Willy Walker:
Good afternoon, everybody, and welcome to the most insightful hour in CRE, the Walker Webcast with Dr. Peter Linneman, episode number 26. Peter, great to see you, my friend.
Peter Linneman:
Hard to believe we're old enough to do 26 episodes, isn't it?
Willy Walker:
No doubt, it's so good. It's such a joy, it's such an honor. You and I have just recently seen one another in Chicago at the Bennett Zell Classic, which pulled together, excluding myself, 75 of the most influential and successful owner-operators in the commercial real estate industry.
It was all under Chatham House rules, Peter, so we won't attribute any of our comments to specific people or companies, but what was your take on the discussion we had in Chicago about a month ago?
Peter Linneman:
Several. The economy's not so bad, but it's not spectacular. Debt's back, equity isn't. Take, for example, in your world, you could have a development or an acquisition that pencils for Fannie or Freddie, but you might have a hard time still finding the equity for it. But the debt's back. Data centers and AI are really exciting. We'll find out how long they're exciting for, but they're definitely exciting right now.
Capital still isn't back in general for real estate. Probably, no one said exactly these words, but why do I do anything for an 8% when I can get 8% in a minute on SpaceX? Sort of that spirit. I'm overstating it, obviously.
Willy Walker:
But jump in on that for a second. There seemed to be a lot of FOMO in the room. Here are 75 people who've done fantastically well as commercial real estate owner, operators, and developers, and yet there wasn't seemingly a person in the room that wasn't sitting around saying, gosh, if I was only in the tech space, if I was only one of the early investors in SpaceX, how appropriate is that today, or how much do people need to think back historically about how well they've done and how well the industry has done in commercial real estate?
Peter Linneman:
Well, they certainly have done well. I think what I was struck by as I thought about it afterwards was our friend Sam Zell, 33 years ago or so, gave a speech at NAREIT saying that REITs and real estate in general are kind of geared for The Little Old Lady From Pasadena, for those old enough to remember. I think it was a Jan and Dean song. And it's not for go-go, and there's nothing wrong with go-go. That's a whole different thing. And I think go-go looks good when it's really going. And when it's not really going, it's not so fun.
It's like everybody wants carried interest until the carried interest is out of the money. This is the same way. And so, I think we were there right as SpaceX was up, 40-something percent from its IPO. There's a whole lot of people, I don't know where it's at today, but probably 3% below.
Willy Walker:
Almost back to the IPO price. It's falling back below 150.
Peter Linneman:
And who knows if that's the right price? Time will tell.
I think the fact that that came out and everybody's thinking Anthropic and OpenAI are coming out, and GFI could have been. And I had a conversation, unrelated, the following week with a very high-wealth family client. And he's passing the hat among his family members to raise money for some real estate stuff he's doing. And he said, they're all saying to him, yep, we've made some money with you. Yep, we like you. But we're trying to keep liquid so we can get bigger allocations to Anthropic and OpenAI. And this is an extremely wealthy family who will definitely get allocations. And they want to get as much as possible. Now, whether that's changed in the, what, four weeks, three weeks, I don't know.
That attitude was definitely in the room. Sort of why am I doing this for an 8% or 12% return?
Willy Walker:
What about the, we heard some of the big office owner developers talking about some per square foot leases that they have just signed in Manhattan that had most people in the rooms eyes spinning or head spinning and eyes rolling of just, how can it be that someone signing a lease right now, a 10-year lease with a three handle, 325 bucks a foot, was one of the numbers that was put out there. Another one was 285 a foot.
That shocked me, Peter. Does that surprise you?
Peter Linneman:
It surprises me. It doesn't shock me. That's like saying everybody's as tall as Wemby, you know? I mean, that's the Wemby lease, if you will. For those of you who don't know, Wembanyama is what, 7'4", plays for the San Antonio Spurs. And it's like saying everybody is as tall as him, aren't they?
I'll tell you what, I came away as they were saying those numbers. Is that for the whole building? Or is that for just a lease or is that to own the place.
Because there are buildings, I suspect, in New York right now that you couldn't sell for 200 a foot.
Willy Walker:
No doubt. So that is to be clear, that's the class AA. I mean, that's brass and glass, midtown, beautiful high-rise. But with that said, the other piece to that equation that made me think a little bit was, a lot of those, one of the people who mentioned that was who have you leased it to, and it was private equity firms. The other was law firms. And the question that I think a lot of people were sitting around wondering is, if AI really does have the impact on the legal profession that many are thinking it will, is that a great lease for the next 10 years to go and sign a big lease with a big law firm that might be thinning down?
That's a little bit of a segue into what you talk about in this quarterly letter as it relates to, AI is not going to be the job Armageddon that many are prognosticating. You've been on this theme, if you will, for the last two letters. If we go back to session 24 and 25, in both of those, you said, I am skeptical that AI is going to be the job killer that many think it's going to be. And you become more declaratory in this letter saying, it's not showing up in the numbers. You want to add anything to that?
Peter Linneman:
And I'm already starting to work for three months from now, because it's a production. For example, I don't think this was in this one, 60% of the jobs today didn't exist 60 years ago. The job category didn't exist 60 years ago. And all I'm saying is we don't have enough imagination. It's easy for us to see what will or might get eliminated. It's very hard to have the imagination. And you always use this example. Okay, you just got eliminated by a tractor from walking behind a plow horse. And it's very easy to see you're going to lose your job, but it's hard to see that your grandkids can be working for Apple Computer.
