Economic updates with Dr. Peter Linneman

Watch the replay of Walker & Dunlop’s Walker Webcast, featuring renowned Wharton professor and expert economist, Dr. Peter Linneman.

Walker Webcast


Walker & Dunlop’s CEO, Willy Walker, and Dr. Linneman discussed numerous topics, including:

  • Unemployment numbers across industries and the current state of the GDP
  • What an economic comeback could look like, and which industries will bounce back first
  • The performance of different CRE asset classes, with a focus on the future of office 
  • May rent collections, forbearance requests, and spreads

A bit about each speaker:

Willy Walker
Willy Walker

Willy Walker is Chairman and Chief Executive Officer of Walker & Dunlop. Under Mr. Walker’s leadership, Walker & Dunlop has grown from a small, family-owned business to become one of the largest commercial real estate finance companies in the United States. With a $32B transaction volume in 2019, Walker & Dunlop is ranked top three with Fannie Mae, Freddie Mac, and HUD.

Dr. Peter Linneman
Dr. Peter Linneman

Peter Linneman is the founding principal of Linneman Associates, a leading real estate advisory firm. For 35 years, he was a leading member of Wharton's faculty, serving as the Albert Sussman Professor of Real Estate, Finance and Public Policy. For over 40 years, Dr. Peter Linneman's unique blend of scholarly rigor and practical business insight has won him accolades from around the world, including PREA's prestigious Graaskamp Award for Real Estate Research, Wharton's Zell-Lurie Real Estate Center's Lifetime Achievement Award, Realty Stock Magazine's Special Achievement Award, being named "One of the 25 Most Influential People in Real Estate" by Realtor Magazine and inclusion in The New York Observer's "100 Most Powerful People in New York Real Estate."

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Webcast Transcript

Willy Walker (WW): Thank you, Susan, and good afternoon everybody. It is Wednesday, which means it's the Walker Webcast. I greatly appreciative of those of you who have taken the time to join us today.

I had originally had Colorado Governor Jared Polis lined up for today and, as many of you saw, Governor Polis had to go to Washington to meet with President Trump today. And, so, at the last minute I called up my friend Peter Linneman and said do you want to come back on seven weeks after the two of us talked at the beginning of this crisis and Peter very nicely agreed to come on and join me. So I'm very much looking forward to the next hour and engaging with Peter on a host of topics, many of which he has done a lot of research on and other topics that he and I just have a lot of, I hope, informed opinions about and so thank you for being here with me today, Peter.

I will say next week we have Dr. Peggy Hamburg joining me. She is the former administrator of The Food and Drug Administration for six years from 2008 to 2014 and I'm very much looking forward to hearing about, if you will, the health side of all of this from Dr. Hamburg and it should be a really interesting and engaging discussion. I have a lot of homework to do between now and next week as it relates to all of the therapeutic drugs being developed and vaccine development and really kind of to dive into all of that.

I want to start off as I usually do by saying that, you know, close to 80,000 people in America have died due to this virus and those deaths are very real, they're real loss, they’re real pain. And close to 40 million Americans are unemployed today, which brings with that real concern and real stress. Nothing that Peter and I are going to talk about today belittles the deep sorrow for the losses of life, nor the real concern that many, many people hold today as it relates to their future from both an employment, a food, shelter and an overall care standpoint.

Nonetheless, we are going to dive into issues that are, at this time, somewhat controversial. There's a lot of pressure and tension going on in our country right now as it relates to opening or staying shut and I think it's important to dive into these issues and to some degree debate them, flesh out some of the more salient points.

During this I think Peter and I will talk about what the value of a human life is. That is not something that is an easy either calculation or something that's easy to talk about. But when we are talking about an economy, when we are talking about health, you have to somehow try and put numbers to this to have a structured discussion.

I also want to put forth that I was listening to something that Michael Milken said a couple of weeks ago and I'm in complete agreement with it. There will be history books written about the response to this crisis and what people did and didn't do. There is no reason to look backwards and either praise or blame what people have done in the past. All we can do is focus on the data that we see in front of us today, the reality that we are all living, and then to take actions to move forward. And to hopefully build action plans that allow us as a society to move beyond the current crisis and with our lives and to get our economy back up and going.

I want to back up for a moment to last week. Walker & Dunlop announced earnings on Wednesday, and I had just come from that earnings call when I did my conversation with Glenn Youngkin. I just want to underscore a couple quick things that I mentioned last week.

First, we had just closed on the largest transaction that Walker & Dunlop had ever done, which was a $2.4 billion financing of a large multifamily portfolio in the mid-Atlantic. I think it's note-worthy of pointing that out only in that at these times where many people believe that there is not financing out there, to do a deal of that size and scale is not only a great accomplishment, but it does speak to the fact that there is still in certain places, and with certain asset classes, liquidity in the market.

The second thing that I mentioned last week was that in the month of April we did $1.9 billion of flow business, outside of that $2.4 billion deal we did another $1.9 billion.

We are doing a lot of refinancing in the multifamily space right now at leverage levels of anywhere between 50 and 70 percent and at coupon rates of anywhere between 2.5 and 3.5 percent depending on the leverage level, depending on location of asset, occupancy, etcetera, etcetera.

But whether it's with Walker & Dunlop or many of the other providers of capital out there, there is capital out there for assets today. We have the somewhat “Goldilocks” scenario, and it's hard to think that there's any “Goldilocks” scenario out there today, but a very, very low base rates and then very tight spreads given the amount of buying that the Federal Reserve is doing today in agency CMBS. And, so, for those properties that have solid occupancy, great fundamentals, and great sponsorship, there is capital out there for refinancing.

