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In Focus: Has the Moment for Infrastructure Revival Arrived?

The incoming U.S. administration could spur greater infrastructure investment.

Directory 2017
Despite global economic uncertainty, continued company expansion and potential investment in infrastructure is expected to fuel demand for warehouses and distribution centers in 2017. In fact, that demand could already be seen as 2016 drew to a close. In Q4 2016, Distribution and Marking Services Inc. (DMSI), a provider of outsourced supply chain management solutions to retailers and manufacturers, leased 350,000 square feet of industrial space at Wonderful Industrial Park, a 1,625-acre, rail-served industrial development in Shafter, California.

Infrastructure is a particularly promising area, with an incoming U.S. president who has expressed strong interest in strengthening functionally obsolete roads, bridges and ports across the United States. Transforming the nation’s infrastructure would open up the possibility of reversing damage to our economic potential from neglect of our infrastructure. If Congress aligns with the White House in support of greater infrastructure funding, many states and cities stand to benefit. Ripple effects could include increased demand for workers, building materials and logistics support, all generating economic value for local communities.

The United States has indisputably underfunded infrastructure spending for the past several decades, and the lack of investment has been cited as a key constraint to doing business domestically. At present, the United States does not fall within the top 10 countries for efficient and reliable infrastructure as ranked by the World Economic Forum’s Global Competitiveness Index. Considering the magnitude of the problem, a concentrated, bipartisan effort at all levels of government is required to make progress toward a more secure future for the nation.
JLL identifies five factors that will impact the sector in 2017
  1. The infrastructure revival.
    The urbanization of U.S. cities cannot continue with functionally obsolete roads, bridges and other infrastructure; as upgrades are planned, raw materials will be needed, and warehouses to store them. Investing in the Rust Belt’s infrastructure would mean reviving dozens of Mississippi waterway terminals that served a dated American manufacturing-based economy. Already zoned for industrial use, these ports are being repurposed to transport materials needed to build infrastructure for new industries driving the U.S. economy.
  2. E-commerce and urban logistics continue rapid evolution.
    Online shopping and consumer demand for rapid delivery is changing what, where and how many distribution centers are needed to feed the consumer e-commerce appetite. In the second half of 2016, growth in e-commerce, coupled with industrial occupiers expanding their presence in new U.S. markets, helped the national industrial market’s vacancy rate reach a 16-year low, pushing below 6 percent. This number is expected to continue declining in 2017.
  3. Ports benefit from both infrastructure updates and e-commerce.
    The revival of America’s ports system is driven by the consumer economy and the need for surrounding warehouse and mixed use infrastructure. The coastal ports of Los Angeles and New York/New Jersey have been the darlings of the industrial sector. However, with the revival of infrastructure and the repurposing of obsolete terminals, 2017 could be the year the Mississippi waterway reclaims its former glory in the global supply chain. Demand for industrial real estate in the region is expected to follow.
  4. Institutional investor interest is higher than ever.
    Institutional capital still views industrial real estate as a lucrative investment opportunity. In fact, year-end industrial investment sale volumes could reach upward of $45 billion, the second largest annual tally since 2008. This investment activity is indicative of the asset class’s ability to weather global economic, political and financial uncertainty.
  5. The rise of creative industrial real estate development.
    As demand for industrial real estate continues, companies could employ new and creative real estate strategies. Unprecedented industrial real estate demand and the push to improve last-mile delivery services may influence development throughout the country, persuading some companies to seek space in secondary or tertiary markets such as Charlotte, Tampa Bay and Kansas City. Smaller urban core warehouses and fulfillment centers, reconverted assets and multistory warehouses could become last-mile solutions for many companies in 2017.

Time to invest in export infrastructure
Where infrastructure dollars are spent matters as much as the size of the investments. In recent decades, most U.S. infrastructure investment has been focused on new developments, rather than maintenance and upgrades of legacy structures, and on support for the imports on which many U.S. companies depend. Considerably less energy has been focused on export infrastructure, which is a critical area of need.

Many U.S. industries rely upon complex international supply chains involving parts and materials imported from around the world. To address this need, American ports have been dredged to accommodate container ships arriving with imported goods from points far and wide. However, still-deeper dredging would be required in some ports to fully accommodate deep-laden boats carrying the heavier goods typically exported by American companies.

Investing in export-oriented infrastructure for U.S. seaports, inland ports and rail yards would benefit the most competitive sectors of the domestic economy—agriculture, capital goods and energy. Strengthening these sectors could potentially generate new jobs to balance out those lost when American jobs are outsourced overseas.

Infrastructure as a tool for growth
Infrastructure investment also could contribute to broader-based economic growth that is particularly needed in places that have not recovered from the decline of the manufacturing era or have lost economic momentum. Improvements in accessibility between mid-sized markets could provide economic benefits greater than the sum of their parts, potentially transforming geographically separate markets into regional growth points. In many stagnant U.S. geographies, infrastructure improvements could advance complementary pairs of historically industrial cities and growing corporate markets, such as Cleveland and Cincinnati with Columbus and Milwaukee with Madison.

Beyond capital values, infrastructure investment can heavily impact real estate pricing and demand, with direct impact on the economic health of local communities. Today, multinational companies have many options when deciding on their headquarters’ locations and expansion strategies for the future. Not only are cities and states competing with each other for corporate headquarters and manufacturing facilities, but the United States also is in direct competition with other nations for the companies and talent that drive the economy. When employers evaluate their location strategies, the quality and reliability of the local infrastructure play a key role in their decision-making process.

Possibilities and uncertainty
Despite the President-Elect Trump’s stated intention of boosting infrastructure investment, no one can predict whether his vision will come to fruition. One issue is his campaign proposal to fund infrastructure improvements through investor tax credits and public-private partnerships (P3s). Investing in export-oriented infrastructure for U.S. seaports, inland ports and rail yards would benefit the most competitive sectors of the domestic economy—agriculture, capital goods and energy.

P3s can be helpful and appropriate for projects that generate user fees or other forms of revenue to repay investor debt, but the P3 model will not work for critical projects that do not generate revenues. For non-revenue-generating upgrade and replacement projects, traditional public debt or direct government investment is the only viable option. Unfortunately, it’s also the option that tends to be less politically viable for federal and state governments.

Trade policy is another area of uncertainty. Any major changes to U.S. agreements with Mexico, China or Europe could disrupt international supply chains, import and export potential, and the prospect of steady growth, along with the value of properties around major ports and transportation hubs.

Alongside these uncertainties, however, is the growing recognition that investing in aging infrastructure—whether with private or public dollars—could deliver many benefits for economic development nationwide. The trillion-dollar question is whether the forces will align to make it happen.

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