Finance & Economy

Live from Chicago with Peter Linneman

June 19, 2024

Live from Chicago with Peter Linneman

Dr. Peter Linneman

Founding Principal of Linneman Associates

Dr. Peter Linneman, principal of Linneman and Associates, says that today is a “go day” for making moves in the real estate market.

The most insightful hour in CRE live from Chicago

I was recently joined by Dr. Peter Linneman live in Chicago for our quarterly look at what’s happening in CRE. As our regular viewers know, Peter is a world-renowned economist, CEO and founder of the American Land Fund and KL Realty, and the principal of Linneman Associates, where he publishes his quarterly Linneman Letter. During our conversation, Peter shared his predictions for the economy.

Current commercial real estate events

Leading up to our discussion, Peter and I attended a two-day conference with 75 of the largest commercial real estate owners and financiers. In the Walker Webcast, we discussed some key takeaways from that conference. The first is that things in the CRE space continue to be uncertain, with many of the most influential players in the space holding on to the belief that rates will be higher for longer. Peter, however, believes the rates will come down. Although he admits we won’t see zero percent interest soon, he predicts rates will decrease over the coming months and years.

Another key takeaway from the conference is that there is a lot of money out there and people are trying to figure out what to do with it. Peter believes this is because most of those in private equity or running family offices are not paid to make moves when others aren’t.  Instead, they’re paid to go with the flow of money and purchase assets when they are “in vogue.”

Whats next for office space?

Many have thought for a few years now that people would go back to the office en masse, but for the most part, that hasn’t been the case in the US.  While the rest of the world seems to be back at the office, workers in the US remain working from home for most of their week. This, of course, has left the commercial office space precariously perched for quite some time.  

The underutilization of office space by commercial clients has slowly made converting to multifamily housing look more and more appealing. It is incredibly difficult to pull off a conversion that’s both feasible and profitable, but some are succeeding with it. A conversion can’t be done with just any office building, but there is a select pool of prime candidates for conversion across the US. Peter has actually invested in a handful of these conversions himself, so he has a finger on the pulse of how these are performing. Although many thought conversions would be impossible at first, necessity is the mother of invention, and a select few are getting creative and managing successful conversions.

"The mall crisis"

A few years prior to the COVID-19 pandemic, there was quite a bit of conversation about how malls were on the decline and that online shopping would make them obsolete. However, there are still a lot of relatively successful malls. There are many things that people want to buy in a physical store, whether that be groceries, camping gear, or sneakers. Many successful malls have had a pivot in their tenants, with a focus on tenants that online retail is unlikely to replace.  

The mall crisis shares many attributes with today’s office crisis. People may be a bit hyperbolic in saying that employees will never return to the office. Instead, specific sectors may rely more heavily on office space, or tenants may repurpose some of their space to have amenities other than offices.

The problem with CPI

The Fed uses CPI as one of the key indicators to measure inflation. Recently, the Fed acknowledged that it was, in fact, a flawed way to measure inflation, since owner’s equivalent rent is such a huge factor in the calculation of CPI.  

However, for the sake of consistency, the Fed has elected to continue using CPI for its interest rate decisions, which Peter believes is a huge mistake because owner’s equivalent rent is simply a survey of homeowners, asking them what they would rent their house out for. This isn’t a metric that takes into account what people are actually paying for rent. It’s simply a metric based on asking people who are often unfamiliar with their local rental market what the rental price for their house would be, in theory.

Predictions for next quarter

As always, before we ended our discussion, I wanted to get Peter’s predictions for the next quarter on some of the most pivotal metrics we’re looking at right now. Peter believes that we will continue to see GDP growth increasing for as far as the eye can see. He also believes that inflationary pressures will come down over the next few months, with the labor market remaining very healthy.  

With all of those predictions out there, I posed the question, if he had to move forward with a real estate project, does he think today is a “go day”, a “study day”, or a “pause day.”  Peter quickly answered saying that today was a “go day” and that he’s actively making moves in the real estate market right now.

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On the Walker Webcast, I frequently chat with some of the most influential minds of our time. To view our list of upcoming guests, subscribe to the Walker Webcast.

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