The final thing that I would mention as it relates to the state of the market right now is that May collections, as I mentioned last week, the early returns were looking better than April. I would reiterate that since the beginning of May what we have seen as collections either on top of, or slightly better, than the month of April in the multifamily space.

I would underscore, as we talked about during April, that the A and B class assets in multifamily are collecting 95 percent and north. The one area where we are seeing, I guess two areas where we are seeing some weakness, is first in the C class properties, so at lower income levels you're seeing some weakness where collections might be in the 85 to 90 percent range. And then the second is on small loans. Smaller loans clearly are showing some weakness as it relates to sponsorship and people who might own one or two, four or five-unit multifamily properties. They're getting hit hard with someone moving out and losing a quarter of their rental income and they are reaching in for forbearance.

The numbers that came out last week on Fannie Mae and Freddie Mac for forbearance in the month of April - Freddie Mac was at $1.7 billion of loans seeking forbearance, Fannie Mae was at $385 million. So, a very significant difference between Fannie Mae and Freddie Mac, due to a number of things. One, I would put forth that the Freddie Mac, if you will, threshold for granting forbearance is a little bit lower than the Fannie Mae threshold for granting forbearance. Second, on Fannie Mae loans there is a cash sweep on the property when it goes into forbearance, whereas on Freddie Mac there is not a cash sweep. And I think the final one is, back to the small loan point, Freddie Mac in the multifamily space has done a huge volume of small loans in the past several years and I think that inside of that $1.7 billion there is a very significant cohort of small loans that have come back in asking for forbearance. Peter and I will talk about that a little bit later as it relates to forbearance and what he is seeing in not only the multifamily space but across other asset classes.

The next comment that I would make is a little bit along the lines of what Peter I think is going to talk about in a moment, which is sort of losing the plot. I think it's very interesting where we sit today as it relates to what people are expecting either at the state level or at the national level on reopening our economy.

We went into a shutdown to allow our country to build up the testing capacity, the personal protective equipment and the hospital capacity to be able to deal with this virus. To the best of my knowledge, I never heard a single politician, either at the national level or at the state level, say we are shutting down until we have a vaccine to this virus. Never said. They all said we need to build up the testing capacity, the PPE, and the hospital capacity to be able to deal with this virus and then move forward.

But it feels like today there is a sense out there that if people step outside of their homes, if they start to get back to work, that there's an expectation that the virus has somehow gone away, that we can't go back to work, we can't keep moving forward until we have a vaccine.

And it's interesting because Dr. Fauci who everybody respects tremendously yesterday in the hearing said, “Some suffering and death that could be avoided will be avoided but it could even set you back on the road to trying to get an economic recovery.” Well, clearly, Dr. Fauci is correct. If we stay locked down there is suffering and death that could be avoided. But I think, as Peter is going to dive into in a moment, what is the cost of that, and did we ever enter into this lockdown with the thought that we were going to try to avoid all suffering and all death. Because if that were the case, we would be locked down for years to come.

I want to touch quickly on states and testing before I get to Peter, and that is that there is a lot of question marks as it relates to testing at a state-by-state level. And there is a, there was a Harvard study released last Thursday which stated that only nine states are running enough COVID-19 tests today to contain a future outbreak. They're all pretty small states - Alaska, Hawaii, Montana, North Dakota, Oregon, Tennessee, Utah, West Virginia, and Wyoming. And, so, you have larger states such as Georgia, Texas and Colorado which, per the Harvard study, don't have enough testing today to “open back up” but they have governors who are taking stances to get their economies back up and going. And I think one of the things that many of us are grasping for is some rules of the road. Do you look at the Harvard study, do you look at the Hopkins study, do you look to the federal government, do you look to the CDC, do you look to your state?

The other thing that has come out as it relates to overall testing is that right now in the U.S., we're running on average about 250,000 tests a day and many people believe that that testing number needs to get up closer to a million tests a day, somewhere between 750 on the low end, and a million on the high end, to make it so that there is enough testing across the country to be able to get everybody into sort of a confidence level that we can get back to it. Who knows exactly what that number is, but clearly testing capacity is coming online quite soon.

The other thing that I looked at was The Atlantic magazine has got something called the COVID tracking project and the COVID tracking project has gone to take a look at how states are set up along a number of different ratings which include reporting, testing, outcomes as far as ICU capacity, ventilators, demographic data, figuring out who in their population basis is doing what, and then they get a bonus for overall hospital capacity.

And, so, there are 14 states with A-plus ratings per the COVID tracking project that the Atlantic is doing and those are Arizona, Florida, Georgia, Iowa, Indiana, Kentucky, Massachusetts, Michigan, New Jersey, Oklahoma, Oregon, Rhode Island, Virginia and Wisconsin. What I like about that is that there is objective measures which are talking about all the component parts on a state by state basis that people can go to, to say is my state, on a number of different metrics, ready to go.

And kind of looping back to the previous comment and then I'm going to go to Peter - the Washington DC Convention Center today is set up with 450 beds that are ready to take overflow capacity out of the hospitals. The Army Corps of Engineers has set up 37 makeshift hospitals across the country, very similar to what they've done in Washington at the Convention Center, to deal with overflow capacity and hospitals. That is what we set out to do six or seven weeks ago. Hopefully those beds don't need to be used, but that was what we set out to do was to set up that excess capacity and it is in place. I certainly hope that after spending the time and effort to set up the capacity - it would be great if we didn't need to use it - but boy would it be a shame for us all to be lulled into the thought that the virus has come and gone, we take down the capacity, and then we have a resurgence in the fall and we don't have that capacity still in place.

