$550 Billion will be gutted from the total $1.2 Trillion in spending that is the Infrastructure Investment and Jobs Act, and will be allocated toward improving roads, highways, bridges, seaports and railways. The 1031-Exchange was spared, at least for now, perhaps due to the potential ‘boom’ in transit-oriented development that the new bill could trigger.
The bipartisan infrastructure bill was introduced to the Senate on Sunday as a compromise to President Biden’s initial $2.25 Trillion proposal, which included capping deferred gains at $500,000—greatly limiting the 1031-Exchange.
The bill forces people to look beyond the now, taking into account 10-15 year projections, but also focusing on how this spending can facilitate economic recovery from the pandemic. The White House projects the bill will generate 2 million jobs per year over the next 10 years.
“I look at it as one of these generational game-changers,” said Ernie Jarvis, a longtime Washington, D.C.-based commercial real estate broker and former development executive. “Developers will certainly follow the path of public investment. You build it and they will come.”
‘If you build it, they will come.’
At least that’s the premise of the new bill that offers some sense of certainty for economic recovery because the government spending on infrastructure is something that benefits almost every industry, not just real estate. Moody’s analytics predicts a 5% increase in construction spending next year, and 5.5% increase in 2023.
This means airline and railroad companies, and other entities like UPS, FEDEX, or Amazon, that heavily rely on roads, will see positive logistical impacts, according to Bloomberg.
“Hundreds of billions in federal spending could pave the way for a surge in new commercial development activity as well, especially along any new or improved roads and transit corridors.”
One of the larger goals for the new bill is to reconnect minority communities that were torn apart by the initial implementation of the highway system. Freeways in Los Angeles, for example, displaced thousands of low-income residents as development cut right through neighborhoods. This resulted in often forgotten pockets of the city that ended up lacking lucrative asset types. Road and bridge development will reconnect minority communities, spur construction of every type of asset, and increase navigability.
The 1031-Exchange did not receive much attention this time around. Avison Young principal Casey Keitchen reiterates what Centennial Advisers firmly believes about like-kind exchanges. “They are an economic growth engine,” that far exceeds the tax implications. Having said that just because the 1031-Exchange did not make it on this first compromise, democratic lawmakers could still target it in the fall during budget reconciliation.
Ultimately, the path of development will be dictated by the finalized infrastructure budget, and will shape the future of commercial real estate for the next 15 years if passed.