On November 15, President Biden signed the bipartisan Infrastructure Investment and Jobs Act (IIJA) into law. Carved out of the more aggressive Build Back Better vision, it marks one of the most significant investments in physical infrastructure in the U.S. in at least half a century. In this report, we provide our quick take on the following:
- The infrastructure bill and what’s significant about it
- Which regions will benefit the most from it
- How it will impact the U.S. economy and property markets
- It is estimated that the infrastructure bill will raise GDP growth by a cumulative 3.5% from 2022-2031, and long-term GDP growth by 0.1% per annum.
- The IIJA is not expected to place any material pressure on near-term inflation as the money takes time to get dispersed, and it could result in downward pressure on prices longer-term through expected efficiency and productivity gains.
- Industrial is the biggest winner, but all property types stand to benefit.
- As a result of the infrastructure bill, we estimate that total demand for commercial real estate space could be about 1.2% higher over the next five years.
What is the infrastructure bill?
The IIJA is a $1.2 trillion infrastructure package that has two key components. The first is the reauthorization of $650 billion of prior mandatory funding that would have occurred under current law. This is spending from various trust funds that is automatically raised and already allocated to pre-existing programs. For example, surface transportation programs under the Highway Trust Fund. Funding is also pre-determined for these programs. Examples include excise taxes on the sale of motor fuel, trucks and trailers and truck tires.
The second component is the additional $550 billion in funding for new investments in infrastructure.1 These range from significant increases in funding for highways and roads to the electric grid, passenger rail, broadband, water infrastructure, environmental resilience and remediation, public transit, waterways, ports, airports and other investments.
Infrastructure Investment & Jobs Act: $550 Billion in New Spending
What is its significance?
The U.S. has under-invested in infrastructure for decades. From 2015 to 2020, non-defense government infrastructure investment was at its lowest level on record, dating back to the immediate post-WWII period. Indeed, since 1929, the U.S. federal government has cumulatively invested a total of 0.4% of real GDP in physical infrastructure and that includes defense investment. U.S. state and local governments have invested a total of only 2.4% over that same timeframe. This means that, since 1929, out of the $678 trillion of economic output the U.S. has created, it has only publicly invested a total of $19.1 trillion in infrastructure.2 To put recent trends into global perspective, the U.S. ranks among the lowest in relative infrastructure investment since 2007. Of economies that have cumulatively produced at least $10 trillion in output from 2007-2020, the U.S. ranks 15th out of 17. Out of 56 countries for which data is available, the U.S. ranks 53rd.3
Historical Infrastructure Spending Real Public Spending on Structures as a % of Real GDPMoreover, returns on infrastructure investment tend to be high. This is true in the private and public sectors: the 10-year return on private capital is estimated to be about 10%, and for public capital, almost 7%.4 Said differently, a $1 increase in public infrastructure investment would yield $0.07 of additional GDP over 10 years. During a period of extremely low interest rates—historically—and one where the return versus cost of capital spread is so large, there is a compelling financial argument to make such investments now.