I mean, how could you have that kind of imagination that's beyond even science fiction writers? Yes, and then there's the other thing. I worked my way through college in the summers, from '69 through '72, working for the B&O Railroad, doing a very intellectual job, driving spikes and building rail, okay? And there was the most coveted job on the railroad back then was to be a fireman. And a fireman goes back to the steam engines where a fireman loaded coal, shoveled coal, emptied out the boiler. It was a hard, dangerous job. And then diesels came, and you didn't need a fireman. You had no need in any way for a fireman. Firemen in some cases still continue today in spite of a technological advance 60, 70 years ago. And that's because of political and because of—
So, you're going to run into — so people talk about truck drivers being eliminated. And let's assume AI can do it and they can do it safely sometime in the next decade. Do you really think truck drivers will disappear in a decade? The Teamsters and the independent truck drivers of America, and I'm not knocking them, they're not going to go quietly. They're going to lobby, they're going to do this, they're going to do that. And so even if the technology is perfect, which is probably not true, but even if we're perfect, it's going to take a lot longer than people think that way.
Willy Walker:
If I go back and look at part 24, part 25, and this is part 26, as it relates to our discussions on your quarterly letter. Back in October of last year on 24, you essentially said, I don't have enough data to really make a call. You basically pulled back from prognosticating what we're going to get on GDP growth and a number of other things, because you just said, look, we're not getting the data feeds that we need right now. There's a lot going on in the federal government. And so, we're sort of out of data.
And at the same time, you did say we're in a transition period from uncertainty to optimism. You then, in our next meeting in January or February, you said people are probably too pessimistic. You're going from moving from uncertainty to optimism in the late fall of last year into people who are probably too pessimistic. This quarter seems more analytical. In other words, let's take all the data, and I'm going to show you all the reasons why you ought to have faith in this data where six months ago, eight months ago, I couldn't tell you that. And yet, where's your sentiment?
Peter Linneman:
I think my sentiment is we're doing okay. That's another Wemby moment. Okay, a Wemby moment. He's going to be my theme of the day.
Willy Walker:
If they'd won, it'd be a better example, but anyway.
Peter Linneman:
It would be better.
Willy Walker:
You guys are used to Knicks fans, but anyway.
Peter Linneman:
But think of Wemby. He's an extraordinary talent. Could he be doing better?
Yeah, if he had three years more experience, if he had 45 pounds more muscle, et cetera, he'll be better. Could the US economy be doing better? Of course. If we didn't have all this uncertainty, if we didn't have the oil uncertainty of the Hormuz, we're pretty much through the tariff terror, as it were. That’s good.
Willy Walker:
Do you believe that or do you think that if the president has three minutes to stop and think about it again, he's going to bring it back up?
Peter Linneman:
I don't think he really can. I think the Supreme Court has largely said, you can only do this by Congress. And by the way, they said that to Biden about canceling student debt, and with his staff, they found ways to nibble around the edge. I think that's about where Trump is on tariffs. Can they still nibble around the edge as these things get there? Sure. But to do big stuff, like he obviously wanted to, I think the Supreme Court has pretty much closed that off. And if you've noticed, it's dropped way back from his rhetoric since the Supreme Court. And it went from being high on his rhetoric table to quite low.
Willy Walker:
He talked today about stopping trading with Spain, but conspicuous from that comment was no, we're going to throw 50% tariffs on every import from Spain.
Peter Linneman:
A year ago, that would have been 100%. It would have been, we're going to tax 100%, everything, 130%, everything coming in. And I think he basically, he and his administration, look, the tariffs are too high. He was able to raise them. It did create distortions. It did create drag on the economy. That drag is getting smaller, and people are adjusting to it. It hasn't done a lot for the US economy. It's done nothing to the trade deficit.
The trade deficit data came out yesterday, and it's way up. And I've said the trade deficit is because people want to invest here. And the only way they can invest here is to sell us more than they buy from us, and then come buy our assets. And they want to buy our assets for the same reason you do, and I do, which is it's the best place in the world to probably have assets from a liquidity, transparency, growth, et cetera, point of view. I think we're in a decent position. The upcoming election, who knows?
I think I'm not a political man, but every day it gets less clear what's going to happen. It seems like both parties are intent on shooting themselves to death. I mean, political suicide is pretty amazing that's going on.
Willy Walker:
One thing about that that I find to be so interesting is as you're talking about the economy, you obviously go to politics and the role that the federal government plays in our economy. And given that we've just celebrated the 250th anniversary of the Declaration of Independence and you happen to be in Philadelphia, where that was done, I went back and looked at what percentage of the U.S. economy, GDP, the federal government played 100 years ago. 1926 versus 2026.
And it will come as no surprise to you, Peter, that the federal government had a 3% stake in our GDP in 1926 and has over a 20% stake in GDP today. As we think about your GDP projections, I was surprised, quite honestly, at how low they were. You're at 1.5, 1.5, and 1.8 for '26, '27, and '28. I would have thought you would have gotten to a two-handle at least by '28, given the growth in AI and technology and the amount of CapEx that's going into the economy right now on that technological boom. Why is it still under 2% with this?