Second thing is, many have heard about the virus getting into children and causing symptoms similar to Kawasaki disease. We talked about it on my Children's National Board call yesterday. The good thing about it - it has plenty of parents, including myself, concerned as it relates to the implications of this virus on the child population - but the good thing so far about this disease which they haven't, there's actually a technical name to it now but it is a variation of COVID-19 - is that it is treatable, it is highly treatable. And that while three kids have died unfortunately from it, all the medical professionals, they know what to do, they know how to treat it.

The final piece that I will talk on before I turn to Peter is student housing. Some of you may have seen the California university system came out yesterday and said they will start the fall in remote learning. Two thoughts on that. One, I have spoken to a number of people who own student housing properties who've been in close contact with school systems across the country and I have to say I'm a little disappointed that in mid-May the University of California has made the decision that they are going to jump to that without waiting to see how the economy opens back up, waiting to see what type of therapeutic drugs might be developed over the summer, and the final thing is to basically look at is there anything else that will change when we move towards the fall. They obviously need to give clarity to students and their parents and people who are paying for their education as it relates to financial planning for the fall.

But the second piece is that many students, from my understanding, still want to go back and be in the community where they are learning. That's clearly the case right now as we're ending the 2020 school year where many, many, many students in off campus housing even though the campuses have been shut down have stayed there and continue to learn remotely with their friends and colleagues around them in the student housing property. I would not be surprised if many of those students head back to campuses in the fall for off- campus housing and that you actually get very significant rental numbers out of those properties. And I would also say that there are plenty of parents who, if they can afford it, are saying boy it'd be really nice if my college age daughter or son could head back to their own living environment after having been in their house for the last several weeks to months.

So, let me now turn to Peter because it was seven weeks ago on March 25, Peter, when the two of us were talking about where things stood and you outlined the potential economic damage that would be caused by a prolonged shut down. So here we are seven weeks later, have we accomplished what we set out to do and how bad has the damage been?

Peter Linneman (PL): So, it's pleasure to be here, Willy, and I feel like one of these guests that come on a late-night talk show after a real star has cancelled, you know, but it's a pleasure to be here.

Unfortunately, Willy, basically what we talked about on March 25th is what happened. I wish I'd been this accurate in all my forecasts. Unfortunately, I think it was about that easy.

What's the damage? As we sit here today probably 45 million unemployed. As we sit here today - forget the data which is lagging - about 45 million unemployed on 160-165 million labor force, so that's 25-26 percent unemployment. That would be the highest in recorded U.S. history. The data is lagging. We started with five million at the beginning of March so probably 40 million people have gone unemployed in the last, what's that, about 10 weeks now. That's deep. As you know it's highly concentrated in certain sectors though it's spreading because if those certain sectors aren't doing business it ripples onward.

GDP, as we speak, non-annualized is probably at about 6.5-7 percent below the last week of March. That's not annualized. If you annualize that comes out in the range of 35-37 percent. That's a lot of economic activity lost.

WW: What is that, about $1.2-1.4 trillion?

PL: It's about $1.25 trillion, just roughly, and I think we're losing about $21 billion a day, $22 billion a day is another way to, you know - remember how Grace used to have the debt clock and you just saw it role and CNN has the death clock, you see it roll. This is the lost GDP clock and it's basically a billion an hour, is a way to view it. And so, every hour we're down another billion, we're down another billion. So, by the time you and I are done, we’re down another billion. So, it's ugly.

Now there's been a lot of money pumped into the system - and I'd like to come back to a couple of points you made so I hope we swing back to them – but when we spoke on the 25th of March one of my overriding concerns was social unrest because I did foresee this type of unemployment and if you say when people go on unemployment, they usually get somewhere between a 35 and 60 percent drop in their income on unemployment. And I kind of sat there going, if we've got 40-45 million people unemployed at 40-50 percent of their income, it's not good. And I also mentioned as you recall the class of 2020 which is graduating now from high school and college not getting jobs, they don't qualify for unemployment so bear that in mind.

However, they did one thing, I don't know whether it was intentionally smart, unintentionally smart, it doesn't matter, if you earn less than about $1,000 a week, that's $50,000 a year. You are making more unemployed than you were making employed and that's true until the end of July.

Now you say, why do I think it's intelligent? They bought peace with that, they bought peace. So that a whole bunch of people, think of like 40 million people unemployed making, of which probably 80 percent of them are making more than they were making before. Can't do that forever, but it did by peace. And, in fact, with an election coming up I'd be shocked if that doesn't get extended from the end of July probably to the end of the year. It’s the $600 top-up a week that does that, that’s what does it.

WW: Let's dive into that for two seconds because, as you well know, Nancy Pelosi last night proposed a $3 trillion additional stimulus plan that many Republicans responded to this morning. Some people probably saw Rob Portman, senator from Ohio, on Squawk Box talking about this issue of, if you will, moral hazard. That if you're paying people more money to sit on the couch than to go out and work, that people aren't going to get back to work and so Senator Portman was basically saying I don't approve with what is in that proposed bill that the House is supposedly going to vote on tomorrow, or on Friday, which is to extend that $600 per week boost on a weekly basis until the end of the year.

