Are we getting our money’s worth? Discussion with Dr. Peter Linneman


In the latest Walker Webcast, guest Dr. Peter Linneman is welcomed on as a leading economist and former Wharton Professor.

Willy kicks off this episode on a different note than normal—he takes a dive into looking at culture and character. Listen to their discussion about the examples of sports teams that proved the need for character over skill when the times got tough. Likewise, learn how difficult times can reveal the differences between good, bad, and great institutions, based on the character, culture, and investments they make. Taking a look at Peter’s recent Linneman Letter, Willy asks Peter to share his thoughts on what we should be doing as the pandemic subsides and the economy rises. Find out more about the responsibility that vaccinated people have to start reliving normal life as they enter back into the world.

Shifting the conversation to the practicalities of what engaging with the economy looks like moving forward, Willy inquires about Peter’s opinion regarding investments. Peter talks about the reopening of investments, a “butterfly recovery”, and the uncertainty that calls for caution before discussing his perspective on the debt relief packages, economy acquisitions, and what the government is doing. Peter holds that the government debt is more manageable than it appears, but we must ask the question—“Are we getting our money’s worth?”. He touches on what he calls the “wildly mistargeted government spending” concerning the upcoming bill and how aid needs to be specifically targeted in order to serve in providing true relief. They discuss the BLS numbers, data, and unemployment realities. Take a look at the peak pre-COVID quarters in comparison to where the year ended in 2020.

Continuing the discussion, Willy addresses chairman Powell’s recent interview and Peter’s outlook on when the rebound will occur and society will switch from survival mode, to growing and taking risks. The talk through numerous questions, including: What was the greatest transfer of wealth from the government in relation to tax and interest payments? What are people doing with the excess money they received? Peter leaves us to consider what we ought to be most careful of—themselves. While there are 5 “Canaries” Peter emphasizes, he says the greatest enemy is ourselves.

The episode draws to a close as Willy takes a look at Peter’s perspective regarding projections for the markets. Listen as to why Peter holds a more tempered projection in regards to the single family market and housing stats. They chat about the strongest and weakest multi market projections for 2022, along with the office markets—all based on supply and demand. Don’t miss their final thoughts on hospitality, retail, and carbon emissions.


Check out the Linneman Letters
Connect with Peter on LinkedIn
Learn more about Willy
Connect with Willy on LinkedIn

Key Ideas:

0:49 Peter welcomed on
3:47 Linneman letter
6:32 Discussion on investments
8:11 Debt relief packages, economy acquisitions, what the government is doing
10:51 Government spending and relief
16:31 Peak pre-COVID quarters and ending 2020
20:12 Chairman Powell’s interview
21:50 Short term rates and inflation
30:30 Yield and personal interest income
35:35 What are people going to do with the excess money?
38:30 What we should be careful of
41:31 Projection on single family market and housing
45:14 Strongest and weakest multi markets by end of 2022
47:09 Office markets, hospitality, and retail
44:49 Carbon emissions
58:24 Thank you to Peter

Webcast Transcript

Willy Walker: Thank you Susan, and good morning everyone to another Walker Webcast. This is my fifth discussion with renowned professor, investor, and researcher, Peter Linneman and given the huge number of people who have registered to listen to this webcast live I'm not the only one who wants to hear Peter’s outlook.

I want to start today's webcast not talking about the economy, COVID, interest rates, or any of the topics I usually touch on to start the webcast I want to briefly touch on culture and character. I'm assuming a good number of listeners watched the Final Four and saw Gonzaga make it to the finals only to lose to an incredibly talented Baylor basketball team. But throughout the tournament Gonzaga’s team showed why they were undefeated during the regular season and what playing like a team was all about. Yes, Gonzaga has some amazing individual players but the way they played as a team passing the ball, spreading the scoring was exemplary of the program Mark Few has built and the team culture he has instilled in all the players who pass up scholarships from Kentucky and Duke to play for Gonzaga in Spokane, Washington.

Then this past Saturday night the UMass Minutemen Hockey team won the NCAA Division I hockey championship. Throughout the championship game, the ESPN broadcasters kept talking about the culture and teamwork of UMass. And after the game, the assistant Captain Bobby Trivigno was asked to explain the UMass culture and responded: “it's pretty simple Coach Carvel places more value on character than skill.” Now UMass just won the national championship five to nothing, and it was pretty apparent, they were the most skilled team in college hockey. Yet on Thursday night in the national semifinals UMass beat defending national champion Minnesota Duluth three to two in overtime without their leading scorer, without their starting goalie, and without two other players due to COVID protocols; skill may have allowed UMass to win the championship game on Saturday, but to get there and beat Minnesota Duluth without four-star players, they needed character and teamwork over skill. The basketball program at Gonzaga that Mark Few has built and the hockey program at UMass that Greg Carvel has built are exemplary, not only for their success, but for their teamwork, character, and culture that define them.

As we head out of the pandemic and get back to a more normal life, I would suggest that people reflect back upon the character and culture of the people and institutions they dealt with during the pandemic. When times are good, the difference between good institutions and great institutions is hard to define and see. But when times are tough and the outlook is less certain the actions that people and institutions take are telling of their character and culture, and those people who stood up, those institutions that invested in their people are the ones that will win over the long term.

Okay Peter another terrific quarterly letter to any of you who don't already subscribe to The Linneman Letter you can go to and sign up. So, you start this letter with a quote from Teddy Roosevelt saying, “In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” So as the pandemic subsides, the economy starts to crank up, and markets continue to reach all-time highs what should we be doing?