Peter Linneman:
Okay, that's a great question because I wrestled exactly with what you're saying. I came to the conclusion that in AI investment, we're doing similar to what we did in the housing bubble, so a little different, which is we build houses. There's no doubt we needed houses, and those houses all got used eventually. But we built in four years the houses we needed for six years, okay? And I have a feeling that what's happening in AI is we're investing about four years of what we should invest in two years. And that means, yes, we're going to get the productivity from it, but we're going to get the misallocation of capital from it. That is something that didn't occur because the money went there. And how does that occur? The money didn't go there because those companies could have been paying dividends. Meta could have been paying a dividend or buying back shares, as the case may be.
I think AI actually, oddly, is going to slow the economy over the next couple of years because we did too much too soon. I could be wrong on that. I'm not enough of an analytic, but when you see these huge surges, it usually means, yep, productive, but too much too soon.
Willy Walker:
You don't think that the derivative effects, the ancillary benefits of the amount of construction that's going on? I mean, I looked at the wage that an electrician in Denver, Colorado, would make in working on a job site of building a multifamily development versus working in a data center. And as you may know, the city council of Denver has banned the building of data centers.
That's the reason I went to look at it because I wanted to say, hey, as you ban that, there's also a very significant impact to the workers who would build these data centers. And if you're working on a multifamily project and you're an electrician, you're making on average about $65,000, $67,000 a year as an electrician in that multifamily property. If you happen to have been lucky enough to get a job inside of the data center, the wages they're paying there are somewhere between $135,000 and $150,000. So almost two X you would earn being a qualified electrician in a data center versus in a multifamily project. Don't those types of benefits, if you will, to all the other places in the country that are building data centers ripple through the economy as it relates to wage growth and GDP growth, and pick that up, forgetting about the cost of tokens and whether Anthropic is overpaying for the data center that Elon Musk is renting to them at $1.2 billion a month.
Peter Linneman:
The answer is, of course, but I could have had a V8. Remember the commercial? I could have had a V8. Yes, I'm now paying an electrician. What did you say, like 80% more? That's a warning sign in a way that we're misallocating. That's a big jump in a short period of time. And good for them, good for them that they get it. But what if I had taken that same money and hired people to do something else on a more timely basis?
Go back to the housing bubble. We're carpenters in high demand when we were building a ton of homes. Of course, that money, or at least not all of that money, some of that money, instead of going to carpenters and building homes that weren't going to be bought in a timely manner, could have been doing research on cancer or could have been doing improvements in iPhones or whatever. That's the unseen, we could have had a V8. Yes, of course, if you're the electrician, you gain, and then you're going to buy more groceries. But somewhere else, that money could have been put to a higher value, I think. I'm not sure, but I think.
Willy Walker:
Talking about misallocation or from your libertarian view—
Peter Linneman:
You mean the correct view.
Willy Walker:
From your view, dollars that go to the federal government versus to the private sector, to some degree, are misallocated in your view. The 310,000, 10% of the federal workforce that is no longer working in the federal workforce, 18 months after Trump too, come into the administration. How big a tailwind is that shifting of tax dollars going towards the federal government and federal government employment versus going out into the overall economy?
Peter Linneman:
Well, one of the funny things is all the Trump cuts in budgets got headlines, but when you really go look, most of them didn't occur. Most of them, we're cutting this and we're cutting that, and you come back, and there hasn't been big cuts, but labor did get cut a lot. Have you noticed any difference in the services you've received from the federal government? You're a citizen; I'm a citizen. I haven't seen any difference in the level or quality of services. You cut 10%, 12%, I think it is up to now.
Willy Walker:
I think it was long needed. I'll put one note on that. That is a fear that I have not seen yet, but the wildfires in the US West and the cutting back of the interior department resources to fight those fires could, could.
It's out there because of the cutbacks that they've done on the interior department. But right now, we have wildfires blazing in Colorado, Utah, and California. And I do put out there that that could be a significant change if we do not fight those fires effectively. And that's obviously state and federal dollars that go towards that. And how you can look at that after the fact and say X number of acres burned, and it would have been less if they'd not cut those dollars. But that's the one area right now that I'm focusing on. But you threw that out.
Peter Linneman:
I'm not saying there aren't such areas. And by the way, I'm not saying that private spending is always perfectly productive. There are people right now on the street shooting up with fentanyl. That's a private decision. That's hardly productive, even though from a libertarian point of view, it's voluntary, but it's not helping the economy. It's not helping society.
My point is not that private spending is always perfect. In fact, I was just suggesting that some of the investment in AI may not be perfect. It's not that, it's just that the government's even less perfect with most of their activities. And not all. I mean, there are some things that are pretty impressive that they do. I think what you're going to see is that 300,000 are net 300,000 are going to be more productive over the next decade in the private sector in some way, shape, or form. And it won't show up overnight. It'll show up over time. But I just think that's going to happen.
Now you say 300,000 out of 160 million, it's pretty small. You would probably never be able to pick that up in the data. I mean, with all the other stuff that's happening, it's hard to pick that one up, but it's there. And so far, without an obvious diminution in service, you have not heard, you and I run in a lot of circles of business and private. You have not heard a hue and cry of the federal government no longer serving me as a result of these cuts.
Willy Walker:
You point out in the letter that deregulation is helping in many, many parts of the economy. There is this deregulatory push. The unfortunate piece to it is, I did a quick calculation on the, what's the savings of the 300,000 federal jobs.
And it's actually a pretty big number. It's either 30—
Peter Linneman:
I've done the math. I think it's $40 billion a year.
Willy Walker:
$40 billion. It's not a rounding error. And at the same time, when we go from defense appropriations from 900 billion to 1.2 trillion, good thing that those people are no longer working—
Peter Linneman:
It's nice to have 40 billion when you do that.
