LPA’s Leader In Right-Of-Way (ROW) and Eminent Domain (ED) Valuation Explains Why Texas Is #1 In Infrastructure — And Why That Matters

LPA’s Leader In Right-Of-Way (ROW) and Eminent Domain (ED) Valuation Explains Why Texas Is #1 In Infrastructure — And Why That Matters

Lowery Property Advisors

12/10/2020

Once again, Texas has taken first place on the Global Groundwork Index, a position the Lone Star State has held since the Index was created in 2018 by Site Selection magazine. As such, Texas continues to be a place where infrastructure investment is making an outsized impact on both the local economy and Texans’ key quality of life indicators.

Texas’s achievement is all the more remarkable considering the shockwaves 2020 has sent rippling through the commercial real estate landscape. As Chairman and CEO of CG/LA Infrastructure Norman Anderson observes, “The COVID-19 Black Swan has completely disrupted the U.S. and global infrastructure market, magnifying the cracks in the global infrastructure investment model. The magnitude of the problem is significant, but so is the opportunity.”

The federal deficit, which now tops $27 trillion, is only one factor in this equation. States and municipalities are facing significant budget shortfalls, too. Consequently, Anderson believes any post-pandemic rebound will be driven by accelerated private investment in highways, utilities, and other infrastructure projects. He points to an August ruling by the Federal Transit Administration (FTA) allowing the use of federal funds for joint development projects as an example of a pragmatic policymaking pivot that will have lasting long-term effects.

Does this trend jeopardize Texas’s ranking? Or does it promise to create even more jobs and drive even more business investment across Texas? To answer these questions, it helps to understand why Texas consistently ranks at the top of the Global Groundwork Index. We recently caught up with Mario Caro, LPA’s right-of-way valuation leader, to get his thoughts on the state of infrastructure investment in Texas, the industries, stakeholders, and regions driving that investment, and what the immediate future may hold for Texan landowners.

Growth Drives The Demand For Infrastructure Investment In Texas

Mario points to Texas’s wide-open spaces, energy richness, and surging population growth as drivers of infrastructure projects. These forces render infrastructure investment essential. “What other choice do we have with the growth and economic development occurring statewide?” he notes. “When you have so many new people moving here, you have to think about roads, water and sewer, getting electricity to the people who need it. Texas has to remain out in front of those needs.”

Texas is doing so, in part, by leading the way in renewable energy, particularly wind power along the Coastal Bend. According to Mario, “We look at it on a nationwide basis, and that industry is just going to keep growing, especially across South Texas. They have the perfect climate — the weather patterns — to generate this type of renewable energy.”

However, energy projects are not confined to the coast. Experts predict that oil and gas production in the Permian Basin will double over the next four years. Mario acknowledges that only by shoring up vital downstream, midstream, and upstream infrastructure will Texas be able to realize the full benefits of all this drilling and laying of pipeline. “There’s a good reason why TxDOT [the Texas Department of Transportation] won federal transportation funds for the Permian Basin. A lot of it has to do with addressing outstanding safety and connectivity issues in that part of the state. Farm-to-market and county roads to and from well sites and refineries, drainage areas — this infrastructure has rapidly deteriorated due to heavy use or become obsolete. Either way, it needs to be brought up to today’s standards.”

Public-Private Partnerships Create New Opportunities

Even in an economic powerhouse like Texas, state, county, and municipal budgets are feeling the strain of both increased public health costs and COVID-related declines in revenue. Moving forward, Mario says, the P3 or public-private partnership model will only play a more critical role in financing infrastructure projects.

As evidence of what the P3 model can accomplish, Mario cites the State Highway 130 toll road, an alternate route to I-35 (and Austin bypass) that runs from Georgetown south to Seguin. According to Mario, “the private side of the concession” is owned by a group from Spain and a San Antonio-based engineering firm. “Although there were some struggles with the southern segment of that stretch of highway — it wasn’t generating the expected revenue — the northern portion looks like it will pay for itself several times over,” Mario reports. “Plans are already underway to widen lanes to keep up with the increased traffic from Georgetown to the east of Austin.”