Dr. Peter Linneman: So, thank you for having me back Willy and your comments about culture -- my backdrop today is a block from where I live, it's Independence Hall, which was the culture of establishing the country and so forth, so it's very fitting.

What should we be doing? I think different answer for different people. If you've been fully vaccinated you, which I have been fortunately, I think we have a responsibility to start reliving life. I mean that when I say a responsibility to the economy, responsibility to our citizens. I’m not saying be crazy but it's time for us to be fully productive. It's time for us to, with care about others, get back to work. I know most of us have been at work, but to get back to work, get back engaged and so forth.

If you have not been vaccinated yet it's I think the right thing is don't die in the last days of the war, right. We talked about that a little three months ago Willy which is don't die in the last days of the war. As you well know, the vaccination rate is roughly three million a day it doesn't take a genius to do the mathematics that says in 60 days basically all people who are over 80 days, all people over the age of 12, will be vaccinated if they so desire. And for those people don't die in the last days of the war. I’m not saying hide in a bunker but be especially careful. And I think that's a responsibility, also society as well as your friends and family. If you've made it this long, make it another few days. That's what I think is the right thing to do is for those of us who can to realize it's time to reenter the real world, which is a little strange. And for those who have not be careful on behalf of everybody who loves you and society as a whole.

Willy Walker: So, we're going to get into specific asset classes and value and all the things that you have in it, but as it relates to investing right now -- there's this big play of the reopening investment. Today I saw that JetBlue was upgraded to a strong buy. A lot of people are sitting there saying wow and we'll talk about in a second all the data says that we're about to come into some really, really good numbers. So, I guess from an investment standpoint is this an all-in time, or is this a hey be careful because we could have some stops and starts this isn't just straight up from the bottom left to the upper right?

Dr. Peter Linneman: Well, as you’ll recall I dubbed this starting back in September a butterfly recovery. You know, there was a big drop and then a pretty big hop up and then it's butterflied around since. And for those who don't know what I mean by butterfly think about how a butterfly moves. A little forward, sideways, back, forth. And we have had a butterfly exercise, and I think we've got a couple of more months of butterfly for the reasons I was just alluding to. Not everybody is vaccinated, not everybody should be fully back, not everybody should be out. And so, I think the next couple of months there's still a lot of uncertainty, there's still a lot. I don't think it's an all-in. And uncertainly includes what happens to variance, and how long does the vaccine last, and a lot of the signs are really good, but I don't think it's an all-in. I think it’s an in, but I don't think it's an all-in, Willy. And that I would say that almost across the board.

Willy Walker: Okay, so let's talk about I want to go to debt relief packages, liquidity in the economy, and what the Federal Government is doing right now. You, you talk about the fact that the Federal debt at $20 trillion and comparing that to $116 trillion of household wealth and $20 trillion of GDP and you say the federal debt is more manageable than it may appear. When does that number get to something that starts to concern you?

Dr. Peter Linneman: We're nowhere near a number that concerns me on debt, and you said it $21 ish trillion in federal debt, $116 trillion dollars in household wealth. Come on, we can afford that. I’m not saying we want to, but we can, and you can do one to one GDP. Come on, think of a building where you could pay off all your debt with one year of income if you wanted to. I mean that's pretty stunning. Or think of the present value version we've talked about. I’ve never viewed the issue it's not about the debt. It's about, are we getting our money's worth, Willy. That debt reflects spending, and that debt reflects taxation policies or money collection policies. The question is always are we getting our money's worth and, by the way, if you think of a private business, Willy if somebody comes to you and says, I want to buy a borrow to buy an apartment building, the question is, are they getting their money's worth right. If they're going to pay a trillion dollars for a six-unit apartment building with $1,000 NOI they're not getting their money's worth. That's the issue. And so, the issue is always with state, local, federal, and even private are you getting your money's worth? And the historic problem I think, is by and large we don't get our money's worth from government spending. If we did sign me up right sign me up. But we know we have waste, fraud, and abuse and we have bridges from nowhere to nowhere, and in my district and so on. On the other hand, CARES I wasn't perfect, but we got our money's worth. We got our money's worth. Less so with CARES II, really less so with CARES III, probably really less so with Jobs. That doesn't mean somebody's not going to get their money's worth. But I say we, I mean society as a whole.

Willy Walker: So, you say on that, but we can't afford $1 trillion of per you wildly, mistargeted government spending. So, for a moment, talk about why this next bill is wildly mistargeted government spending.

Dr. Peter Linneman: Well, I’m not saying all of it has been mistargeted. I’m not saying this is what happened. Willy, if I told you we spent $2 trillion and it was all to pay bribes, that would be mistargeted, right? That would not help society. Or if we spent $2 trillion, and it was all to buy heroin for people, that would not be productive. Now obviously, that's not what we're doing; I’m just showing what I mean by that. We still have probably 10% - 15% of our economy. Whether that is businesses, or individual workers, or people who want to be workers who are still struggling. Now the good news is most of us aren’t struggling. But we still have 10% - 15% who are in a generational struggle, as it relates to COVID. Whether it's a medical struggle or a job struggle because of where they happen to work. Those workers at restaurants, it's not their fault governments decided in the sake of health and welfare to shut down their jobs, right? That's not their fault. Those people need targeted aid. They deserve targeted aid. Much as after a hurricane. If a hurricane hits, those citizens need and deserve targeted aid to them. If a hurricane were to hit New Orleans, we don't give money to everybody in the country, we give relief to the people affected in New Orleans. And what has happened as we went from CARES I, as we've gotten to CARES III, and now as we talk about jobs, the program jobs, we're not targeting nearly so much, we're giving “to everyone.” And my comment by the way, I have nothing against somebody at Microsoft who's making $70,000. Good for them. They have a nice job with a great company. They did not need that last money that just was given to them. In no way. There was somebody on the other hand, who was working at a tourist hotel in New York that needs ten times that amount. That’s what I meant.

