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What Will LeFrak’s and Roth’s Appointments Mean for Trump’s Infrastructure Plan?

With President Trump’s infrastructure plan reportedly pushed back to 2018, the trillion-dollar questions are: how feasible is the plan and how will investment decisions on infrastructure be made?

With the postponement of any plan to 2018, it appears that a largely Republican-controlled government does not currently have the appetite for a major infrastructure bill. About $3.6 trillion in investment is estimated to be needed by 2020 to bring U.S. infrastructure up from its current grade of D+ to a B, according to the American Society of Civil Engineers.

The administration’s crackdown on illegal immigrants can also exacerbate labor woes in the construction market. Pew Research reported in November that illegal immigrants comprised 13 percent of the U.S. construction labor force.

“The construction labor market on the whole is tight, for both manual labor and skilled engineers,” says Chris Muoio, senior quantitative strategist with online real estate marketplace Ten-X. “But an expansive infrastructure project will make it extremely tight. Wage growth will be needed to entice workers to enter the construction field, and that will drive up construction costs and affect commercial real estate pricing for both investors and occupiers.”

The shortage of construction labor will likely lead to higher pricing on real estate development, agrees Ryan Severino, chief economist with real estate services firm JLL.

Specifically, in reference to the infrastructure plan, he notes that if decisions must be made to adhere to a hard line budget of $1 trillion, other inputs (such as the amount spent on materials) will have to decrease as labor gets more expensive.

One of the most significant challenges to implementing a national infrastructure improvement plan will come when prioritizing projects, according to Sam Chandan, associate dean of New York University’s Schack Real Estate Institute and founder of advisory firm Chandan Economics. “One thing we have not seen from the administration is a rubric or algorithm for determining which infrastructure investment will have the greatest long-term economic benefit,” he says.

“Prioritizing the right projects is extremely significant--larger deficits and growth in debt are sustainable if the infrastructure investments reinforce long-term growth of the economy. That would help our debt burden to be stable or declining.”

There are also geographical considerations to how infrastructure investment is implemented. “Speed to a location is a key determinant of pricing,” says Jim Costello, senior vice president with real estate data firm Real Capital Analytics (RCA).

No official infrastructure plan had been released by the White House, but two preliminary versions were floating around “congressional and business communities,” according to news outlet McClatchy. Both plans pitched 50 projects with a total investment cost of $137.5 billion, with a 50 percent private investment goal.

Sources interviewed for this story were unsure of the feasibility behind implementing a 50 percent private investment component. “As for Trump’s goal of 50 percent private investors, I’m not quite sure what that means,” says Barbara Byrne Denham, economist at New York City-based research firm Reis Inc. “A private investor will buy a municipal or treasury bond that’s invested in a new bridge, but a private company is not going to invest in public infrastructure without the government financing it and/or some concrete and measurable benefit to the company.”

Who will make decisions?

On Jan. 17, President Trump appointed New York City-based real estate developers Richard LeFrak and Steven Roth to head a “council of buildings and engineers” who will oversee the administration’s infrastructure plan. The appointments have “worried ethics experts,” according to a Politico article, which cited conflict-of-interest concerns.

The REIT headed by Roth, Vornado Realty Trust, is already a prominent player in New York and Washington, D.C.-area development. But the firm appeared to be increasing activity in Washington throughout 2016. The company has reportedly entered bids on the Labor Department and FBI buildings.

The Trump Organization also owns 30 percent of two Vornado buildings—one in San Francisco and one in Manhattan—entitling it to annual payouts, the Wall Street Journal reported in early February. According to WSJ, the stake in Manhattan’s 1290 Sixth Avenue is valued at $428.9 million, with “$14.7 million in annual cash flow for The Trump Organization.” The media outlet’s sources estimate Trump Organization’s 555 California Street holdings are worth $322.6 million and generate about $8 million annually.

This year, Vornado was also selected to oversee redevelopment of Manhattan’s Moynihan station in partnership with the Related Cos. The project is a 255,000-sq.-ft. revitalization of the James A. Farley Post Office building, in which Long Island Railroad and Amtrak ticket and waiting rooms are located. The project is expected to cost $1.6 billion and will get approximately $1 billion in federal funding. The developers will split the remaining balance in commercial rights. In Vornado’s fourth quarter earnings call  on Feb. 14, Roth acknowledged the role of the funding, saying “that will be basically paid for by government and constructed by Skanska.”

When asked by analysts about his work as an infrastructure appointee, Roth replied, “I know President Trump. I know him for a very long time. We have had dealings together. We know each other. I’m honored that he has asked me together with Richard LeFrak to be an advisor to him and the administration with respect to infrastructure matters Infrastructure matters are not political. Everybody—every citizen of America wants our our infrastructure to be robust to be in a good state of repair… I’m an advisor. I’m not a line executive. I’m not in any way an employee of the government. And so this is something that we do when asked. Just as we serve on hospital boards or university boards when asked.”

It can be difficult to prove infrastructure is not political, in light of historical cases such as Alaska’s 2005 “Bridge to Nowhere” debacle and Boston’s O’Neill Jr. Tunnel. The Bridge to Nowhere would have connected Ketchikan (Census Bureau population in 2013: 8,214) to Gravina Island’s airport for an earmarked cost of $223 million in 2005. In 2015, the plan was finally scrapped, according to Reuters, which called it “a symbol of wasteful federal spending on politicians' pet projects.” The O’Neill Jr. Tunnel was named after 47th Speaker of the United States House of Representatives, who championed its construction. It ended up costing about $24 billion, including cost overruns, and continued to need maintenance funding.

“Boston would not have seen the Big Dig without the federal spending which supported it. There’s a reason it was named the Tip O’Neill tunnel,” says Costello. More importantly, allocating money to political needs, not economic needs, can distort pricing, Costello says. And the economic ripples of that can extend through many industries. “It’s hard to say that infrastructure isn’t political—people have to choose whose project gets funded,” Costello adds.

In January, LeFrak told CNBC that he and Roth will bring private industry sensibilities to government and advise on how to "stretch our dollars," while scrutinizing whether investments have "payback or pork."

The LeFrak Organization owns over 400 buildings nationally, a mix of high-end residential, retail, office and hotel properties. Many of the company’s developments are located on or near major sources of transportation infrastructure. LeFrak City, in Queens, New York, sits along the Long Island Expressway, for instance. Its newest Newport residential tower development in Jersey City sits along the Hudson River. In Miami, LeFrak is building a $4 billion, 183-acre master-planned community on a superfund site in partnership with the Soffer family called SoLē Mia. Reportedly, about $150 million of the total cost is being initially funded by the developers themselves.

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