November 25, 2020

When calculating the valuation of a commercial real estate (CRE) property, there’s a lot of individual factors you have to look at to arrive at a reasonable value. One of the more predictable factors is the market the property is located in.

However, as the infrastructure in the US continues to degrade with no ironclad plans in place to fix it, what is the anticipated impact this could have on CRE around the country?

CRE Depends on Infrastructure

As much as it matters to compare different types of real estate against each other, all commercial real estate has one thing in common: it relies heavily on infrastructure.

Without good infrastructure, all CRE properties are less attractive as investments. This is equally true for multifamily, industrial, retail, and otherwise.

Access to good roads and highways, airports, seaports, utilities, services, and people are all important to CRE across the board. If an industrial building doesn’t have easy access to good roads, how will the tenant bring materials in or ship good out? If multifamily properties are difficult to reach or not located close to population centers, how will you reduce vacancies?

Infrastructure is like the gears in a machine. If there’s no infrastructure at all, or if it’s poorly maintained, nothing is going to work like it should.

The dependence CRE has on infrastructure makes the broader market area and governance significant factors in CRE property values.

The State of US Infrastructure

Unfortunately for the CRE market, infrastructure around the US is aging. While most of it is still intact, a consistently underfunded maintenance budget is beginning to show.

As far back as 2016, the American Society of Civil Engineers estimated that the infrastructure gap in the US that is underfunded is as high as $2 trillion. This gap is visible in the budgets for both maintaining and rebuilding existing infrastructure and constructing new infrastructure to accommodate growth in population and economic activity.

It’s a problem that’s been slowly accumulating over the years. Although legislation is routinely passed to fill in some of the gaps in specific states or for particular federal infrastructure, there is an imminent need for a large investment into infrastructure that will be difficult to continue putting off.

How Infrastructure Will Affect CRE Investments – Current & Future

In 2020, infrastructure has played a role in the valuation of CRE, most notably for industrial properties. As ecommerce grows, more businesses are seeking out space near urban population centers to process and ship products. However, there are a limited number of industrial spaces available that fit the needs for shipping and processing facilities, putting some strain on the market.

One of the major short-term challenges in 2020 is directly related to the Covid-19 pandemic. Because of fears of increased spread, public transit has been limited or stopped altogether in different parts of the country. This is having a noticeable impact on employees who are experiencing difficulty getting to and from their workplaces, making certain CRE spaces less practical than before.

If there isn’t a plan put in place soon to begin working on the infrastructure gap, CRE property values are likely to reduce as the roads, public transit systems, and other public infrastructure around them becomes less useful. A combination of short-term and long-term investments are needed to ensure the gears of the economic stay as efficient as possible.

Some short-term investments have been budgeted in the 2020 CARES Act, but there’s an unfortunate lack of capital for long-term projects. While public-private partnerships are being sought out to fill in some of the infrastructure gaps nationwide, a larger shift is necessary to get the country where it needs to be.