energy investments.

Jobs and Clean Energy Goals

Abigail Ross Hopper, president & CEO of the Solar Energy Industries Association, said in a prepared statement that the infrastructure proposal is a significant step in meeting clean energy goals. “The plan creates jobs, spurs the economy, faces the climate crisis and advances environmental justice,” she commented.

Hopper noted an upcoming jobs study will show that solar has a unionization rate of 10.3 percent, “which is substantially more than previously estimated and higher than the economy-wide average.”

Steven Nadel, executive director of the American Council for an Energy-Efficient Economy, said in a prepared statement that the plan “is an excellent starting point for transforming our infrastructure to create jobs, increase equity and enable a low-carbon future.” But he argues that the pace to retrofit all houses and multifamily buildings to cut energy use is too slow. Nadel called for Congress to push even further for clean energy legislation, noting it should be incentivizing the purchase of electric trucks and the building of more charging stations. He added that the federal government should provide grants and rebates for millions of residential energy retrofits and should also invest in additional transformational technologies to improve competitiveness and reduce carbon emissions in the industrial sector.

Kelly said e-commerce represents one of the biggest real estate stories in the last five or six years and noted it is crucial to have upgraded infrastructure to support it. “We don’t have efficient e-commerce unless we have efficient roads, bridges, highways and seaports,” he said.

Spending money on infrastructure will stimulate the economy better than direct payments to people. “When we spend a billion on infrastructure, it goes a lot of places like roads, bridges, tunnels. It stimulates a lot of manufacturing. It stimulates a lot of truck drivers and deliveries,” Kelly said.

Severino agreed: “The modern economy is in motion. The more effective we can get those things to move around, the better it will be for the economy and the better it will be for commercial real estate.”

Regional, Local Projects

Kelly pointed to a major regional infrastructure project: The Gateway rail tunnel project between New York City and New Jersey, which is considered a high priority for the Biden administration to fund. It also has a potential broader regional impact because it serves Amtrak’s routes in the Northeast. The project has been delayed for more than a decade after former New Jersey Governor Chris Christie opposed funding it and, more recently, former President Donald Trump.

Soroudi noted that even local infrastructure projects can impact commercial real estate developments. Much of the firm’s work is done in Southern California and in the Bay Area, both of which have issues with utility infrastructure. Recently, CGI had to team up with a nearby multifamily housing developer in Los Angeles when both firms wanted to build on a street that had no more capacity on the electric lines, Soroudi said. CGI was building a high-end supermarket in the Los Feliz neighborhood and it would have “financially painful” to pay on its own to add the electric capacity. “It probably would have killed the deal,” Soroudi said. “It’s definitely a major issue and something most developers working, especially in the Los Angeles areas and other areas have to deal with constantly.”