Willy Walker: So, talk about that for a second on unemployment. So, the BLS [Bureau of Labor Statistics] number is now down to 6.2%. Your estimation is that that's shy by about 400 basis points, or 6.6 million jobs, is the number that you that you talk about. Why are those 6.6 million people not appearing on the BLS numbers?

Dr. Peter Linneman: Okay so first of all, everything I’m about to say, the BLS fully understands, fully knows…they're not trying to deceive anybody. Their job is to collect data in a consistent way, right? That's the first thing. You can do some simple, real simple math and you'll see where I get where I do. And I’ll explain it. We are eight million…we had a 3.5% unemployment rate February 2020: 3.5%. We are 8 million jobs lower than the number of jobs we had in February 2020, okay? And on top of that, over that year, we would have added about two million more jobs. So, we're down about 10 million, just roughly, I’m being very round. You're right, you can get it as low as about six and a half, depending on how you play with stuff. If you're 10 million jobs short, and you just do the math, that says the unemployment rate is around 10/10.5 % apples-to-apples.

Another way, Willy, is that you had about five million people getting unemployment benefits February of 2020. You have 18 million getting unemployment benefits today. That is to say, they walked into the office well, they haven’t walked, they’ve virtualed into the office and said, I’m unemployed and I deserve. And we have 18 million. Well, do the math on 18 million, and you come up to around 12% unemployment. And there's a couple of other ways you can triangulate. They're all, as you say, 400 basis points higher. Some of them relate to how unemployment is measured. That's the main one in the survey the BLS does. They ask people: Are you employed? And some people are saying, Yes, but they're furloughed. Right? And they should be saying, No, but they don't -- who cares the difference between furloughed or not? I’m getting my…So there's a whole bunch of technical reasons, but if you compare to where we were February 2020, we're somewhere minimum, probably 6.5; maximum, probably 13 million more not working. That's the math. And when I say that go back to what I was just saying before that, Willy what, 10% of the economy/something is really still hurting? That's what I’m talking about, right? That differential. That extra number of people and their employers.

Willy Walker: So, with that as the backdrop and there are a ton of people who are still unemployed you go through and look at peak, pre-COVID quarters across all sorts of different metrics and then you go to where we ended the year in Q4, and I just want to run through a couple of these because the statistics are fascinating. This is from the very best quarter pre-COVID to Q4 2020: Home prices up 10.8%. Retail sales up 7.4%. Single-family starts flat at $1 million. Real median multi rents up 17%, while vacancy is up 30% to 8%. And it's the same for office: real rents per square foot are actually up 4.6% while vacancy is up 15%. Those numbers don't seem to make sense to me. Just the retail sales went up 7.4% we can get. A lot of people at home are still buying stuff, retail sales are going well. But when you look at things like office rents up 4.6%, and real multi rents up 17% while vacancies have gone up, help us understand those numbers.

Dr. Peter Linneman: So, what's happening I think on multi and office I know what's happening, but the data is not fine enough to resolve it is concessions, right? Concessions. And there aren't, especially in office, there aren't a lot of transactions, right? There aren't a lot of leases. So, it's a little misleading. What's happening in office I think is you're not seeing net effective; but more to the point, you're not getting many leases. And what is leasing tends to be better space, right? Tends to be the really better space, so that skews. The equivalent, Willy, is we have in there that the average hourly compensation in the U.S. went up dramatically as we shut down the economy. How could that happen? Well, the way it happened was low-wage workers, right? Low-wage workers got let go. Recalculate the average. Nobody’s being paid more, but the average goes up, right? That's what was happening. And since we started to recover, the average wage has come down. Why? Same thing, right? Which is now the lower wages come in, they pulled the average down. Some of that is also going on with the office rent. Multifamily, I think again the data as you know better than anybody probably; you see it in your underwriting, concessions have grown, but they aren't well-measured by any of the data. Now as they are well-measured when you underwrite a particular property, but they're not well measured in the data. So, I think that's what's going on there. As to what's going on in the other stuff… look, 85% of the people are doing pretty well, right? They're doing pretty well. And even because of the aid that was given, not perfectly, to those that were hurt, they're not doing awful. This is not like you know…I have the program in Kenya. And I spent my morning talking to people in Kenya. When they lose jobs there's nobody sending them money. There's nobody giving them unemployment. It’s grim, right? And we did a pretty good job of keeping people alive. We could have done better, but you know, we did a pretty good job. So, I think that's what's going on in some of the others.