However, the P3 model is no guarantee of success. As Mario points out, partnerships can collapse when inequity is built into the arrangement. “In many instances of failure, it’s been the public sector that hasn’t been able to hold up their end of the bargain,” he explains. “The simple fact of the matter is that public authorities aren’t as accustomed to negotiating these types of agreements. The private sector has more experience in that realm, and they often walk away from the table having won more favorable terms. But some public agencies are making efforts to correct that: by calling in private consultants who can help the public sector negotiate better deals. That’s certainly a trend to watch closely.”

Texas Recognizes The Need For Diverse Infrastructure Funding Sources

Public infrastructure investment aims to support area businesses and improve the quality of life for all citizens. However, private investors are often responsible to their shareholders, who, in turn, want to see a measurable return on their investments. Consequently, there are real limits to the P3 model. As recently as 2019, more than three-quarters of all infrastructure projects originated with state and local governments. “There is no federal or national infrastructure mechanism to renovate bridges and upgrade wastewater treatment plants,” Mario adds. “So state and local governments must get creative when it comes to financing these projects.”

One way forward, Mario believes, is to capitalize on future land values. Speculators have become quick to buy up property surrounding planned infrastructure projects. They know the improvements will drive up land values. According to Mario, “Public agencies are now asking, ‘How can we partner up with the private side?’ They know where these projects are going; they know what they’re going to look like. With careful planning and collaboration with developers and investors, maybe these local governments can capitalize on those future land values, essentially raising money based on that appreciation to pay for their infrastructure needs.”

Where To Look For Future Infrastructure Projects In Texas

To quote Norman Anderson again: “The macro fact that dominates our thinking is an extraordinary pent-up demand for projects all over the world. … Could infrastructure investment swing the heavy lumber in a comeback from the COVID-19 deficit?”

Mario believes it could, especially in Texas. “There’s a hard ceiling to economic development, and right now, the U.S. is lagging behind other countries in infrastructure. In many cases, neglect is also an issue. The state has no other option but to step in and help out now.”

That means that Texas landowners who live in the path of growth or areas subject to heavy industrial usage — such as the Permian Basin — need to stay informed and up-to-date about the state’s infrastructure plans. “We’re going to start to see investment in more than just highways and transmission lines,” Mario predicts. “We’re going to see many more wind and solar projects, as well as infrastructure to safeguard communities from natural disasters.”

Indeed, a record-breaking hurricane season and other extreme weather events in 2020 suggest that climate-related risks will influence many infrastructure-related decisions made in 2021 and beyond. “We’ve had hurricanes; we’ve seen flooding in the Midwest and wildfires in California,” Mario explains. “These aren’t isolated events, and they require us to ask ourselves how we can improve our infrastructure to mitigate against the destruction they can cause.”

Mario also sees a need for infrastructure that more directly addresses human needs. He anticipates that Texas’ expanding workforce will precipitate higher demand for affordable housing, particularly in its urban centers. However, Mario also notes that “these are policy issues that may require housing subsidies or tax credits. Both would potentially affect property values. Along with this policy should come thorough and transparent public scrutiny. To protect the public interest, only those developers who offer up truly affordable housing should receive generous tax breaks and incentives.”

Whatever Texas’s position as a hotbed of “shovel-ready” infrastructure projects means for commercial real estate values, Mario predicts that landowners may be able to exercise more leverage than ever before. With the rise of P3 and entirely private projects, such as the proposed high-speed passenger train linking Dallas-Fort Worth and Houston, authorities may be more willing to purchase infrastructure-adjacent properties than condemn them outright.

“I’m interested to see if, or how frequently, private entities claim the right of eminent domain for these projects,” Mario says. “I think they may think twice before doing so. Invoking that right opens the door for more litigation and regulations. But will their hesitancy to seize property slow progress on infrastructure projects? Or will it help win over certain landowners who have been resistant to infrastructure investment in their back yard? And how might that reset fair market value benchmarks for what might otherwise be considered perpetual agricultural acreage? The implications for Texas’s economic health and vitality here are huge. But I’m confident we’re up to the challenge.”

Let LPA’s Southwest Experts in right-of-way (ROW) and eminent domain (ED) valuation help you keep your infrastructure project moving in the right direction.

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