A Little Bridge

Economic guru Larry Summers recently wrote an article in the Boston Globe about a small bridge near his office in Cambridge, Massachusetts. The bridge is just 100 yards long and was built in only 11 months more than a century ago. But today, needed repair work on this little bridge is now in its fourth year and counting, with no end in sight due to rather onerous building regulations that keep holding up the process. In his article, Mr. Summers uses this as an example of what he sees as a much larger problem in America: excessive regulation that inhibits economic growth.

As the former Treasury secretary under President Clinton and head of the National Economic Council under President Obama, Mr. Summers has wide credibility in economic circles. So when he suggests that excessive regulation is a problem and hurts growth, he does so at the risk of political criticism.

As we noted in our recent post on the 2016 Presidential election, the financial market is optimistic that less federal regulation and more infrastructure spending will stimulate economic activity. The market has shown its optimism through a rising stock market and strengthening dollar in the wake of the election. While I agree with this position, I temper my enthusiasm knowing that there is only so much the federal government can do to stimulate growth. Oftentimes growth and the forces that encourage or inhibit it come down to the local level. The expression “all politics is local” applies equally to commercial real estate when it comes to regulation.

From my perspective, the main culprit slowing growth in real estate development and the overall economy is NIMBY. While big regulators like Congress and the Fed play an important role in tapping the brakes as they have done recently by restricting banks from making risky loans, local regulations can slap a metal boot on your car’s wheel indefinitely.

And why does it seem like the NIMBY crowd has grown louder? Perhaps it’s because economic growth has been slow and people are fighting over their slice of the pie rather than working together to make the pie bigger. Slower growth also causes people to take positions, such as restricting new development, that exacerbate the very problems they complain about. From my perspective, growth is the only solution to most of the major issues in the world. How do we solve the national debt problem? Higher growth. How do we solve the underfunded pension fund problem caused by an aging population? Higher growth. How do we make people think more collectively and less individually? Higher growth. Political intransigence regarding income equality also is a problem that can be solved by boosting growth and spreading the economic benefits broadly.

Before all the real estate developers reading this blog start having an “I told you so” moment and submit this blog as Exhibit A in their local zoning board applications, let me go one step further and say you are not off the hook either. One area I will point to is the affordable housing crisis, particularly in large metropolitan areas. Many say that they can’t profitably build affordable housing in these places or that building Class A luxury apartments is more profitable and they have a fiduciary responsibility to maximize profits for their investors. I get all that. But get this: If we as an industry don’t solve this problem, local government is going to solve it for us.

How will local governments seek to tackle the affordable housing issue in the absence of an industry solution? In addition to raising local property taxes on commercial real estate, which directly decreases its value and potentially raises its cost for tenants, some local governments may impose special taxes on foreign investors as was just done in Vancouver. Fund flows are much more important than fundamentals when determining capital values, and if we stem the flow of foreign capital for political expediency, we are in effect lowering the value of all real estate assets in that market. Through some terrific work by our industry and some foresight in Congress, the FIRPTA tax on foreign investments in the U.S. was limited in December 2015, which we hope will spur additional foreign investment in the U.S. Now because we as an industry aren’t sufficiently addressing affordable housing, we run the risk of winning the foreign tax battle federally, but losing the war locally. Former Supreme Court Chief Justice John Marshall famously said that “the power to tax is the power to destroy.” In no place is this more of an issue than at the local government level.

Let’s please all meet in the middle of that little bridge in Cambridge and find common ground. Growth is the only solution, and we hold the key.

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