Given that there are no jobs right now for people to go back to do you not think that, if you will, to put it in Democrat and Republican lenses, the Democrat pushing for the extension of that until the end of the year as you just said probably wins over the more sort of moral hazard we can’t have people sitting on the couch rather than going out and finding a job until you actually start to see job growth coming. And that then kind of dovetails into when do you think we're going to start to see jobs starting to reappear again?

PL: Alright, so you know that normally I think both parties are wrong about everything. This is a rare case where both parties are right. There is a discouragement - it's not so much a moral hazard, it's a discouragement phenomenon which is why the hell should I work if I'm doing this well not working. And particularly for lower wages, it's a big differential. Some people have gotten 40-50-60 percent increases by going on unemployment. So, they're definitely right in the “Republican” side saying that's a concern.

The Democrats are right in saying, but they aren't saying it as bluntly as I'm about to say, it is to buy peace, it is to buy no social unrest, it is to avoid Newark riots. I don't mean the riots would be in Newark, I mean totally devastating kind of riots. The kind we've seen in our lifetime in Detroit and Newark - real riots were huge amounts of capital and life were put at risk and lost forever.

And, so if you ask me, they're both right, and for me to say either is right is quite a concession, but to buy peace, I suffer a little bit because peace is critical until we get back up.

WW: So, go to getting it back up for a second. I heard you say, talk for a moment about when you think we start to see jobs coming back on and what the take-up rate is.

PL: Okay, so we have a little evidence from Sweet, not a lot. There are two phenomenon going on. I'll go back to the night the NBA shut down. The night the NBA shut down, I went to a sold-out Sixers game, okay, but it was already clear COVID was in the air and so forth and attendance was about 90 to 95 percent. Sold out, but attendance was 90 to 95 percent. That was, “I don't want to” and there was going to be always some dimension of “I don't want to” - I don't want to go to the concert, I don't want to go to the restaurant, etcetera.

Then, and that based on Sweden probably would have taken our unemployment from five million people unemployed to 10 or 15 million unemployed - the “I don't want to” would have happened, would have happened. That's not the government's fault, no matter what they did that was going to happen. Maybe it would have even taken it to 20 million.

The other is “you can't, you cannot”, and that has been the government shutting down. And some of the shutdown, as you said, the shutdown I always heard was for the same reason - flatten it out, give us time to put up these temporary facilities, give us time to get mass production, etcetera up.

And what happened is “mission creep” and mission creep is a classic phenomenon. The famous one in my lifetime was John Kennedy as President sends some military advisors to South Vietnam and within five years, we have 100,000 soldiers doing frontline combat. How did that happen? And it was mission creep. Not ill-intended, probably ill-informed, misguided, not willing to admit mistakes, all human stuff.

The other is you start out thinking you're fighting one enemy and then it evolves, it becomes political. The other is, how did World War I start? Archduke Ferdinand and his wife are assassinated by an anarchist and the next thing you know the major industrialized powers of the world are at war. How did that happen? And historians are still doing that. I think historians will look back at this and go how did this, which may kill 300,000 this year, I mean who knows how many it'll kill, still to be determined. But, by the way, we have 330 million people. And we do know now, you pointed out the current death, we know that about 60 percent of the deaths - not to be cruel, my mother was one of these people - not to be cruel, but 60 percent of the deaths are people in nursing care, not just in senior living, in nursing care. And we know from independent data before this, the median life expectancy for somebody in nursing is five months, five months. The good news of this disease is that 60 percent of its victims had a life expectancy of around five months as opposed to if it killed a lot of children or healthy and so forth. I'm not saying it is good news, it is the “relative” good news and so the mission creep here has been extraordinary.

How does the comeback occur? The comeback occurs when the “can't do” hands it over to the “I don't want to do.” As long as the “can't do”, the government is deciding; the government is going to come up with 50 decisions for a million situations. We're going to come up with millions of answers for millions of situations. Your office there is a very different thing opening than my office in Philadelphia, than Macy's, than a shoe repair shop, than a McDonald's, than a big bar - there are millions, and there's no way, no way a government can ever figure out all those answers.

And what we are now in is a “can't do” world. The “can't do” world is well intended but it's crushing. We need to get into the “we won't do”. So, I'll give you the best example. I think I mentioned on the 25th I live within a couple of blocks of University of Pennsylvania Hospital system, that way a couple of blocks, Thomas Jefferson University Hospital, that way - two major national, international medical. They've been ghost towns, ghost towns, because all elective has been said “no”. So, here are - and almost all they have are Medicaid patients because that's most of the nursing home who are brought in, or emergency victims, so they are going bankrupt. They're getting huge subsidies from the government not to do cancer screenings, heart screenings, colonoscopies, all that stuff. So, to help the medical system deal with one thing we've destroyed all this other.

Here's how it comes back though, Willy, this is my good thought for the day by the way after one more funny thing. Nestled between all the medical office that you would imagine, if two blocks that way is one major medical, two blocks that way is another, is a marijuana dispensary. They have been allowed to stay open, they have been allowed to stay open, but cancer screenings have not been allowed to stay open. That's when the “can't do” world dominates, because any intuitive says that doesn't make sense, that just doesn't make sense

But now let me give you the best news that I've come up with. For years we've been saying our healthcare system eats up about 18 percent of GDP, it eats up about 18 percent of GDP, how awful that is. And of that 18 percent about 2 percent of GDP is eaten up in the last year of people's lives. Okay, so those are facts. And that COVID dimension is that 2 percent right now, it's a big part of that 2 percent, the last year of people's lives. By the way, maybe it's up to 3 percent now, right, of GDP. But most of medical shut down. So, what was eating 18 percent of GDP might be eating 4 or 5 percent of GDP.