Willy Walker:
Exactly. But that leads to our deficits, and that leads to our federal debt because all this ties into rates and both foreigners and domestic buyers of US treasuries. You spend a bunch of time in the letter talking about the fact that, A, our federal debt now exceeds GDP. And then you walk through in your typically very detailed and, from my standpoint, very persuasive way of saying, look, as long as our net worth as an economy and net worth of the United States economy being over $180 trillion with a T, $180 trillion.
Peter Linneman:
And that doesn't include what our grandkids and our kids are going to create. That's as we sit here.
Willy Walker:
You come to the conclusion, we can still afford it. But you dive into who's the owner of the debt. You dive into foreign owners of the debt, which are the $9 trillion that you say we actually truly, truly, truly owe somebody else. But what's your state? I mean, the 10-year old today, Peter, went back over. It's at 460. It was down below 450 until the president announced today that he is no longer negotiating with Iran, and the conflict might be coming back. You feel pretty good about a 10-year sitting in sort of 450, 460? Or do you think that that has more upward pressure towards a five or downward pressure towards a four?
Peter Linneman:
I still believe it's too high. I still think it should be down towards a four. I believe that, as we've talked about, it's very simple. If you calculate inflation. It's really simple. If you calculate inflation, excluding fuel because it's highly volatile. And we've already seen why they exclude fuel because it can go from 60 to 118 and 118 to 70. It's hard to make policy around something that volatile.
Willy Walker:
Let me give you props here for two seconds. I'm going to come back to take that out and get to the true inflation number. But you published this letter when oil was at $105 a barrel, and you said in the letter, it will get down to $65 before the end of the year. And before the president came out today and said, we're no longer negotiating with Iran, it was under $70 a barrel. You had, effectively, in the time you published this to today, predicted where oil was going. Kudos to you on that one, but keep going on the real inflation number two.
Peter Linneman:
The real inflation, take out the owner equivalent. No one pays it. All right? It's not an intellectual hard one. Let me do it differently. Take out everything no one pays for.
Willy Walker:
Warsh might look at taking out the owner's equivalent.
Peter Linneman:
I think there's a chance. I think there's a chance. But my comment is, take out everything that consumers don't pay for. Oh, there's only one thing. But why would you put in something they don't pay for into a consumer price index? Take out what they don't pay for. And then, for a very different reason, take out energy. Energy they do pay for. It's just that it's so volatile. Are you supposed to be basing policy on the $118 or the $59 it was before? And the answer is, monetary policy has no impact on the Strait of Hormuz. None, zero. If it did, do something, but it doesn't. And when you do something, this is a general thing I've seen in life. When you pretend you influence something you don't, you're usually going to screw something up. It's just going to have unintended consequences. They should ignore the energy part. They should completely ignore it.
When you take out energy and when you take out the owner equivalent, you still have 2.3% annual year-over-year inflation going on. It's that simple. And it's been there for two and a half years now. Not for six days, two and a half years, 2.3% year-over-year change is what it's been. If it's, back to the interest rate, if it's 2.3%, why is the short rate at, what, effectively 3.7%, 3.65%, something like that? That's a big premium, just from an investment point of view, allocating capital. It's too big a premium. It should come down.
I had said three cuts yet this year, or 75 bps yet this year. I think because of all that's going on, unfortunately, we may only get 50 bps. We should get 75, but I think we're only going to get 50. How are we going to get 50? Because this thing in the Middle East is going to tamp down. And we saw what happens when it tamps down. And all of that going up in oil prices raised inflation. What do you think will happen next month? Or actually, now this month, when the data comes out for last month? Well, the data for last month, gasoline prices fell 25% last month. When the data comes out late this month about what happened last month, that's going to be showing them down. It's got more to go. And I just think it's too high. If you think it should be 3% on the short end, I don't see why you're at four and a half on the long. I can see why you're at four. And because they compete with one another.
And then one other thing, I was saying to somebody the other day, they'll say the Strait of Hormuz will never be solved. I said, no, no, no, you've got to think long term. Do you think Saudi Arabia, Kuwait, the Emirates, et cetera, are going to allow Iran to unilaterally bankrupt them and to cause their regimes to fall and perhaps cause them to be assassinated as leaders? You really believe that? I don't. And either they're going to do something directly, or they're going to work with the US to do something directly. If you're in charge of Saudi Arabia, you're going to let them unilaterally shut you off, impoverish your people, and create a rebellion in your country. I don't think so.
Willy Walker:
And they're also able to get out about, I think it's 5 million barrels a day through the pipeline.
Peter Linneman:
And give it a year, and there'll be 8 million, and markets adjust. But they're not going to just sit there neutral in the face of this. Imagine a different world.
Suppose the following had happened. We never bombed Iran. Israel never bombed Iran. And Iran unilaterally said, oh, we're going to shut off the Strait of Hormuz. What do you think the Middle East guys would be doing? They'd be going berserk to get it done somehow.
Willy Walker:
Does the price of oil in the US come down so precipitously, Peter, how much is due to A, the leakage, if you will? I just talked about the 5 million barrels that are coming out of Saudi Arabia. We know for a fact that many tankers have still been able to get through the Straits. Question A.