Willy Walker: So, I don't know whether you saw Fed Chair Powell on 60 minutes on Sunday night, Peter, but his… couple things that I jotted down as I listened to his interview. The first was strong growth and strong employment starting right now. Your outlook on that is a little bit more tempered, as it relates to when this thing starts to spring. I think, from my recollection is you said September’s when we're really going to start to see this thing launch…

Dr. Peter Linneman: …Yeah, I mean it's not going to be a light switch. It's going to be more of a dimmer, and I think Chairman Powell is certainly right; it is starting. There's no doubt it is starting. You're an employer. I’m an employer. I'm on boards. There is still a caution. And I think most employers are taking the attitude sort of that what we started out with, Willy which is I don't want any of my people to die in the last day of the war, right? And so, there's still caution. But I think by the time we get well into July, and certainly after Labor Day, absent some unforeseen, it will be really picking up. And employers are going to be saying, Okay, we're going to grow. Now we are going to switch from survival mode. Which let's face it, a lot of companies have just been in “survive and tread water.” There's going to be a switch in mindset to grow. And grow and grow. And I think there's going to be a desire to grow and take that risk. And I don't think that fully kicks in, maybe late July or August, but certainly after Labor Day.

Willy Walker: And so, the Fed has, and this will lead to a question on rates, because I want to know how long you think there'll be low. How low and for how long? But the Fed has clearly stated two things have to happen for them to think about raising the short-term rate, the Fed Funds rate. First, unemployment has to come down and you need to get back to full employment and Chairman Powell said that’s somewhere between 4% and 5%. If you use the 6.2 number that the BLS is saying you might sit there and say we might not be that far away from that. If you use your “more like 10% to 11%” we got a long way to go to get to something that would check that box for the Fed.

The second one is for inflation to start to run on us. And one of the things I thought was interesting that Powell said in the interview was he said, Look, we have such great data today. The Fed used to be preoccupied with missing the markers and then letting rates run, and then you can't kind of get in front of them. And so, they would always take sort of proactive steps to make sure that inflation didn't start to run. He seemed to indicate on Sunday night that he has great data and that they can actually watch inflation, not only touch 2% but be at 2% for a period of time, and not do anything about it. And you state in The Letter, several times, “Rates are going to be low for a long time.” What does that mean? How low and for how long?

Dr. Peter Linneman: Okay. So, just as a reminder, go back and look how long short rates stayed at essentially zero. The Fed Funds rates stayed essentially at zero. And the answer is essentially I think I’m doing from memory last Quarter of 2008. It was well into 2017 or 2018 until it went anywhere, right? And as you and I know, the economy had come a long way from the 4th Quarter of 2008 to let's say 2017, when they started raising the short rate. I think that shows their mindset. And I don't think that mindset is any different under the current Fed than under its predecessor. So, I look for it to stay low for 2 to 3, 4 to 5 years, 6 years. Even if there is a robust recovery, okay? And I think partly because they're going to be implicitly paying more attention to the unemployment rate I’m describing, than the mechanical unemployment rate. That's what they did the last time. Now as to inflation, I think it's the great misunderstood phenomena of the last 12 or 13 years. The narrative is there has been no inflation to speak of over the last 12-13 years. Consumer prices, you know, 2% a year. Let's just say more or less. Some items more, some items less, but CPI 1.6% to 2.2%. And all that money of QE1/QE2/QE3 went in the system. Tons of it came out from 2014 to the end of 2019. No inflation. That is absolutely wrong! There was enormous inflation over that period. Inflation, if you look it up in a textbook, is the on-average movement of prices in the economy. It doesn't say “consumer prices”. Of prices. So, Willy, if I did a quiz, consumer prices didn't go up much over that period, but what did go up a lot in price as that money came out?

Willy Walker: Stock prices, assets.

Dr. Peter Linneman: Real Estate, home prices, stock market, private corporation values, I mean, we go across the board! Assets! Assets! And the reason and it took me a while to come to understand this, the banking system of the 1970s, which is when they put a lot of money in, and it came out because the banking system was very fragmented, very fragmented! Unrecognizably fragmented compared to today, compared to the last decade, and they made one thousand dollars, two thousand dollars, and ten thousand dollar loans to little America. So, the price of bread went up because that's what America bought with the money they were given. What we saw, particularly from 2014 to the start of 2020, was the money that was given to the banks came out to people who bought assets, and they went out and bought assets from people who owned assets, and the people who sold took that money and went bought other assets. They didn't buy Wonder Bread, they bought the company Wonder Bread, right? They didn't buy bottles of Coca-Cola, they bought Coca-Cola the company. And I think we had enormous inflation, when you look at it, it just was focus and asset prices because that's who got the money, and I think we're set up for the same thing going forward. The money they put in with QE Infinity is going to sit in the banks, at the Fed more particularly, for another year or two, and when it comes out it's going to go to asset buyers much more than goods and service buyers.

Willy Walker: And does that systemic change that you just outlined set us up for more crises like the asset inflation or the asset bubble and single-family housing in the mid-2000s? In the sense that if it used to be the concern was that the cost of bread was going up, the Fed felt like they had to temper that and make sure that they're watching everything from M1 out to everything else, and now all of a sudden, you have asset values that can get inflated but if that's institutional capital that's going into those asset values that goes in quickly, it can also come out just as quickly. Have we put more, if you will, beta into the economy because of where money is going?

