If you want to get a preview of where the US is going there’s no better place to look than into the bubbling cauldron of UK politics. Not to bury the lede, it’s bad for the country, bad for the economy and certainly bad for commercial real estate.
Fragmentation and radicalization.
In the UK, the Labor Party has had its hand on the tiller these past two years while drifting, or perhaps more accurately galloping, to the left. This is setting up, over the years to come, a Manichean battle of fringe-ish politics as a surging Reform Party will stare across the abyss that was once the center at a radical left Labor Party.
The Brits just finished a local election cycle. It resulted in the defenestration of Sir Keir Starmer and his Labor Party (how weird that committed lefties in the UK seem to revel in their aristocratic titles). This election showed the temper of the electorate, Labor was eviscerated, making Reform the most popular party in the UK. Along the way, the Tories went in for a modest drubbing, the Greens had some success and the Liberal Democrats continued to demonstrate their insignificance. Most Labor MPs think said drubbing was because the party was not radical left enough.
Reform is now the most popular party in the country while Labor controls a stable super majority in Parliament for the next several years. What could go wrong?
The dysfunction resulting from multiple, deeply philosophically adverse political factions jockeying to control the levers of power is worth our attention as we’re about to live that reality.
One could argue that we are well down the path to replicate the UK dysfunction.
I’m not saying that we’re going to develop new third parties; we’ve tested those waters repeatedly over the last century with the zero success. But don’t despair if you really enjoy a good NASCAR car crash, we found a new and novel workaround by, in substance, splitting each major party into disparate and hostile factions. Their memberships (comrades?) loathe not only those across the aisle, but the other caucuses within their own party.
The Republicans have the House Freedom Caucus. In the penumbra of the House Freedom Caucus are a number of other semi-autonomous, semi-formalized caucuses, many with deep and fiery convictions about what’s right and what’s wrong. Across the aisle, the Democrats have their Progressive Caucus, the Squad, a handful of democratic socialists and a number of adjacencies in such squishy organizations as the Medicare for All Caucus, the New Green Deal Caucus and God knows what caucus popped up today as I was writing this. Same dynamics. Both parties disagree on almost everything and generally don’t like the other much (at least on policy, even if they do play baseball together), but their real enmity, their real energy, is saved for hating members of their own party who don’t agree with them. In our two nominally big-tent parties there remain some traditional Republicans (Main Street Caucus, etc.) and a couple of blue dog Democrats who are constitutionally not adverse to reaching across the aisle, but at this point, too few to matter.
The energy is in the far left and the far right. What’s happening within these political splinter groups is that, motivated by a sense of us versus them-ism, turbocharged by the certainty of their monopoly over truth, they’re always fixing for a fight. The tent gets smaller. Ideological purity is enforced; in other words, they get radicalized. It’s always been true and it’s true now, that true believers hate heretics more than non-believers (next time you meet an Albigensian, ask them).
What all of these schismatic factions have in common seems is an embrace of performative opposition as the main business of legislation. They have a great distain for the notion of compromise. And governance? Not really their thing.
Whatever has happened will be made worse in the upcoming election (and probably every election that follows). Blame the primaries. After World War II, in a burst of democratic purity, both of our parties rejected the notion that party grandees should get together in smoke-filled rooms, drinking bourbon, scratch bellies, trade favors and eventually come up with a consensus candidate.
While that process might have seemed a bit unseemly for the democratic purist, the process worked. It produced candidates who were centrist, quintessentially inclined to compromise, non-ideological with a tolerance for log rolling and an inclination to govern.
Having tossed the baby out with the oligarchic bathwater, we primary every one of our senators, our Congress people, our president (and frankly, virtually all of the elected offices at the state and local level).