Question B or point B would be, US domestic production is so high as 20% of global oil production that we've become oil independent, and therefore that doesn't impact us. Therefore, prices can come down. Or C, that China has released their strategic oil reserve to the point where they're not in demand of so much oil right now. And the combination of them releasing their strategic oil reserve as well as moving to renewables, they have cranked up solar and wind in China to lower their dependence on oil, that's really what's making it so that global oil prices have come down to the degree that they have. Which one of those three or is it a combination of all three?
Peter Linneman:
All three. I'm doing this from memory. I think China has reduced 4 million barrels a day. And that's what you'd expect in the face of a higher price. Interestingly, a lot of the European countries have subsidized, so they're not getting reductions in consumption. Because the government's subsidizing the consumption of, and I think Malaysia's doing that, Indonesia's doing that, but that can't go on forever.
Yes, the cutback in consumption dampens. This is just Econ 101. Second, more supply. If you and I were in Guyana right now in charge of the oil wells, we would wake up every morning happy. Because we're unaffected operationally, the only way we get rich is to pump. And we're going to pump as fast as we can.
One thing we're going to do today is pump as fast as we can. And the other thing we're going to do today is keep doing research to figure out how we can do even faster. And the tar sands, so it's supply adjusting, it's demand adjusting. And I understand that the Europeans have not largely used their strategic reserves. The US has done some, but I don't think Europe has even tapped into their strategic reserves yet to speak of. It's not easy. Look, you can't cut the bulk of 20% of the production in the world off without effects.
Willy Walker:
Of course. One of the other interesting pieces to the global scene is Ukraine. And it is phenomenal. The success that Ukraine is having fighting Russia right now. I saw General David Petraeus yesterday, and we had a long conversation about Ukraine. And he gave me incredible detail about what they're doing in their drone warfare and how they are basically in Crimea, and they are wiping out all the power supply in Crimea, launching 10,000 drones a day. And that they have, A, changed the face of warfare, but B, that they are really winning right now and taking it to the Russians. And I asked the general sort of what's the end state here? He said, well, the very clear one is the end of aggression.
That clearly changes the landscape in Europe that you were just talking about. Should Ukraine be able to effectively push back on Russia?
Peter Linneman:
It's funny, as best I can tell, there's been a lot of people killed and a lot of damage done, and the boundary has moved like six inches over the last three years. I mean, it's horrific that all this is happening to keep basically a static line. It's World War I-like in that regard.
It's shown that Russia can't do it. They can create a lot of havoc, but they can't do it. And Ukraine has found a way with weapons and drones and a lot of spirit to do it. But it is quite remarkable. The ones that I worry about, and again, I'm not a geopolitical but I've traveled a lot and I've spoken to a lot of people. Is Putin going into Estonia or Latvia and they have Russian speakers in the east and do they go in so he can get a victory? But that's NATO. And I don't know. Does he try to call their bluff and break NATO by, not bluff, does he do an incursion in Estonia say to NATO, now, what are you going to do, big boy?
Willy Walker:
Challenging the question.
Peter Linneman:
It's like when you used to play hearts, the card, and you had the queen of spades, you have to figure out how to strategically play it because it's so strong. That is a real risk here.
Willy Walker:
Let's focus back on the States for a second and the K-shaped economy. People for the last two to three years have been saying the U.S. consumer is going to give out on us. The U.S. consumer hasn't given out on us. And yet, you and I have spoken in the past, Peter, about the data in the Linneman letter of the mean versus the median and trying to get these numbers all seem great when you look at them on an average basis because it has what I call the Musk effect. When you've got one guy in there who's worth a trillion dollars, Elon Musk used the numbers quite dramatically. And if you look at the average net worth of an American in their 60s, okay? The average net worth of an American in their 60s on an average or mean basis is $1.58 million. Sounds pretty great, feels very wealthy, feels like people have disposable income, et cetera. But if you look at the median, which, as you and I both know, just for those listening who might not remember the difference between the mean and the median, the median sits half or above and half or below. You're right in the middle. That drops down to $275,000. That's underscoring a little bit of the K-shaped economy.
As we look at numbers like that, kind of, if you will, is that the story in the economy today, Peter? In other words, should we be looking at the median numbers, or can we continue to look at the mean and say, you know what? The numbers are just so big that these things keep on cranking forward.
Peter Linneman:
They're both relevant. The median tells you something about centrality. The average, when it's skewed like that, is saying there are real people out there. On that, it's skewed, but those people who are skewed have resources that they're going to spend. And one of the issues is if you take somebody making $20,000 and they get a 10% increase, and you take somebody earning $20 million and they get a 10% increase, the spendable dollars are what matter. And that kind of creates a K effect. The absolute dollars are what gets spent, not the percentage. People misinterpret the so-called K. It's really not a K. It's not, because a K would suggest there's a group going downward. It's not so much that they're going downward. They're going up 2% or 3%. It's just that 2% or 3% isn't as big as 2% or 3% on the higher end. And therefore, the absolute dollars that flow. And you see it in retail. You see it absolutely in retail, and you see it in experience shopping. And that's the dollars you're going after.
There's a variant of this. One slight, we've talked about it a couple of times. People constantly point to China growing faster than the US, growing fast. They aren't. They're growing faster in percentage terms, but not absolute spendable dollars. When you sit down and just do the math, and you take our median, and you multiply it by our growth rate, and you take their median per household, and you multiply it by their growth rate, the absolute dollar growth is greater in the US. And in fact, China falls farther and farther behind, even though they grow faster than us every year. It's an odd little mathematical problem.