Dr. Peter Linneman: We put more beta into the short term of asset values and the reason is the fear and greed factor, right, of the asset. Yes, there's the fundamentals of cash flows and future, but on top of that is the fear and greed. And we have probably accentuated the exposure to fear and greed by pumping more money into it, right? So that when you're greedy, you're really greedy because you have so much more money. But when you're fearful, you're really fearful and you pull it out, okay? On the other hand, I’m reminded of my, as you're talking, and I’ve had this conversation with my grandmother Linneman. My grandmother Linneman was an immigrant from Germany, and I was a Milton Friedman Ph.D. student in the 1970s, and my grandmother was a real person. She kept saying to me, “Peter, how can the price of a loaf of bread keep going up? Surely it will come back down.” and I said “Grandma, it’s not going to come back down as long as all that money is in the system and they're not going to take the money out that they put in. They may slow down how they increase, but they're not going to take it out.” And she’d say, “But surely the price of a loaf of bread has to come back down!” I said, “Grandma, it might go up and down because of a sale or a shortage of wheat or something, but it's not going to fundamentally.” That's the same thing, Grandma Linneman, right Willy? Talking to you, the price of $1 of operating income has been fundamentally changed by QE1, QE2, QE3, QE infinity. Fundamentally changed. We put money in, and unless they were to take that money out of the system, there's been a fundamental reset on values. Now, to your point those values can go higher or lower in a temporary sense, that's the fear and greed, in particular. But fundamentally there's just too much money there, and when the fear burns off it goes right back to where it was, and there's so much more money than ever before, so it's done.

Well, just, the last point is, is my grandmother worried about the price of a loaf of bread going up. We're in a world where the price of a loaf of bread doesn't go up, but the price of $1 of operating income fundamentally went up and it's not going to go back down. Again, with QE infinity, though it can bounce up and down but not fundamentally.

Willy Walker: So, let's talk for a moment about the amount of money in the system, and what that means, as it relates to yields and being in a yield starved world and why that then seems to be driving more and more capital into commercial real estate. So, in The Letter you talk about the fact that personal interest income, so interest off of corporate bonds, off of government debt, was at $1.6 trillion in January of 2021, and that is down over $1,000 per household in America from 2007. I want people to hear this! So, $1.6 trillion of interest payments were made in the month of January to Americans, and that was $1,000 per household lower than it was in 2007 even though there is $17 trillion more of corporate debt and government debt outstanding today than there was in 2007. You go on to make the point that annual dividends were at $1.2 trillion last year, down 5.7% year over year between ‘19 to ‘20 because corporations are holding on a dividend income.

So, you sit there, and you say, “Okay, we've got a dramatic fall off and interest income off of bonds, and we've got a dramatic step down in dividend-bearing securities, and so there's no cash flow. There's no cash flow whatsoever to all these people who, particularly retirees, which is where all the money is today, who aren't making that monthly recurring revenue off of being invested in bonds or dividend-paying stocks. As I sit around and talk to clients of Walker & Dunlop who say, “I can't believe that I...” I mean, just yesterday was in Salt Lake City talking to one of our clients who said that an asset in Albuquerque, New Mexico, a multi-asset, just traded at a 3/9 CAP rate, and they sat there, and they roll their eyes at a 3/9 CAP rate in that roaring metropolis. Nothing against Albuquerque, New Mexico, but that warm metropolis of Albuquerque, New Mexico. And I said, “The issue with it is, is that Linneman talks about a) spread between CAP rates in commercial real estate and interest rates, and then second of all, having no yield off of bonds or off of dividend-paying stocks, and everyone says that 3/9 on a multi-asset in Albuquerque looks pretty good! Can you expand on that?

Dr. Peter Linneman: No, you hit it! I mean, first on the interest payments, probably the greatest transfer of wealth, without ever being legislated by Congress occurred over that time period you were describing Willy, right? Congress never voted about or debated, should they take money away from people who were safe savers, right? And give it to borrowers and equity investors, right? Asset buyers - no debate! I don't know if it would pass Congress or not, but there was never a debate, never a bill, and yet without that, the government through the Fed, made enormous wealth and income transfers. You hit it!

You know, imagine the person, they have a $400,000-lifetime savings and a 4% interest at $16,000 a year, and then suddenly for a decade, they had zero a year. That is the Federal Government imposing effectively 100% tax on what otherwise would have been their interest income, right, with no legislation. That was a huge huge transfer and I think it's hard of the dissonance that's out there. I don't think people think like the way we do.

As far as chasing yield, if you put enough money in the system it's got to go somewhere. And the people they're giving the money to ultimately don't want to buy bottles of Coca-Cola, and they don't want to buy bread! So, if I jam a whole bunch of money into the system, and people don't want a whole lot more bottles of Coca-Cola, what can it do except chase assets? And chasing assets is exactly what you're describing. Now, do they chase it every day? Nope, they get frightened sometimes, right? And that's the volatility you're talking about, because if they're chasing with a lot more money, and suddenly they get frightened of their own shadow, the drops really big. But then, they come back, and you see it in the stock market, right, you've seen it in asset prices. They've got to chase it! They've got to chase it. If you give them the money, they're going to do something with it.

Willy Walker: So, on that, you also point out... So, let's take this to retail sales because you just talked about, they don't want to buy a bottle of coke. You point out in the letter that deposits in checking and savings accounts at U.S. depositories the standard is $3 trillion! That's the trend over the last 20 or 30 years that you point out, and today it’s $9.1 trillion! $6 trillion more than trend, sitting in checking accounts and savings accounts of the U.S. consumer. So, what is Joe and Mary Consumer going to do with that $9 trillion?

