In the last 15 months, three landmark pieces of legislation carved out a plan for investments in domestic infrastructure, advanced manufacturing, and sustainable building. New and expanded tax incentives on top of extra funding have been welcome news for businesses in construction and real estate.
The combined trillions of dollars in federal spending between all three bills will be used to leverage private investment, setting up certain industry segments for years of continued growth. In reality and considering current economic factors, the immediate outlook is less certain.
Inflation Reduction Act
In some sectors, the Inflation Reduction Act (IRA) simply builds upon planned spending from the infrastructure act. Transportation, energy, water, watersheds and coastlines, and other environmental programs are all areas that will see combined funding sources. In the IRA specifically, clean energy projects will receive the most funding.
Expanded, long-term tax incentives for investment and production tax credits, clean energy tax credits, and the energy efficient tax deduction make planning for sustainable projects more reliable. 45L, the residential clean energy tax credit, had already expired when the IRA passed. Tax credits for electric vehicles (EVs) and EV charging stations had either expired or were limited. And other tax credits for alternative energy have been created or expanded and extended through 2032.
Incentives for building retrofits will probably be higher with a better tax deduction for energy efficient system upgrades. The ramped up 179D deduction will also make it easier for property owners to follow more stringent sustainability rules. And unlike other funding, money for 179D is available now. Home builders and multi-family property owners can benefit from a higher tax credit for residential energy efficient building design under 45L.
Another effect of the IRA is an uptick in hiring specialized commercial real estate professionals. Real estate is poised to help projects in sustainable new building, retrofits, site selection, land sales, project financing, and project management. If a real estate firm has experience in green, sustainable, or innovative projects, it can better compete for projects coming down the pipeline over the next several months and years. This holds true across the other two pieces of legislation discussed below, too. Like infrastructure funding, building out more knowledgeable real estate teams is expected to hit toward the end of 2023.
The CHIPS and Science Act was signed into law in August 2022 to incentivize investments in domestic semiconductor manufacturing. Most of the focus is on advanced manufacturing, but as new facilities are planned, construction and real estate will necessarily benefit.
The advanced manufacturing tax credit is one of the bigger tax incentives in the CHIPS Act. $24 billion has been allocated to provide qualified manufacturers with up to a 25 percent credit for capital investments in building a semiconductor fabrication plant. Construction contractors with experience in innovation and technology will see a boost in demand for building these new facilities.
Another big piece of the CHIPS Act is the $10 billion allocated to create 20 regional technology and Innovation Hubs. These tech hubs are meant to create additional public and private investments for the regions in which they’re located … and Virginia is a top contender.
Statewide, Virginia boasts three existing tech megasites, another eight in development, local universities that provide a pipeline of future tech workers, and an existing semiconductor plant in Manassas that is about to complete a $3 billion expansion.
North Carolina has four tech megasites in the Carolina Core, a corridor of more than 120 miles of certified land, urban research parks, universities, airports, and more.
In Maryland, the impact of the CHIPS Act is more likely to be seen in ancillary areas, especially science and technology and research universities.
Innovation Hubs have many positive correlations to construction and real estate, like investments in:
- Mixed-use housing
- Commercial office space
- Physical infrastructure
- Other public and private assets
Ancillary construction and real estate projects from advanced manufacturing and Innovation Hubs remains to be seen but is definitely an area to watch.
Infrastructure Investment and Jobs Act
The other big piece of legislation, the Infrastructure Investment and Jobs Act (IIJA), became law near the end of 2021 and is entering its second year. Most of its trillion-dollar funding is expected to begin in late 2023 and go into 2024, so the impact is still hard to pinpoint. Construction contractors managing projects for manufacturing, commercial, communication, and healthcare are expected to see the biggest increase in growth.
Yet, the outlook for 2023 isn’t quite as promising as what was once hoped. Inflation, interest rates, continued labor and supply chain issues, and a mixed economy have created a situation that contractors may find untenable. Despite the common belief that infrastructure projects are relatively immune to inflation, that’s not the case this year. Lack of buying power is causing some federal agencies to pull back on planned projects or reduce the scope. Supplier commitments for materials at a guaranteed price can also make it difficult to accurately plan for expenses. Contractors will need to plan ahead for subcontractor staffing, especially for more complex or specialized projects. This will be the case with advanced manufacturing projects in the CHIPs Act as well.
Implementing a phased approach may work well for some larger projects so contractors can better control costs and labor. Contractors are also advised to plan for longer lead times with certain materials and products that must be made in the U.S. under IIJA requirements.
Considerations for Construction and Real Estate
Across project funding from all three bills, ongoing labor shortages may be the most challenging issue for construction contractors to manage. From a pre-pandemic labor shortage to prevailing wage and apprenticeship requirements, projects will need to account for different variables. Should a contractor bid on federally funded work if it’s specialized and there’s no immediate guarantee of fulfilling the labor needs for that niche? Can the project be completed within a certain time limit given supply chain, economic, and labor considerations?
Real estate owners and investors may want to consider the timing of energy efficient projects and upgrades and how the various tax incentives can bolster cash flow. For real estate developers, teams with a deeper knowledge of green infrastructure and renewable energy will be better positioned to help project partners take full advantage of federal funding and requirements.
Stakeholders in both construction and real estate will need to understand how state and local governments are managing all the funding, from project requirements to local zoning and economic factors. And even though there are several years to use all the funds from the IRA, CHIPS Act, and IIJA, it’s very possible that not all projects will be completed in time. Contractors, owners, developers, and investors need to prioritize major investments and projects over time. It would also be wise to plan for different scenarios with various funding sources.
As funding hits, firms need to be ready.
Strategic and financial planning tools can help real estate and construction companies anticipate and prepare for changing conditions. Jennifer French, CPA, team leader of PBMares’ Construction and Real Estate practice, can answer more questions about how recent federal legislation could affect your business.