Willy Walker:
No, but it's an interesting one to keep in mind. And when I was in the UK two weeks ago, when they lost, I think it's their sixth prime minister in the last seven years, maybe it's the seventh in the last—
Peter Linneman: I think it's seven and eight, but I'm running out of fingers.
Willy Walker:
Exactly. But as you said before, Peter, GDP growth per capita in the UK has not grown since 2007. The other number for Germany is that GDP has not grown per capita in Germany since 2014. But the staggering number is that GDP per capita in the UK today, as the sixth largest economy in the world, is below that of the state of Mississippi, which is the 50th of 50 states in the United States. The UK on a per capita GDP basis is below the lowest state in the United States of America, which I think many people in the UK would sit there and say, no, we're rich. We'd be right up there with, I don't know, pick your state, North Carolina, if we would have to slot ourselves in. And they're 51 out of 51, if they were a US state.
Peter Linneman:
And Germany would be right at Mississippi. Median would be right at Mississippi.
Willy Walker:
And a lot of fun, because there were a lot of jokes about Belgium beating us in soccer. And I saw this meme that came out that said, but the Belgians get to go home and live this wonderful life. And they've got these great lifestyles, and they've got great beer, and they get to sit around and regale on their victory while the US is poor and this and that. And I went and looked it up and Belgium would sit right in there with Mississippi.
Peter Linneman:
Yeah.
Willy Walker:
Is it 50,000 per capita GDP? And I think Belgium is 59 or 57.
Peter Linneman:
People, there are these things floating around. Bill Maher had a lovely New Rules on this, but there are all these posts floating around of people visiting the US from around the world for the World Cup going, it's not at all like the media back home says it is or people say it is. And they see our retail choices.
They see the scale of our hotels, houses, restaurants, and portions. There's the one, the funny one, which is somebody talking about ranch dressing and these people have ranch dressing. And it's just the variety of choices.
You go into a US supermarket in the suburbs, it's staggering versus what you would find. And by the way, Europe, and I don't mean this as a bang on Europe. If you leave Poland out, I said to friends in Germany, you're basically 75% of the US median, median is about 75%. And you're working pretty hard three days a week for six hours for 46 weeks a year to catch up. And that kind of captures the, you're not going to catch up working six hours a day for three days a week for 46 weeks a year. And we've grown, they haven't. This goes back to, yes, could we grow more? Could we be better? Of course, we grow.
And in fact, I don't know if you appreciated it. I live two blocks from Independence Hall, and spent most of the third and fourth over in that area. And we published the declaration in the current issue. And we published it in the version that has original typos. You know, they were old-fashioned letter settings. And if you think about it, it's not like we're perfect. From the beginning, we couldn't even print it right. Putting that aside, did we live up to our ideals? We couldn't even print it right, you know? And did we have bad periods? Yeah, we did. But if you come back at any random date, it's been a pretty amazing place. And people say, oh, you're overly optimistic. And I say, no, I'm realistically not pessimistic. And are there moments? Of course.
If you're going to be in real estate, one of the things I think I fit well in real estate is it's a long-term business. We focus on transactions, but it's a long-term business.
Willy Walker:
Talk about, though, the consumer confidence numbers, because you do talk about consumer confidence in it. And I asked Grok, have we ever had the disparity between stock price, stock market performance, and consumer sentiment that we have today? And it very clearly said, this is an unprecedented, exclamation point.
That we have never had this disparity between consumer confidence and stock price, stock market performance. And it went through, and it listed all the times previously where consumer sentiment had gotten down this low. And as you know, Peter, in all of those previous times, the stock market was not tanking, but well, in some instances—
Peter Linneman:
Not doing well, not doing well.
Willy Walker:
Instances it was truly tanking and others it was just not doing well. Which is right? Is the consumer sentiment overly negative or is the stock market overly positive?
Peter Linneman:
Consumer confidence is fairly sensitive to two things. Remember, it's an index of attitudes. It's taking a survey questionnaire and making it quantitative.
And it tends to be very sensitive to inflation in general. And it tends to be very sensitive to gasoline prices, okay? Just as a reality.
Willy Walker:
Just one thing on that, that's really important to remember. Do you know what the average American spends in take-home pay on gas?
Peter Linneman:
I should know this, but I don't have a car.
Willy Walker:
2%.
Peter Linneman:
2%, if gasoline goes up by 50%, that's a big hit.
Willy Walker:
And so, when oil went over $100, it moved from 2% to 4%. That is a huge impact. But if you have oil in the 60 to 80 bucks a barrel range, it's in the 2% number. I'm just saying, everyone drives by it, everyone sees it. I'm not in any way trying to negate your comment. I'm just saying, if you really look at the numbers, the amount of take-home pay that actually goes to oil is not nearly as high as many would think it would be.
Peter Linneman:
But, no, I agree with that. But it's something people do, what, once, twice a week?
Willy Walker:
Oh, it's like the cost of eggs.
Peter Linneman:
Constant reminder. It's a constant reminder. I think the consumer confidence, I think, remember, it lags a month. I think the consumer confidence will come up this month. Simply remember, this month's going to be reporting last month. This month's report will be last month's data. I think it's going to be up because gasoline prices are down substantially. We're down, it's already over. We're down substantially in June. I think you'll see that up.