Dr. Peter Linneman: So, no one knows! It's a great question. It's an unanswered question. What do I think they're going to do? I would say, a third, a third, a third. I think probably a third they are actually going to save. The primary way they're going to save is buying a home. There were a lot of people who stalled buying a home. We saw that in the past year as the savings shot up. People put it into the down payment, and not just a minimal down payment, in many cases a fairly large down payment. So, I would include in savings buying a home. It’s not perfect, but I would include that. I think a third is going to be saved, maybe a third at most will be consumed in the sense of “I'm going to take that vacation to Paris! Remember I didn't take my vacation to Paris last year, so, I’m going to take a super vacation when I’m allowed.” You're not allowed in Paris, so I think you're going to see a lot more season tickets, right, more concert tickets, more that type of stuff. Then I think the other is you're going to see it chase mostly passive assets, mostly passive assets. So, all I mean by passive assets is it's more likely to go into Vanguard than it is to private equity. I'm not saying private equity won't get some of it, but it's more likely be relatively passive. They got to do something with it! They're not just going to sit on it forever, right? What's the point? What's the point of sitting on something yielding nothing? And I’m willing to bet if we went through all the, by the way we have 7000 listeners who are going to watch this and on YouTube get to 70,000 or some number? Ask yourself, do you have more cash today than you had a year ago, or two years ago? The answer to almost everybody is yes, a lot! I know I do. And I keep asking myself, “What am I gonna do with it?” So, it's why, when people talk about the roaring 20s that understand the data, you can see why Willy, right?

Willy Walker: So, let’s go on that for a second. I hear roaring 20s and it scares the crap out of me! Sorry, but it does! I mean I hear roaring 20s and I think about mansions in Newport, and then, a crash that comes afterwards. You talk about the reopening and the roaring 20s and people going back to health clubs and that you think that that's a good buy right now, and cinemas, and sort of, if you will, active retail. You put out there, that you know from your visibility, it's got a solid three-year expansion here. I mean, you also just said that rates probably don't move for even a longer period of time, what should we all be careful of? What are the warning signs? For canaries, just one quick thing, for people who read The Letter, Peter has his five canaries like “We've got to be careful about this, this, and this,” and right now, other than a potential rebirth of Covid through the strains, you basically got five canaries on everything, in other words, right now, your VIX. Your volatility index is really low.

Dr. Peter Linneman: Right, so what do we need to be careful of? What was it? Was it Pogo or Peanuts, the cartoon strip that said, “We’ve met the enemy and it's us,” right? I don't remember if it was Pogo or Peanuts, but it was one or the other. We have to be careful of ourselves. We are strange little animals, right? With strange psychoses, and strengths, and we keep replaying them and we get afraid of our own shadow. And then, at other times we're afraid of nothing, and the fact that we're species that at times is afraid of its shadow, and other times is afraid of nothing. When I say nothing, think of the people who charge into combat, you know? And yet, they can also be afraid of their shadow, right? So, you go “If we’re a species that can charge into combat and yet also be afraid of our shadow, you're gonna get volatility, you're gonna get overdone,” and I know that's not a very elegant, mathematical model, but it's kind of true. So, I think we're in a three-year period or four-year period where we're set up for the charging forth and ignoring a lot of the signs of excess that are there. There's going to be money. We've already saved money. There's going to be a growth in jobs. There's going to be growth and productivity, and we'll start believing our own PR. I don't know about you, the most difficult thing I have in my life is controlling me in terms of my own belief of my own bullshit, right? And I think what do we have to be afraid of, not a lot, we obviously have variance and such to be afraid of. We always have to be afraid of politicians, no matter what party they are, no matter what level. Anybody who believes they know better what to do for you, than you do, and they've never met you, should give you pause, right? That should give you pause that someone who's never met you believes they know what's better for you than you do. Systematically! So, of course, we have to worry about that. But we're in a good window and, by the way, it doesn't matter if it's Democrats and it doesn't matter if it’s Republicans, okay? Might be a little better this way or a little better that way. Yes, it will help this sector if it's Democrats, yes, it will help that sector if it's Republicans. It's not that. But you're right, at the back end of it is that we've met the enemy. We know who the enemy is, right? We know who the enemy is! It's us.

Willy Walker: So, as we think about the various asset classes, let's get you to run through from a real estate standpoint. One of the things that I was surprised in your data is that your projections on single-family housing starts and the overall single-family market are what I would call tempered in comparison to what you hear in the general media of this kind of frenzy as it relates to single-family housing. So, talk for a moment about why you think single-family housing cools a little bit as we move out of the pandemic and what we're going to see from starts over the next couple years.

Dr. Peter Linneman: I'll be the first to admit that I was, I think everybody was, but certainly I was completely wrong about what would happen to single-family. I thought it would collapse. With it, I thought the construction costs would collapse, instead, what I did not understand was how powerful the involuntary savings would be in terms of driving down payments and driving the demand for housing. And once you have that demand for housing, then, with some other technical stuff, construction costs instead of plummeting, kind of rose. So, I missed that completely.

Why do I see it temper? We have fundamentally under built single-family housing. We have under built multifamily a bit over the last 15 years. So, there's a catch up in both. But you need a down payment. As savings rates have come down, as people go back to traveling, as people go back to shopping. Remember what involuntary savings did was, I was unwilling to save rather than go on vacation, or rather than go to the ball game, or rather than go to dinner. But when I wasn't allowed to go to dinner or a vacation, I saved it, I had that savings and I put it to work on a down payment. I think, as people are going to be able to do stuff again that's going to deteriorate a bit and so down payments will become a bit more of a constraint. So that's why I'm optimistic, I’m actually kind of bullish but not off the charts bullish on single-family and on multi.

