Crumbling Infrastructure, Building Jobs

President Barack Obama’s announcement in early September of a proposed $50 billion program to improve America’s roads, bridges and transportation systems has once again brought infrastructure to the forefront of public discussion.  Although we’d like to think the US has better infrastructure than the rest of the world, that’s actually not the case.  The fact is, compared to most of the developed world, our infrastructure is much older and in desperate need of repair.

We only have to look at the age and condition of water mains and gas pipelines for evidence of this.  A recent New York Times story revealed the somewhat startling statistic (based on Environmental Protection Agency data) that, on average, a major water line bursts somewhere in the country every two minutes.  Most of these leaks are dealt with quickly, but the fact remains that at a time when water is one of the world’s most precious commodities, the US is wasting too much.  Nor is it only our water infrastructure that is outdated and unreliable.

Recently in the San Francisco bedroom community of San Bruno, CA, a natural gas pipeline exploded in a residential area, killing eight and injuring more than 50 people.  The 50-year-old steel pipe carrying the gas was reportedly close to the end of its expected life.  Compounding the damage was the fact that the residential area sitting over the pipe did not exist when the pipe was laid.  Thirty seven homes were destroyed and damage estimates exceed $38 million.  This situation could play out in almost any other urban area, especially since almost all of our cities have expanded outward over the past 50 years.

Add to this the fact that our roads, thousands of our bridges and dams and parts of our rail system date back well into the last century, and it become clear that our infrastructure as inadequate.  In fact, that’s exactly how it’s been described by most recent reports on the topic, including our own joint reports with Urban Land Institute over the past four years.

Nor are we alone in our estimation that dealing with our crumbling infrastructure is one of the biggest challenges facing the US this century.  Ernst & Young recently polled executives in a variety of industries as well as industry analysts around the world about the biggest risks facing their businesses or industry sectors.  Among real estate executives, the impact of aging or inadequate infrastructure ranked in the top 10.  It’s not hard to see why, when business people draw a direct correlation between the quality and extent of a country’s infrastructure and its ability to sustain economic growth. 

The proposal put forward by President Barack Obama on Labor Day included a six-year program to rebuild 150,000 miles of roads, maintain 4000 miles of rail track and build 150 miles of runways, with a total cost of $50 billion.  This may seem like a grand program, but last year, the American Society of Civil Engineers estimated the minimum investment needed to bring the country’s infrastructure, including roads, bridges, rail and airports, up to standard is $2.2 trillion and counting.

In the past few weeks, the president has also backed up his call with a new report from the Treasury Department and the Council of Economic Advisors cataloging a 50% fall in infrastructure spending in the country since 1960.   The US spends just 2% of GDP on infrastructure, compared to 9% in China and 5% in Europe.  There’s a clear danger the US will continue to fall behind in global competitiveness if we continue to shortchange our infrastructure.

Of course, the president’s proposal is also about jobs.  More than 1.5 million construction workers have been sidelined during the recession, and a major building program such as that proposed by the president would go a long way to putting people back to work, as well as creating jobs over the next decade.  In fact, analysts suggest that without the Obama plan in place, highway spending in the US may fall by as much as 5% next year.  Bottom line:  more jobs will likely be lost in the construction sector, which would have a negative impact on real estate.

In an election year, and with spending a touchy political issue, it remains to be seen whether the president’s proposals will even get off the ground.  The proposal to establish a formalized approach to the country’s transportation infrastructure challenges, including the possible establishment of a National Infrastructure Bank, is a good first step.   All we need now is for our water delivery, wastewater treatment and utility infrastructure to get a similar boost.

Howard Roth is the Global Real Estate Leader and a partner with Ernst & Young LLP’s Real Estate practice. You may contact him at howard.roth@ey.com. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP or ALM’s Real Estate Media Group.