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Commercial real estate and infrastructure investment

The economic growth of global economies has long been linked to the amount of investment governments make towards infrastructure and the amount of infrastructure investment directly impacts the performance of the commercial real estate industry. It comes full circle as construction and CRE activities create a multiplying effect on economic growth, direct and indirect employment, salaries and associated activities.

The economic contribution of commercial real estate is far-reaching to industries such as professional services, engineering, manufacturing and landscaping and should be a key focus for economies wanting to expedite the road to recovery in post-pandemic years. For the CRE industry to thrive however, governments must commit to investments in infrastructure. A study by the Urban Land Institute, stated the quality of infrastructure to be the single most important factor in real estate development and investment decisions in cities across the world. There are difficult decisions to be made by leaders worldwide; infrastructure investment usually consists of capital-intensive projects and for most countries, these projects are increasing in number and cost as aging infrastructure nears the end of it’s useful life.

What projects are typically included in infrastructure spending?

Infrastructure spend can be largely classified into hard and soft investments. Hard infrastructure are those physical things that we need to move goods, people and information around such as our roads, railways, bridges, ports, airports and utility networks providing electricity and high-speed internet. Soft infrastructure are those things that contribute to maintaining societal standards, around health and the environment for instance and this may include assets such as hospitals and EV charging facilities.

We tend to define infrastructure as transport mainly, probably because this was the one thing (pre-virus) that we relied on most when going about our everyday lives and that need has not gone away, especially for those essential industries that depend on a reliable and convenient network to keep their businesses and employees moving.

Other infrastructure needs have come to the fore more recently with an increase in the severity and frequency of climate change events highlighting the real vulnerabilities of the systems we rely on every day. The unprecedented Texas power outage just a couple of months ago saw millions left without heat and water for days as the power grid was so ill-prepared to deal with a weather event unseen since 1989. Completely unrelated but a major risk nonetheless involves the protection of federal and private IT infrastructure systems from cyber-related attacks which are on the rise and make easy targets for cyber-criminals targeting legacy computer systems. Then there’s the inequity in broadband availability for those living and working outside of metropolitan areas which has been accentuated by the work-from-home orders.

There’s too much dilapidated infrastructure to mention in too many places where regeneration has unfortunately taken a back seat to population growth demanding new buildings and now this century-long underspend presents immense challenges for society as a whole.

What do countries spend on infrastructure?

“Not nearly enough” is the answer for many. As a percentage of Gross Domestic Product (GDP) in 2018, China’s spend was way ahead of that of Canada and the US according to Statista. Canada’s investment hovered around 0.5% of total output, merely scratching the surface of what is estimated to be an average $110-270B deficit in infrastructure spending.

Federal plans laid out in 2016 for over $180bn of spending on Canadian infrastructure over the subsequent 10 years already seem to be lagging behind schedule as provinces appear to be delaying the spend of monies awarded to them. This could however be due to inaccurate cross-program and departmental reporting.

How does infrastructure improvement benefit commercial real estate?

Measuring the impact of soft infrastructure on commercial real estate is complex, physical investments are easier to quantify however. A report by the American Public Transport Association (APTA) revealed that office properties in close proximity to a transit station enjoyed median values per square foot of between 5 - 42% more than properties that were not situated within half a mile distance of a transit hub and the biggest gains were for those closest to rapid rail services. Rent prices also increased by 2 - 14% in these areas due to higher demand.

Another big factor in bolstering CRE is with investment into sustainable green infrastructure such as green roofs, landscaping and trees and stormwater management. These enhancements can amount to big money for commercial property owners over the longer-term through both cost-savings and enhanced profits. If we’re starting from the ground-up, protecting the natural capital and biodiversity of our cities makes sense both economically and environmentally.

Priorities not Politics

Economies are emerging financially scathed from the events of the past year and making significant investments in infrastructure will divide opinion. Not only are there big deficits to contend with, opposers will argue that this type of investment undermines any efforts to meet the Paris climate change targets that have been agreed on by participating countries.

Additionally, by the very nature of these projects that are designed to have positive economic and social impact for future generations, huge amounts of spending cannot be done quickly if it’s to be spent effectively. Determining the right projects for future needs and delivering them sustainably takes time and planning, it isn’t something that should be done purely to stimulate a depressed economy. In fact, some economists suggest that this recession being altogether different from previous, means that sudden impetus into the system could cause more harm than good because we’re yet to know the full extent of the fallout and whether we’ll come out of it just as quickly as the dip happened.

The cost of doing nothing is not an option for the economy and commercial real estate relies on a thriving economy. Cities need investment if they’re going to attract the workers that we need to grow and they need advanced systems that can underpin new ways of life. The cost to the planet of continuing to invest unsustainably is not an option either; the question remains whether private and public entities can collaborate in cost-sharing and prioritize infrastructure that meets real needs on a number of levels rather than being a pure political play.

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