Now, the stock market is ecstatic about a particular technological moment in history. And so, I think that's what explains, I think that's a one-off, not one-off, you can find other episodes, but that's what explains the stock market is we're going to be a whole lot richer forever, and we never dreamed of this kind of productivity growth. And if it occurs, wow, I want to own it. I think that's what's going on in the stock market. And I think the consumer confidence is really simple, which is every week, I go in twice a week to fill up my tank, and I go, oh my God.
But last month, they started getting some relief. Now you're going to say, okay, right now, it's going to be up now next week because of what's happening. But it is very sensitive to gasoline price consumer confidence.
Willy Walker:
You have 15 canaries on their backs, dead in your canaries in the coal mine analysis inside this quarterly letter. That's a lot for a commercial real estate industry that feels like it's just trying to get back on its feet after three years of higher interest rates, lower transaction volumes, and the value of most assets shrinking significantly. Should we look through the 15 canaries and say, but it's going to come around the corner, or should we be concerned about the 15 canaries?
Peter Linneman:
Well, I think three of the canaries we'd get back to life if we just didn't have a Fed.
Willy Walker:
You got four on your misguided Fed, so you got a new Fed.
Peter Linneman:
Four, four. We could get four back,
Willy Walker:
You've got three on tariffs and misguided tariff policy.
Peter Linneman:
And by the way, we got one back on that.
Willy Walker:
One back. Next quarter, you're going to get even more if the president—
Peter Linneman:
I think we're going to get another back on tariffs. I think we're going to get another back on the Fed. Look, I think the Fed's going to do nothing this month except wring their hands. I think in August, they don't meet unless it's an emergency, and they're unlikely to call an emergency session. And they're going to come back in September and say, what do we know with two more months of data about gasoline prices and inflation related to it? I do think the Fed is moving in the right direction on all this posting of their forecasts and their dots and their this. That was a very interesting academic proposal. I mean that very seriously. More information, more information, more information, more information. What it did was create noise that was authoritative. It didn't create information because they didn't know any better than we did.
It was premised on the notion that the public should know what these authorities think. Well, it turns out what we've found out since they've been posting their dots, they don't know anything more than the rest of us, but they send out a signal of authoritativeness in what they don't know. And so it unintentionally increased noise in the capital markets. It certainly wasn't intended to do that. And in fact, when they began to do it, I was supportive.
And then you find out they're terrible at it. It was just like publishing random junk, it was like going to fourth graders and publishing their predictions, in the sense it added no information.
But since they weren't fourth graders, they were fed board members or voting members, it sent information like it must mean something, and it didn't. And it just increased the noise. All it did was increase the noise-to-signal ratio. And it gave no extra signal or extra noise. And that was just not worth it, and they're moving away from that. I think you're going to see more moving away from that, and it will improve volatility a bit. It's not going to be the cure-all for everything, but I think that's a good move. If it was a good move to try it, they stuck with it too long. It was clear it was noise several years ago, a number of years ago. They're right to have tried it and right to get rid of it.
Willy Walker:
Just on that, if they end up doing that and you're saying that'd be a good thing as it relates to what the market sentiment would be and that you kind of wouldn't miss it. What about if public companies are allowed to report once a year rather than on a quarterly basis? Do you think that's net positive or negative to the market?
Peter Linneman:
In general, it would be positive because most companies, take your company, are legit companies. I mean, you don't sit around going, how are we going to screw them. I think most companies, if you reported once, you and I know the cost of reporting and it's kind of staggering for what you really get. And you and I read, you can't say what I'm about to say, but all the worry about this and worry about that kind of document, nobody really reads that to speak of. If you got rid of some of that, that would be good. You'd save those resources; it'd be good elsewhere. And you'd find other ways to legally communicate effectively in the interim.
The problem is it gives a longer period that thieves can function. And okay, they're going to get the thieves anyway. They seem to always get the thieves. If you really did a deep audit every minute, you'd get them sooner, that's all. They'd still be thieves. And Madoff was Madoff.
Willy Walker:
I hear you on that. I'd be really surprised to see how many, if they did it, how many companies would move off of it. Because I would tell you, even though we do spend a tremendous amount of time, effort, and money on doing it on a quarterly basis, I believe that the reps that you get from doing that, the hygiene that it provides you with as it relates to being a publicly traded company is wildly valuable. And so, if they said tomorrow, go ahead and walk or not, you don't need to report on a quarterly basis, I would put forth that we probably, for quite some period of time, would continue to do it just because of the reps that it gives us and what it gives me as CEO from a control standpoint and a visibility standpoint to exactly your point. But I'd be interested, I have no idea what percentage of publicly traded companies would go to the one annual reporting versus quarterly. I just wanted to hear your thoughts on it.
Peter Linneman:
No, and I think immediately very few would, and then a few would, and then a few would, and then a few would. Of course, you're still going to generate information internally. To have the information for you internally. How should I say this nicely? Do you really need the lawyers doing the… You just need the information.
Willy Walker:
I agree. We're almost out of time. I want to get to a couple quick things before we go. One, there was a canary added this quarter for data center development and overbuilding. You've now included data centers inside of your commercial real estate overbuild analysis. I just thought that was interesting. You also highlighted earlier the strength of consumer spending. And in the letter, you talk about the strength of sort of inline retail. As you think about looking forward, I would add one other data point, which is that from a multifamily standpoint, we have started to see some green shoots as it relates to net absorption and overall vacancy numbers coming down.