When the “can't do” say you can get colonoscopies, you can get cataract surgery, you can get, you know go through all the list, you can have your hip replaced, when they say that occurs do you understand that about 14 percent of our GDP comes back pretty quickly.

WW: And I want to, I want to take that into - so that's exactly the type of thinking that I wanted to get to here, Peter, as it relates to, that's a snapback. And just as a quick aside, on my Children's call yesterday we were losing about a million dollars a day back at the beginning of April. We're now down to, after cost cutting and things of that nature, somewhere between $200,000 and $300,000 a day. And, you know, there's a breakeven number as it relates to getting back for elective surgeries to getting us to break even by sometime in June. So, there are - and Children's Hospital, by the way, does not have the influx of COVID cases like normal adult hospitals would have. But nonetheless, to your point is it relates to, we run the very real risk of killing our first line of defense to this virus by prolonging this shutdown for too long and gutting the staffs and gutting the actual operations of these hospitals right when we need them the most.

But let me talk for a moment about the sectors that have gotten most hit back to your $45 million number and ask you whether you think the rebound - you just said it on health care, for instance, some interesting numbers between this crisis and the great financial crisis (GFC) of where we've lost jobs and then your thoughts on them coming back.

So, for instance, in leisure and hospitality we have so far lost 7.6 million jobs versus a total of 454,000 in those sectors in the great financial crisis. Education and health services, exactly what we were just talking about, so far have lost 2.5 million jobs versus actually adding jobs during the great financial crisis as people went into healthcare, people went into education. Professional and business services, it's almost a wash, 2.1 million now, 1.6 million in the GFC. Retail 2.1 million now, a million in the GFC. Manufacturing up significantly as far as job losses, 1.3 million down from the GFC of 2 million. And then the other final one that I put out there - there are two other ones. One, government. Interesting, we’ve lost almost a million jobs in the government sector already in the COVID crisis versus actual growth in the government sector during the GFC of 48,000 jobs. And then construction, clearly construction was a huge job loss in the GFC of 2.2 million, we have “only” lost 975,000 jobs in construction so far in this crisis.

So, as you look at that, specifically back to your point as it relates to, you know, once healthcare comes back, that can snap back in. Is getting jobs back in leisure and hospitality, for instance, where you've seen the lions share, 7.6 million jobs lost, is that going to snap back or is that a slower recovery similar to construction starts, getting construction jobs back as we clearly saw during the GFC?

PL: So, this time they'll come back when the “can't do” - as the “can't do” disappears, where will there still be “don't want to do”? Travel, entertainment, concerts, ballgames, Disney, etcetera. There's very little evidence, if any, that anybody gets this from outdoor exposure by the way so things like Disney will come back far faster than something like movie theaters. So, again, it's not one size fits all.

So, I think what you'll probably see is by year end if the “can't do” recedes, you'll have a tripling of demand or quadrupling of demand for travel and hotels. So that will still only get it back up to about 40 percent or 50 percent, right, still got a good way to go. But there are people, I mean there are people, there are things. The construction is going to get worse, as projects finish there's not going to be something replacing it in the pipeline.

WW: So your sense is housing starts fall off. What about commercial construction?

PL: Same way. Commercial construction is going to fall off. Look, the comment I keep making to people is with 25-30 percent unemployment it's generally hard to imagine any sector doing well, just any business -it’s very hard to imagine. It’s easier to imagine some businesses not doing as badly but it's hard to imagine a lot of businesses doing better. Even something like cleaning offices, outsourcing cleaning of offices. You'd say, well, they're going to do a lot better. Yeah, but some offices are going to shut down so they're even going to take a hit. So, everything is relative in that regard. The slowest to come back will be indoor entertainment oriented and travel and leisure. When hotels, as they come back, it's my view it's going to come back much better in branded, than non-branded. Why? Because, I don't know - Chris and Seth if you’re listening you don't have to pay me for what I'm about to suggest because I'm not an ad guy. I love Chris, he's fabulous. But, you know, I can see Hilton doing a campaign commercial showing how we clean this every hour, and then we do this and, you know, you can just see the commercial of how they clean everything.

WW: Chris actually spoke earlier this week about the fact that they're going to put a tape on the door to your room that when you, you know, similar to the way that when they clean toilets sometimes in hotels, you open up the lid and it breaks the seal and says to you someone cleaned it. They're going to be doing that on the outside of the room and so exactly to your point, Peter, those people who can create the sense of security around the experience are going to be the winners.

PL: And airlines, the big airlines are going to do - by the way, my guess is we'll have never been safer from transferable diseases than we’re about to be for the next year or so in an airplane or a subway or a hotel because, come on, they're going to be, you can drop stuff and eat it off the floor in those places going forward. They are going to be unbelievably hygienic by any historic standard. So, they'll come back but it will take time, it will take time.

The quickest to recover will be hair salons. The next will be healthcare. Healthcare, my guess, is 90 percent of the drop, like at your Children's Hospital, 90 percent of the drop is because you “can't do”, 10 percent is because “I don't want to do.” And so you could get that snapping back quite quickly.