Willy Walker: Go on multi and one of things I want you to go on multi is your projection is that multi vacancy actually moves up through this year and then recovers after this year. Talk about that because I thought that was interesting.

Dr. Peter Linneman: Right, well what's happening there is the pipeline. And you see this Willy and your listeners sector and multifamily, particularly in core urban. There was a big pipeline, not huge but that pipeline started to empty last year and into this year, so that's driving the vacancy up. And at the same time, a number of these people who would have otherwise bought a home in two or three years when they built up more of a down payment, instantly had it and they moved out. So that's what's going on there. There's a transitional moment with the long-term dimensions of multifamily. We have good demographics, not unbelievable demographics, but good demographics from a renter perspective and I like it. I like it as a sector. I like it as, it's going to burn off some excess in the urban cores, but I generally like it. I always kind of like suburban, especially when everybody wanted to be in core central. I like multifamily.

Willy Walker: Let me list your three weakest and strongest multi markets by the end of 2022 and then I want to go and ask you to talk about office for a moment. So, on the strongest multi markets by the end of 2022 you list Orange County, Inland Empire, Detroit, Cleveland, and New York City as the strongest multi markets. So, I just want to point out there, if you will, the blue markets, the markets that have suffered so greatly now, you're putting a lot on them as it relates to strength. As it relates to your weakest multi markets by the end of 2022 you have Orlando, Charleston, Miami, Denver, you can't pick on Denver come on Peter, Chicago and Tampa. What I thought was interesting about that is you've got real weakness in Florida, some markets in Florida that have been complete stars. Just briefly what is it about the Florida market that you don't like on the multi side?

Dr. Peter Linneman: All about supply. If you look at the markets that I liked, it's about supply relative to demand. And they were relatively relative to the demand, not a lot of supply pipeline empty. If you look at the markets I don't like, take Charleston, I love Charleston in the long-term context, absolutely love it from a longer-term context. But it's going to be a rough next year, because there was a lot of product emptied out last year, this year, and the first part of next year. And we always knew it's going to be more supply than demand, so we're just living with it now. So, the Florida markets, there was a lot of supply relative to the demand. It's not that I don't like them in a fundamental way, it's just that they were high supply markets, it's that simple, if you really untangle it.

Willy Walker: So, on the office side there's this big question about when we get back to office, and you talk a lot about office CAP rates and CAP rates kind of reverting back to pre-pandemic levels and sort of the 2024 timeframe. But you point out as far as your weakest office markets, Fairfield county, Houston, Westchester county, Austin, and Dallas. Now it struck me that you've got the three major Texas markets as your weak office markets and it doesn't seem like a day that you pick up the Wall Street Journal and don't see some company that's leaving California and moving to Texas. Why are you bearish on the Texas office market?

Dr. Peter Linneman: So, again same answer. I love the demand side, it's about the supply. So, if demand is going to grow by say 3% but supplies going to grow by 4% you tell me what happens, right. And so, Houston and Dallas have been the poster child of that, probably all of your life. By the way, Dallas and Houston over the last 30-40 years, year after year, basically the strongest demand growth. The problem is they grow the supply at about 1% faster than the demand or a half a percent faster, so they outrun. It is not that I don't like the economies, I really like the economies, it's all about supply, all about supply. Now there are a few markets where it's about demand, but mostly it's all about supply and if the supply out runs demand. If people make a mistake, kind of systemic mistake in real estate, as an investor they focus on demand, rather than demand fundamentals relative to supply fundamentals. And you get a market where demand is always good but supply always out runs, it's going to be weak. So that's all that’s going on Willy.

Willy Walker: So, on that, you also point out that you think there will be no new deliveries, basically of hospitality and retail. That basically those sectors, other than something that was started pre-pandemic, there's going to be no new delivery of retail and hospitality. But you also point out, Peter, which I thought was a fascinating stat that between 2009 and 2019, 64% of retail sales growth in America was through bricks and mortar. And so, while all of us think that Amazon and everybody else has taken over the world, and clearly, online sales have grown at a much, much faster rate than bricks and mortar. But as you look at the aggregate amount of retail sales in America and I think the number was a growth of $1.1 trillion in retail sales between 2009 and 2019 and 64% of it happened through bricks and mortar. So, with no new supply of retail, and you and I have spoken about previously, that we were over retail pre-pandemic and that a lot of, if you will, mediocre retail is now out. What's your outlook for retail and hospitality?

Dr. Peter Linneman: Let me get to the easier one, hospitality will do quite well coming out of the freeing up of us. They'll do quite well first with local travel, then more exotic travel. The U.S. will benefit from U.S. consumers because they won't be able to go abroad, but they'll be hurt by not having a lot of foreign. Now not having a lot of foreign will not affect a lot of markets, but it will hit Orlando, right, and hospitality will hit New York, DC. It will hit Philadelphia less. That's not to say we don't have any foreigners, but not nearly the proportion of those other markets. So, I think hospitality will do well. The challenge in hospitality is, am I paying, and you alluded to it earlier, I'm paying as if it has already recovered when it hasn't. So, there's still a risk that I'm wrong, and as my wife frequently reminds me, I'm wrong a lot and as hard as that is for me to believe, she after 40 almost 48 years continues to remind me of that.

Willy Walker: At 50 you’re right about everything Peter. There’s absolutely nothing you do wrong at 50.

