Infrastructure in 2025: optimism tempered by uncertainty

The outlook for the public infrastructure market next year is a mix of optimism and uncertainty as municipal market participants look forward to a rush of projects amid threats to financing tools from Capitol Hill.

Only about half of outgoing President Joe Biden’s 2021 Infrastructure Investment and Jobs Act legislation has been spent, and the remaining billions could see a shift in priorities from the incoming Donald Trump administration.

The 119th Congress late next year will begin to craft the next surface transportation bill before IIJA funding expires at the end of 2026. Republicans have expressed their ire at the IIJA’s massive number of competitive grant programs, which make up 30% of the law, and will likely promote a return to formula funding and the kind of traditional highway projects de-emphasized by Biden’s transportation department.

Energy is expected to be one of the busiest sectors if Trump’s pledge to lower energy prices materializes. Yet issuers hoping to pursue clean-energy projects may hit the pause button if Republican leaders successfully unwind parts of Biden’s signature climate law, the Inflation Reduction Act.

The new administration is expected to prioritize public-private partnerships, which may also see an uptick as states and local governments run out of COVID stimulus funds and face cuts in federal funds under the GOP budget-cutting measures.

Infrastructure investment funds are also hoping that deal flow picks up in the new year given expected interest rate declines after two years of relatively weak fundraising.

Hanging like a black cloud over the sector will be threats to tax-exempt bonds, the chief infrastructure financing tool in the U.S. That’s one driver in bankers’ optimistic new-money issuance projections as they expect cities and states to hustle to market ahead of potential legislation.

Municipal bond supply projections for 2025 are at a high of $745 billion and a low of $480 billion, with most firms anticipating issuance next year will be on pace, if not surpass, 2024’s record-breaking total. Bank of America strategists expect to see $375 billion of new money, and CreditSights projects new-money only deals will total $340 billion next year, up from $303 billion this year.

“We may see issuers and conduit borrowers that have projects they feel might be threatened by Congressional action hurry to get those projects financed before Congress acts,” said Johnny Hutchinson, partner in Nixon Peabody’s project finance and public finance practice.

Meanwhile, investment will continue to flow from the IIJA, which is in the third of its five-year life.

The IIJA’s $568 billion of funds “is only about halfway spent,” said Moody’s Investors Service analyst Kurt Krummenacker during a Dec. 4 Moody’s transportation infrastructure outlook webinar. Roughly 67% of the funds had been awarded and 47% outlaid through mid November, Moody’s said.

“The new administration will have about $294 billion to spend and we’re not expecting them to turn their back on that money, particularly as many Republican-leaning states have benefited from public funding,” Krummenacker said.

The Trump administration will “have significant latitude to determine and reallocate funds on different priorities, emphasizing P3s and focusing on energy infrastructure,” he said. “Items like public infrastructure, Amtrak, high speed rail and electric vehicles are at risk in the new regime.”

Public highway, pavement and street construction — the largest transportation market sector — is on track to grow 8% next year, reaching $128.4 billion in 2025 compared to $119.1 billion in 2024, according to the American Road and Transportation Builders Association’s annual market outlook.

That would make 2025 another record year. Federal and state funds have contributed to the trend.

“In the last few years, several states increased their own revenues to match federal funds and make additional transportation investments, using a combination of general fund transfers, bond issues, business taxes, and other user-fee increases,” said ARTBA chief economist Alison Black.

ARTBA projects the total value of overall transportation construction work, including highways, will grow 7.5% to $219.4 billion in 2025 from $204 billion in 2024. 

Amid the forward momentum, some sectors that received federal support under Biden are expected to fare less well under the GOP majority.

Publicly funded high-speed rail projects, like California’s, face serious headwinds.

Trump on the campaign trail said he would seek to unwind some provisions in the IIJA, like the $7.5 billion National Electric Vehicle Infrastructure program, which includes $5 billion in formula funds for states and $2.5 billion in competitive grants to build out a national network of EV charging stations.

The IIJA program to expand broadband access — supported by a new private activity bond category — will also face Republican scrutiny. Like the EV charging station program, the broadband plan failed to gain much momentum in the first three years of the IIJA.

The new administration may also target the plethora of tax credits in the IRA, which for the first time are available to cities and states to help finance clean-energy projects.

A renewed emphasis on fossil fuels under Trump — perhaps by executive order — may prompt utilities to tap the brakes on some clean-energy projects, said Dan Aschenbach, principle at consulting firm AGVP Advisory.

“Utilities need reliable energy and they need to decide how much further they will develop clean-energy sources and may decide to hold off,” he said, adding that demand growth from data centers adds to the pressure for reliability and capacity. “There’s already some of that taking place because of the expectation is that the [fossil fuel] regulations will be eased.”

Energy has become one of the top infrastructure sectors for private infrastructure investment, some of it spurred by the IRA.

Investment in clean energy production and industrial decarbonization rose by 43% since the IRA was enacted relative to the two preceding years, according to Macquarie.

“Under the new Trump administration, we believe it is unlikely for the IRA to be fully repealed given the numerous benefits it delivers in terms of job creation and economic development,” the firm said in its outlook for next year.

“We continue to view the U.S. market as an attractive investment destination for the renewable energy and energy transition sectors,” the firm said. “That said, risks may remain around timing – the speed at which clean power gets added to the grid and how fast the fossil fuels are phased out under the new U.S. administration.”

Infrastructure investors should look forward to a “constructive return environment” over the next 12 months amid declining interest rates and economic growth, Macquarie said.

Among traditional U.S. transportation assets, ratings analysts see the most volatility in the port sector. Trump’s threat of tariffs could pressure the credits, especially those the large ones that operate the business themselves as opposed to leasing it out.

“Also hanging in the balance is continued uncertainty surrounding the labor environment due to ongoing labor negotiations at U.S. East/Gulf Coast ports and in Canada at the Ports of Montreal and Vancouver, ” said Fitch Ratings in its outlook report.

Despite the headwinds, market participants say trends like extreme weather, reindustrialization and demographic shifts will demand additional infrastructure investment going forward. That will mean more borrowing from the cities and states that finance the bulk of the country’s infrastructure, regardless of policy shifts and uncertainties emanating from Washington.