And then as you go across the board it's, you know, what are you doing, what is it that you're doing. It will be a bit virtuous. By virtuous what I mean is as they come back - health care, I'll just take healthcare - as around me all these jobs come back to do the elective stuff what's going to happen is they're going to have to buy more sandwiches and the nearby little restaurants will do well. Since the nearby little restaurants are doing well orders for pickles will do better and on you go in the virtuous cycle.

WW: So, let's take that then to housing starts and generally speaking housing and then we'll run through the various asset classes and your views on where things stand today and how people are sort of fighting the good fight in some instances.

So, you said construction way down, so housing starts sort of fall off a cliff. Are you long on single family housing because there will be no new supply and therefore if you actually own you're going to get price inflation, if you will, in the existing stock, or is single family housing looking for a train wreck because of the 5 million homes that have gone into forbearance and are going to end up causing even further damage to Fannie and Freddie’s financials once those loans go from forbearance into foreclosure?

PL: Near term it's hard to see anything going up a lot in value there - there could be a few exceptions. Look what's it take to want to own a home? It takes confidence, a job so you can get a mortgage, a down payment, and an income. Well, if you have high unemployment a lot of people can't get the loan, they don't have the income. Twenty-five percent unemployment does not exactly exude confidence and the values of assets being down hurts down payments. So single family ownership has got a difficult near future. Just, by the way, ultimately, it'll be fine, it'll be fine, but in the next year or two it's hard to see how it does well.

WW: Roll that to multi and the fact that there won't be new supply on the single-family side. Multi occupancies are holding up pretty well right now, to your previous point as it relates to the Cares Act and the $600 per month bump has been keeping rent rolls strong.

I think you said in something I read that you thought that occupancy, economic vacancy would get up to about 12 percent, so 88 percent payroll collection. I think that’s a little low from my take but let’s use your 88 percent. But you also said that that's going to have people who need it get forbearance but you're not going to see many foreclosures on the multi side. So, your general outlook as it relates to multi is constructive relative to other commercial real estate asset classes?

PL: Oh absolutely, absolutely. Here's my concern about multi, it's very simple. Supplies going to slow down, big time, that's fine, that'll help. I go back - it's hard to find an industry that does well in a world of 25 percent unemployment. So, what will happen? Right now, they're getting unemployment checks and they're paying. When their lease comes up in July, if they're unemployed are they going to renew or are they going to move back to mom. Some are going to move back to mom, I'm not saying all, but some that otherwise if they had a job would keep renting.

So, you're not going to lose many people to home ownership, but you're going to lose some people to 25 percent unemployment moving back to mom. And, they're not going to be replaced by the class of 2020 because the class of 2020 has no jobs. And if you think about the extruder of the economy - out of this end you have some people dying and going to single family and whatever, and at this end you have the class of 2020 coming in. You have no class of 2020 coming in. By the way, don't just think of young people in apartments, I own an apartment project where we have a fair number of seniors and some of them are going to die in the course of things or move in with their children. There's no class of 2020 to replace them. So, I don't think it drops to 88 or 90 immediately, I just think what happens is that, oh, there's nobody new coming this way, there's some going out that way, and with 25 percent unemployment a lot of them that are currently renting move back home. And when I say back home it could be with their uncle. I don't care who it's with, right, that's the scenario I see. It is helped by the single-family weakness, but it isn't offset is what I think.

WW: So, let's go to the next, if you will, best asset class which is industrial. If you own industrial that happens to be an Amazon distribution facility, or is taking products to get to an Amazon distribution facility, lucky you, and sit on it. What about industrial around ports as imports and export volumes fall dramatically?

PL: I said this about a month and a half, about a month ago - about a week or so after our first talk - is that imports and exports are going to get killed. Why? Put aside nationalism and so forth, very simple reason. When our income is up, we buy more stuff from everywhere, including abroad, and it has to come in and go through a port or through an airport and be broken down and so forth. And when they, in foreign countries have higher income, they buy more of our stuff and it has to throughput.

If you're around those throughput points, they have less money, we have less money, less exports, less imports, less handling throughput - in the near term, going to be very adversely affected. Add to that any nationalism, reshoring, etcetera, it will dampen it further. Your Amazon is at the other extreme - so you have those kind of two extremes, if you will. But I think the hardest hit will be port and near airport where they're handling, I don't mean they're handling Amazon kind of shipping, I mean they're handling import-export kind of coming off of planes and, as you know, there's a lot more than that then people realize.

WW: Yeah. Next, office long-term leases. Walker & Dunlop rents space in 40 buildings across the country and we're not canceling leases right now, but we’ll obviously take a look at what our footprint needs to be going forward and how many people are going to be coming into offices and then also what the square footage is on a per-person basis.

So, there are two sides to that. One, some people may continue to work from home. The flip side to it is the space you need for the people who come into the office may actually expand. What's your thought on office and more specifically than that, Peter, urban office versus suburban office - do you think that this sort of disintermediated world, to your point as it relates to entertainment, Disney comes back much quicker than movie theaters because people are outside. Do you think that suburban office actually gets a boost in the arm because people don't want to take public transportation or any kind of transportation to go to an urban core office building?

PL: Yeah, the thing people forget about office Willy is, their long-term leases signed. There are long term leases. So, let's, you mentioned Amazon. Let's say Amazon has a long-term office lease in one of my buildings. Let's assume they want to go to the suburbs for the reason you said. They’ve got a lease with me for the next nine years. So those decisions about city-suburb, directionally I think you're right, there aren't going to be many people at the margin able to make that decision in any near term. There just aren't that many people who have their lease role and have the capacity to put the money into moving, or find a landlord in the suburb who's got the money to put in building out the space. So that's going to be a bit of a freeze. So directionally you're probably right. Near term, I think what you see is a leasing kind of freeze until the tenant figures out their world. I mean they'll renew if they're a real business but until they figure out their world.