Clearly, the multi-market was in a survive to 25 mode and then you were going to be able to start pushing rents. That never arrived. 26 seems to be a transition year to hopefully getting to some rent growth in 2027. But it feels like you're seeing, generally speaking, good data coming that the tightening brought values down, rates went up, and we're now in this sort of transition into some real solid fundamentals on a CRE standpoint. If you believe what I just said, and that's my read of your letter this quarter, where are you making bets right now?
Peter Linneman:
I like multifamily. It's been a delayed comeback because you did have some slowdown. You still had positive absorption, but you had a slowdown and you had all that overhang of supply. The absorption seems to have firmed up a bit. And at the same time, construction is down, new starts are down 40% to 60%, some markets 70%. When you take out non-market starts, it's even more dramatic. That'll get the market healthy fast. The market problem over the last three years in multi, generally, again, this goes back to one of the things Sam Zell always said, is that there wasn't demand. There was demand there to absorb apartments. We did not have negative absorption over the last three years. What we had was absorption that couldn't keep pace with the supply. This wasn't like we emptied out, net-net emptied out units. We just didn't add absorption as fast as it came. That solves, I use solves loosely, when you stop building so fast. And that has occurred in almost all markets.
I'm sure you could probably identify several that just have huge overhead. One of my favorite markets from a demand point of view is Huntsville, Alabama.
From a demand point of view, but they had enough supply to last them. Mike Roizen isn't going to live as long as the supply they build up down there. For those who don't know Mike, he's going to live forever.
Willy Walker:
They had a piece of demand coming, then it went back to Colorado, then it went back to Huntsville. It's been political.
Peter Linneman:
So, but my point being, Huntsville's soft multifamily market was not that demand stopped. The supply just went huge. And if you could go back to zero. And cut off, and this is the point, I don't mean to, I always make the point about these little bullshit markets where nobody's going to build, but if I can get 2%, 3% nominal growth.
Willy Walker:
You just endeared yourself to a lot of people who live in small secondary and tertiary markets.
Peter Linneman:
I grew up in, I mean, I have family and such. I mean, they're bullshit markets in the sense that nobody is, nobody in New York even knows they exist. And nobody in California has even heard of them. But people live there, they pay rent.
Willy Walker:
And real estate developers make good money there. Let me get you real quick. If someone had listened to you 18 months ago in Philadelphia and you said, I asked you, how do you get rich? And you said, there's a play to be made in the office. If you've done office work in several gateway cities, you have made a fortune. San Francisco being one, New York being another. You still like, generally speaking, the office outlook or that obviously has lots of caveats to it, if you may not like offices in downtown Denver, but you love offices in CBD, San Francisco or Palo Alto. What's your take on the office market?
Peter Linneman:
Here's my office problem. I've been involved in office a long time and it eats capital. That's always the negative. Having said that, in a typical year over the last 30 or 40 years, 50 to 60 million square feet were built. And so over a two-year period, you might have 100 to 120 million square feet built. In 2026 and 2027, I doubt if you're going to get over 10 total, 10 million total.
Now, I was with somebody in Philadelphia the other day, and we could count within five blocks of where we were having lunch, just in Philadelphia, within five million feet, that's been taken off the market. Five million feet of office taken off the market.
Willy Walker:
Taken off the market in the sense that it's not being leased, or it was leased up?
Peter Linneman:
No, empty, gone, being converted, being torn down, being converted. That was just within distance of our lunch. We didn't even go out and look at the suburbs. We didn't do Chicago, New York, and so forth. My guess is if Philadelphia center city has 4 million, what do you think? Probably in greater Philadelphia, 6 million. If you then expand that to the U.S., 60 million being withdrawn, some number. And you go, okay, we're in a market that normally would build and we're going to only build 10 and we're going to take 60 away. That market's going to get healthy quickly. Now, not every building.
And that's back to what we were talking about on the rent. Some are going to get really healthy. Some are going to get really healthy. But if you've got a 20% occupied building, I don't know that that kind of phenomena saves you. But if you've got an 87% occupied building, I think that phenomenon helps you.
Willy Walker:
I can keep going asset class by asset class, but we run out of time. One final question, the surprise to the upside and the surprise to the downside between now and the end of the year.
Peter Linneman:
Well, I think the surprise for most people will be, rates will be cut 50 basis points. I backed off versus 75. And only because of the prolonged reaction to the inflation, number jumping caused oil. I think that'll be a surprise. I think that would be an upside surprise. The downside surprise is probably you're going to see more, whatever you want to call them, democratic, socialist, or whatever. And it's not to be elected. And it's not that they're going to do a whole lot in the near term, but they are going to change tone. And they're going to change, I don't know that we need a lot more. You can like Democrats, and you can like Republicans. I don't think we need a lot more Bernie Sanders. One may be enough just to get media for that. I think there is a risk that the election is going to bring in more than a handful more of that.
Willy Walker:
Peter, as always, loves it. Keep going for another hour.
Peter Linneman:
Well, hopefully 26 or 30 more of these. I hope I'm still around.
Willy Walker:
You'll be around.
Peter Linneman:
I hope I'm around.
Willy Walker:
We'll keep doing it as long as we get as many people tuning in as we've had today. Thank you, my friend. Thank you. Have a great Wednesday. Have a great summer. And we'll see you on the Walker Webcast next week. And then we will be back with Peter in next quarter to see how all of his fantastic prognostications have played out. He's been pretty damn prescient over the past couple of years. I take what Peter says with heavy weight. Peter, great to see you.
Peter Linneman:
Thank you.
