I’m a huge fan of Peter Linneman and have referenced him many times in the past. Linneman, in addition to being a highly lauded academic, is a thoughtful and pragmatic economist that often challenges conventional thinking. In other words, my kind of guy. HERE is the latest interview of Linneman done by William Walker, CEO of Walker & Dunlap which is one of the largest commercial real estate finance and advisory services firms in the United States. Here are some of my top take-away’s from this webinar:
- Everyone who talks about an economic hard landing vs. soft landing is missing the point. Debating these two outcomes pre-supposes that GDP is running above potential GDP and the economy is over-heating. Linneman disagrees and believes that the US economy is in fact still running below trend. According to him, the US still has 2.5mm people that aren’t working who should be working if we kept to the pre-pandemic job creation trend. In addition, GDP is still below its pre-pandemic trend. In other words, the economy still has more slack/room to run.
- The popular thinking that consumers are massively over-levered and we’re in for a massive correction is unfounded. Household debt as a percentage of personal disposable income was at 81% in Q3 ’23, down from a peak of 128% in 2008, just prior to the GFC. It’s also down from 88% pre-COVID (Q4 2019). The consumer has massively de-levered from where they were pre-COVID. Credit card delinquencies were at 2.6% in Q4 of 2019. They’re currently at 3% at end of Q3 ’23. While up, they’re not up much relative to pre-COVID.
- Linneman believes headline inflation will be down toward 2% by the end of 2024. As a result, he believes that long term Treasuries will be in the 3.5% range by end of year. He’s calling for 5 rate cuts in 2024.
- The energy picture in the US has never been better. The US in the last quarter of 2023 pumped more oil than has ever been pumped by any country in the history of the world!
- The best thing multifamily has going for it is the US’s long term under-building of housing relative to the demand. Linneman believes that the estimated 3.5mm gap is not likely to be closed anytime soon.
- In the short term however, there could be some shakiness in some markets. Multifamily is overbuilt in some locales and underbuilt in many others. There may be short term softness, but we’ll make it up in 2025, ’26, and ’27. That’s because, due to the rapid rise in rates, developers aren’t starting new projects. Multifamily starts have already fallen by > 50% meaning that there will be less product coming online in the next 1-2 years.
- Linneman believes that many in the investing community are committing Type 2 errors today by not investing because of the uncertainty in the market. Historically, this has been foolish as real estate titans like Sam Zell built much of their wealth in these same turbulent times. It just takes courage and capital.
- There is a ton of dry powder out there in terms of private equity, REIT’s, and sovereign wealth funds. If rates fall as Peter suspects, he thinks the competition for otherwise viable investments with sub-optimal financing will be fierce.