The other thing I think you see is, if you just did your office, forget the WeWorks, I'm talking about you, Walker& Dunlop, you know or a real company, if you just redid your offices with butcher blocks, shoulder to shoulder, hot seat, etcetera – and you and I have been in a lot of offices like that, of tenants who were really proud of it, showing off their space over the last two years - those people right now are contacting landlords and designers saying how do I undo this in a hurry. And that means - I was in a conversation this morning - WeWorks of the world, WeWork in particular, is going to give back some space. In the good buildings, the space they're going to give back could become the expansion space to deal with, “I need a bigger footprint to get my people back to work.” It may not be with WeWork as the landlord, but the landlord takes it back and does it. In the weaker buildings it’s different.

So, I think, it's actually more space - got to be, got to be. And I had been writing for years that the cognitive output of that kind of space was very low based on the cognitive literature. We can't text and drive at the same time, we don't deal well with interruptions, and I had been writing about that and I thought eventually people would get it, the health is going to get it not the cognitive part. So, I'm not so dour on office, the hardest thing office has to deal with in the near term is vertical transmission. Even in a two-story, three-story suburban building, most people aren't going to walk the stairs, right, they just aren’t. So, you've got the vertical transmission issue is just going to have to be worked around, it's just going to have to be worked around, unless everyone gets in and faces the wall. I don't know.

WW: I will say to that, one of the things, we have a COVID Task Force at Walker & Dunlop and as you can imagine we've chewed through every single issue you can possibly chew through and one of the frustrating things about all this is that nobody has experienced this before.

So, if I pulled you into a discussion and we were talking about the great financial crisis, you'd have great insight into what you saw in the great financial crisis, how people dealt with it, well, long, etcetera - you'd be a leader in that room.

On this one there is no leader in the room. There's no one who can say, hey, I’ve got all the experience on how you deal with this thing. So, my taskforce and I have been dealing with this and the issue with it is there are twelve different opinions on every single issue and there's nobody who can say well I know exactly what the answer to that is. I will say, and all these people are wrestling with these very real issues, we sat around yesterday for, I don't know, twenty minutes, thirty minutes talking about exactly that point that you just raised here – elevators.

Well I came into our office building today and guess what, Seabee has already taken care of it for me, or the owners of this building have already taken care of it. You got a line that you get into, you've only got four people who get into a car, you’ve got tape on the floor of where you're supposed to stand, and everyone's got to wear a face mask. And that's the rules and regulations of this building. And, so, we were sitting there saying we need to set a Walker & Dunlop code on a national basis and the building management has taken care of that for us, if you will.

PL: That’s the million solutions for a million situations as opposed to a government saying here's what it's going to be. And, by the way, my guess is they're going to start with four per elevator, and then they're going to find out that that's perfectly healthy and they're going to do the six, as long as everybody has a certain quality mask, right, and then they're going to do nine, as long as they have a certain quality mask, and maybe you're checking their temperature in the lobby, I don't know. That's the million solutions I'm talking about.

WW: Big time. So, we have limited time and I want to get your thoughts on a couple quick things. The first is, there are, you may not find a lot of opportunity in multifamily, in industrial and in office because those three asset classes probably will hold up quite well. There is bound to be opportunity in retail and hospitality and so I have a question not so much on how bad it gets but when should people think about jumping in? You did the work out of Rockefeller Center back in the early 1990s, you watched the GFC where we watched Bear Stearns fail, a lot of people thought that the economy was actually okay in the summer of 2008 only to watch Lehman Brothers fail and the economy fall off a cliff. I think I've heard you say before, you know wait till the blood starts to dry a little bit. When should people start looking for opportunities?

PL: Unless you're playing with “mad” money - that is, I can invest it, if I lose it, that's fine. So, I'm not talking to that. And by the way, we know people like that, right, that they're going to take a certain amount of their money and it is “mad” money and there’s nothing wrong with that so I'm talking about not “mad” money.

I was reminded, I don't know if you know who it was, don't ask why. I was watching the Baseball Hall of Fame induction video on YouTube of Bob Uecker. Bob Uecker was a terrible, he was a Major Leaguer, but a terrible player, he was a catcher. But he was a fabulous announcer for like 44 years, still alive, and a very funny man. And I encourage you, if you're a baseball fan, to go to YouTube and watch his Hall of Fame induction. Anyway, it's appropriate to what you're asking. He says, you know, I caught Phil Niekro, probably the greatest knuckleballer in the world, and I heard all these catchers say how difficult it was to catch a knuckleball and I didn't find it hard at all, I just waited until it stopped rolling, and it was no problem at all to pick it up from there. That's kind of, for most of us catching a knuckleball is too hard, right, just too hard for most of us. Unless you want to try to do it for fun, you want to see, could I do it if the pros can't do it. I think most people, and most people I know are looking and looking and looking but they're kind of waiting for the ball to stop rolling and, by the way, if they miss the greatest opportunity of all time, that's fine.

WW: So, what - yeah.

PL: And if I got it when it's 25-35 percent back, that's all right, you know, that's okay. So, I think most people are going to pause. Retails going to be particularly hard because it's a hard sector, it's a real operating sector. Hotel, the same way, it's a real operating asset. And so those are going to take not just buying the asset but the operational.