While perhaps our early 20th century selves had the best of intentions in creating a primary system, but they likely did not foresee that it would turbocharge the extirpation of the center of our political life. The radical right and the radical left own the primary process. They’re noisy. They’re raucous. They vote in the primaries. They drive the choice of candidates. Everyone running for office will be primaried from either the left or the right and will be compelled to embrace a Faustian bargain to get the nomination, expressing fealty to the appropriate-isms of their most radical supporters. Once elected, it’s truly hard to get back to the middle as the self-same noisy and committed tranches of one’s own party or faction act as thought police enforcing fealty to the cause. Tough to compromise, tough to reach across the aisle. Compromise is what traitors do. We all know what we do with traitors.
In consequence, we’ve hollowed out the middle while ideologically committed and intolerant caucuses embedded in a nominal two-party system, fight and performatively demonstrate fealty to their ideological core in a world where the fight, the struggle, is the only thing, vastly more important than actually governing.
This obdurate us versus them mindset is now leaking into what ought to be ordinary course non-ideological issues. In this new world, everything is ideological. In some ways, it doesn’t even matter what the issue is as identity supersedes rational analysis. If one can’t come up with a good reason for objecting to a particular bit of legislation, one can always revert to the notion that if the other guys support it, we clearly don’t.
In the commercial real estate world, we have always been able to rely on the fact that both Democrats and Republicans own real estate and consequently, issues important to the commercial real estate community and the commercial real estate finance community would get regular get support from both sides of the aisle. TRIA is an excellent example. (Fingers crossed it will still be an excellent example in a year’s time.) So are advantageous tax provisions such as accelerated depreciation, opportunity zones, 1031 exchanges and on and on. The same can be said generally for the rules around capital formation, banking and land use. While left and right often skirmish around these sorts of things, the liquidity required, the fundamental legal landscape required for a healthy commercial real estate community have not been negative impacted.
The certainty that such things will continue to get a fair hearing and get support is increasingly frayed at this point. We’re not going to get much accomplished any time soon. Worse, things that we think of as settled are likely to come under attack.
That’s the cherry on this midden heap of a sundae. If there’s any place where left and right might get together, albeit arriving along wildly disparate paths, is anything viewed as “populist.” While populism can be hard to define, like pornography, you know when you see it. It’s really a little bit Fred Hayek, isn’t it, where the left and the right can actually get together? Regrettably, it’s always in a place that is generally statist and is fundamentally anti free market, anti-capitalist. This is damaging to commercial real estate finance. That’s truly scary. We’re seeing it right now. Consider the “Help the Folks” initiative in housing. When President Trump and Elizabeth Warren get together, everyone should run for the exits. Rent caps, limits on build-to-rent business plans and the mere notion that businesses could produce “excess profits” is the grist of the populist narrative. It is increasingly the stuff of public hearings and the performative antics of our legislators. We need to be concerned about the possible roll-back of long established tax benefits and changes to long-settled aspects of the legal environment in which capital formation occurs, bank and non-bank lending occurs and commercial real estate businesses are conducted. We see our politicians, who largely can’t agree on almost anything, coalescing around these themes of anti-capitalism, equity and fairness. It’s coming from both the left and the right. This is not good for the commercial real estate industry that depends on free markets, that depends on entrepreneurship, that depends upon folks taking outsized risks to get significant reward (no billionaires earned it?).
We have a tough row to hoe looking over the next several years. Gridlock will be bad but when large segments of our gloriously elected representatives come together in populist lanes, it will be worse.
What do we do about all this? We work harder. It’s incredibly important to support our political action committees and give them the resources to take our case to the lawgivers. It’ll be important to demonstrate that a healthy commercial real estate market is good for the folks. We can’t run away from arguments of fairness and equality but need to weave them into the defense of the commercial real estate industry. We’ll have to work harder to show how the folks will benefit from the health of our business. We’ll have to work harder to establish strong relationships and trust with all the grandees of the heights. Look, it might be harder to be an entrepreneur in this type of an environment, harder to make long-term bets in the commercial real estate space, but what are we going to do? As that Sage of Wall Street, Charlie Prince, said a couple of decades ago, “as long as they play the music, we probably gotta dance.”