The likeliest outcomes for how infrastructure investment decisions will be made.
Editor’s note: Though best known for his views on free trade, Adam Smith recognized the “duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals.”
Demand for warehouse and distribution space driven by e-commerce growth may be explosive, but it’s not the only reason the industrial real estate sector is on track for a record-breaking 2017. With new President Donald Trump’s plans to invest in long-term infrastructure, the prospect of federally funded new roads, bridges and ports could emerge as another significant driver of industry momentum.
The potential economic impact of such infrastructure improvements is vast and varied. New raw materials will be needed for every planned upgrade, whether rebuilding functionally obsolete roads or repurposing ports, which means storage space will also be needed. Investing in the Rust Belt’s infrastructure could help revive outdated terminals along the Mississippi River, creating new hubs for raw material transport and restoring the waterway to its once starring role in the global supply chain.
More broadly, investing in infrastructure could strengthen new industries driving the U.S. economy. If Congress and the White House unite in support of greater infrastructure funding, many states and cities would stand to benefit. New jobs, particularly in building materials and logistics support, could be added in those communities, ultimately generating economic value locally as well as nationally.
The results could be impressive, considering that for the past few decades the U.S. has underfunded infrastructure, a budgetary sacrifice that many consider a key constraint to doing business domestically. Currently, the United States does not rank within the top 10 countries for efficient and reliable infrastructure, according to the World Economic Forum’s Global Competitiveness Index.
Considering the potential value, a bipartisan effort at all levels of government will be needed to move the nation toward a more secure future.
Export Focus. Even the most sizable investment will only be effective if distributed strategically. In recent history, most federal infrastructure dollars have gone toward new developments or supporting the imports on which many U.S. companies and consumers depend. Considerably less attention has been given to export infrastructure, which is now a critical area of need.
It’s no secret that many U.S. industries depend on intricate global supply chains involving parts and materials imported from points far and wide. That dependency is exactly why American ports have been dredged to accommodate arriving containerships. To fully accommodate the deep-draft vessels carrying heavier goods typically exported by American companies, still-deeper dredging is required in some ports.
Investing in export-related infrastructure for domestic seaports, inland ports and rail yards stands to benefit the most competitive sectors of the U.S. economy: agriculture, capital goods and energy. By strengthening these sectors, this infrastructure spend could also help generate new jobs to balance those lost when American jobs are outsourced overseas.
Ripple Effect. Smart infrastructure investment could also nurture broader economic growth, which is especially needed in cities and states that have lost economic momentum with the decline of local manufacturing. Improvements in accessibility between mid-sized markets could provide economic benefits greater than the sum of their parts, potentially transforming separate markets into regional growth points. In many stagnant U.S. markets, infrastructure improvements could advance partnerships between historically industrial cities and growing corporate markets, such as Cleveland and Cincinnati with Columbus; and Milwaukee with Madison.
Infrastructure investment can also play a significant role in real estate pricing and demand, with direct impact on local economies. After all, large multinational corporations have many options when deciding on their headquarters’ locations and future expansion strategies. With stronger infrastructure, more cities and states can enter the competitive playing field, vying with each other for corporate offices and manufacturing facilities.
At the same time, the country as a whole 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 vital role in the decision-making process.
No Crystal Ball. Despite President Trump’s stated intention of strengthening infrastructure investment, it is still not possible to predict whether that vision will come to fruition. One potential issue is his campaign proposal to fund infrastructure improvements through investor tax credits and public-private partnerships (P3s).
P3s are often helpful and appropriate for projects that generate user fees or other types of revenue to repay investor debt, but the P3 model will not work for projects that do not generate revenues, even critical ones. For non-revenue-generating upgrade and replacement projects, traditional public debt or direct government investment is virtually the only viable option. Unfortunately, it’s also the option that is least politically viable for federal and state governments.
Global trade policy is another area of great uncertainty. Any major changes to U.S. agreements with Mexico, China or Europe could disrupt existing international supply chains, import and export potential, and the prospect of steady growth, as well as property values around major ports and transportation hubs.
Still, aging infrastructure is not doing the economy any favors. Investing in vital economic foundations like roads and ports, whether with private or federal monies, could pay off in the short and long run for the U.S. economy. Whether we can come together to craft and implement the right plan is the only thing we can’t yet predict.