Dr. Peter Linneman: We won’t be able to remember. But here's my view on retail. The thing that happened to brick was they were used to getting all the growth. And by the way, supply kind of came online and all the rules of thumb were “we get all the growth” and then they weren't getting all the growth. They were only getting part of the growth and you're already overbuilt for a lot of reasons and suddenly you were really overbuilt. And not just overbuilt physically, but over retailed with a bunch of weak retailers and that has to get shaken out. Now I think that's changed right now. It's hard to get money for bricks and maybe if you have Publix or somebody like that you can do something. So, here's my analysis of retail. Online sales as best we can measure it, which is not perfect, was rising about 125 basis points a year as a share of all non-auto related retail. So, the pie is, all non-auto retail and it had gotten to 15% in 2000, I’m rounding, you had gotten to 15% in 2019. That says, by the end of 2020 the trend was to be about 16.25% and, by the way, you’ve seen those charts Willy and they're pretty straight trends right, they're pretty straight. So, by the end of 2020 it was supposed to be 16 and a quarter, it ended up at 18% of all sales. That is to say, yes, 18% of all sales is a lot different than 16 and a quarter, but I played basketball reasonably competitively until I was 53 and I averaged about eight points a game, I'm rounding a little bit, I averaged eight points a game. If I told you, I then played a season where my defenders had their hands literally tied behind their back and my scoring average went from eight points a game to nine points a game. And I said, are you impressed? I don't think you'd be impressed. It's true, I scored more but it's not an impression because their hands were tied behind their back. And by the way if I further asked you what happens when I untie their hands? You’d say, you're going to go back to scoring eight points a game. What happened with online sales is the competition, bricks literally have their hands tied behind their backs. As you know, whole malls were literally shuttered, whole retail is literally shuttered.

Willy Walker: And it still only got to 18.

Dr. Peter Linneman: And they can still only get it up to 18%, give me a break! So, by the way, the last two months as best we can tell guess what's happening to the share of online sales? It’s going down. It's not going to go down to zero, it’s going to go down to around trend line. I don’t know why people are so impressed, that is all I'm saying.

Willy Walker: Yeah, I know, it's going to see it's day again. So, on that and we've only got a couple minutes, so we have to be brief here. But on that, looking at the pandemic and what the pandemic did to retail sales is super, super helpful to understanding exactly those percentages you just talked about. You also talk about carbon emissions and what happened in the pandemic and where we have to get to for the Paris Accords and the numbers here are eye popping Peter. They’re eye popping! Because when the economy was shutdown, we still didn't even get a fraction of the way to what we're supposed to get to by Paris and so, as briefly as you can talk about both on the pandemic and then also how unrealistic getting to the levels established in the Paris Accord, we are.

Dr. Peter Linneman: Look, everybody with a brain appropriately is concerned about global climate change or whatever you want to call it. But let's be realistic, unless you have it in context, I write about this in the last issue. Context versus other problems in the world and as you know I travel, I have this program in Africa and when I see literally millions of people dying a year from lack of clean water, the rise in temperature over the next hundred years that might affect some lives, you know I don't want to put so many resources. So, to that, when the economy was completely shut down, we only did about 10% of what was necessary by 2030 to get to the Paris Accord.

Willy Walker: Repeat that again, in April of last year when all of us sat outside and looked up in the sky and there was not a single airplane flying, we got 10% to what the Paris Accord is asking us?

Dr. Peter Linneman: We got 10% to what the Paris Accord would require. Which is to say, we would have to do it again and not just do it again, we'd have to have that same drop again and again. So, in that sense it sounds good in a classroom, it sounds good in a speech, but it's not realistic. What I suspect ultimately will resolve the challenge of climate is over the next 10 or 20 or 30 or 40 years, technological advance. And do I know what that will be, of course I don't, but that's what I believe will be. And in fact, I know it’s a little self-serving, but the reason I care so much, and a lot of people say, “well why do you care about those people dying of water borne pathogens and countries I’ve never been to, would never go to”, or you know whatever. It's because they are smart too and for all I know one of those kids who just died while we've been doing this session, might have been the kid that if they lived 40 years from now, would have figured out how to solve some important part of the emissions, we need those resources. And by focusing so crazily on the current situation while other bigger human tragedies are happening, that are robbing us of human capital in a very real and immediate sense. Yes, I don't want people to die, but I also don't want them to die for the reason of their productive pieces of society. And for people to say, “oh well they'll never advance” that's what they said about China when I went there in 85 and they said, “oh they’ll never advance” and you go wait a minute. And you come back 35 years later, it's a whole different picture.

Willy Walker: We are at the bottom of the hour, I have about three more pages of notes to get through with you, but we always stop this right on time. So, a couple things, first of all to any of you who don't get The Linneman letter and want to get it and read it, as I said previously and you can sign up for it. Second of all, I have notes and notes and notes that I asked Peter about that are sort of my crib notes on The Linneman report. If anyone would like those notes on this one, I’m perfectly happy to send them around, just write an email to our email address and we'll send you a copy of those. And then the third thing is, Peter, thank you. I love doing this on a quarterly basis, it's super insightful, I look forward to doing it after the next quarter if you'll come back and I hope you have a great day in Philadelphia, and thanks as always for the partnership and the friendship.

Dr. Peter Linneman: I look forward to coming back and thank you for the friendship and the time and opportunity.

Willy Walker: We’ll talk soon. Thanks everyone, have a great week, we'll see you next Wednesday.

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