I learned real estate from many people, but Al Taubman most of all, and I remember in 1990 - I was young - and Al said, I asked him about apartments being bought cheaply and you could lower the rent, make money, and then Al pointed out the problem with retail is even if you buy it for essentially nothing it might not be cheap enough because you cannot lower your rent enough to change the price of Cheerios. That was literally his comment. And if you can't change the price of Cheerios, you cannot affect consumer patterns. Whereas if I buy an apartment building cheaply enough, I can lower rents enough to attract customers, and that's what makes retail harder. And I think hotel is the same way. I could have the best corner, and the best physical design, but if it is badly operated people aren't going to come. So those two sectors are always difficult and given this situation they're really for the pros. You know there'll be some money flowing to it trying to side with the pros.

And I'll give you one other, back to multifamily. I do think there'll be opportunities, not just in multifamily. If I said what is the big opportunity going forward the next couple of years, it is really low interest rates have made prepayment penalties, you just can't do it, you can't sell your building. You could take the penalty of a lower interest rate but the way the penalty is calculated usually by discounting a treasury and so forth, the penalty part, the true penalty, you can't do it. And I think where the opportunity is going to be is, I'll assume your debt. So, I'll discount you to the extent the interest rates too high but not for the penalty part. And if you're open to that, and you can figure out that math, and you can work that margin effectively, I think there's opportunity, not just in multi, but certainly in multi and others. Because, as you know, probably the typical buyer you deal with for the last what, 10 years, wants it free and clear. Free and clear, there isn't going to be much because all they have to do is say even if you pay me a great price at that prepayment penalty I may as well hold it. And so, I think that creativity comes back, if you will, and it becomes essential and that means, gee, do you put an add-on piece or, you know all that kind of stuff for opportunity.

WW: So, final thing because we've run out of time and I could keep going with this for much, much longer, but we are faced with these government stimulus packages and bailouts and we've done you know two trillion in the last one and then they added on to that, they've done the PPE. These numbers keep adding up and keep adding up and you hear a lot of members of Congress say, you know, we're putting on too much debt and we can't afford it and we've got to be thinking about the future of the United States. Talk for a moment about just the cost of this or the relatively small cost as it relates to flooding the system with not only aid right now to get through this but relative to the $4 trillion dollar budget that we have, what issuing $6 trillion of debt will actually cost us.

PL: Okay so I have to give you my own bias so people can discount appropriately, just like when I say I usually think the Democrats and Republicans are both generally wrong. My bias is it's never been about a deficit or a surplus it's are we getting our money's worth? And if we're getting our money's worth for what the government is doing, then we should do it. And if we aren't getting our money, we shouldn't be doing it whether we have a surplus or a deficit. Now with that said, I'd say Willy - you're kind of a half a generation younger than me, a generation younger than me - if you could have reached back in time and ameliorated the suffering of your great grandparents and grandparents during the Depression, wouldn’t you have loved to have given them some money?

WW: Yep.

LL: The answer’s, of course, all of us would have. You read about during the Great Depression how awful it was and you say we would happily have given them money backwards in time if we could to have ameliorated that pain.

We can today. Our grandchildren, our children and grandchildren and great grandchildren, can do that today by allowing us to float debt that is paid by a future generation who's going to inherit money from us, by the way, to partly pay it, to ameliorate the pain today. And to me that’s, we're getting our money's worth. We're not going to get every penny worth, some is going to be wasted, some is going to be defrauded by the mob, you know, but by and large to ameliorate the pain and suffering of a generation - 25 to 30 percent unemployment - to ameliorate that, I believe my grandchildren, who aren't yet born, would be willing to take on some burden.

When you say what's the burden look like? We started this with about $17 trillion in federal government debt on a $21 trillion economy, roughly, I'm just rounding. Even if we add $8 trillion to ameliorate the pain and suffering – and by the way, not $8 trillion to build a bridge from nowhere to nowhere - to alleviate the pain and suffering. If we do $8 trillion, the 30-year government bond is below 1.5 percent. We can carry $8 trillion additional debt for less than $120 billion a year. On a $21 trillion economy that 30 years from now will be a $32 trillion economy and, by the way, on a government budget that's $4 trillion. $160 billion on a $4 trillion budget is rounding error, absolute rounding error. So, we're in a moment in history where we can do this. By the way, Zimbabwe can't do that, Kenya can't do that. It is the reward for our historic virtue, if you will, and we should use that. We shouldn't use it for any government spending, we should use it for government spending that maintains social order, that maintains a standard of dignity, and a standard of living, and that helps eliminate this threat of death.

And it's easily covered, you don't even have to do taxes to speak of to do it. You know if all we needed was $160 billion more in taxes, that's trivial when the time comes, that's nothing. Or, if all you have to do is cut $160 billion out of the otherwise budget, that's trivial to do. So, I'm generally opposed to deficits because I don't think we get our money's worth. This is a generational moment where we do and I think if our unborn grandchildren could vote about it, they'd say, sure.

WW: So, on that and thinking about unborn grandkids and thinking about bright days ahead for all of us, I will thank Peter for joining me today. I hope everybody on the line found this discussion between the two of us to be hopefully insightful and give you some thoughts as it relates to where we're living today. Peter, thank you again and to everybody on the line have a great day and we'll see you again next week. Thanks. Thanks, Peter!

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