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Real Estate

Most insightful hour in CRE: Dr. Peter Linneman on rates, inflation, global tensions, and more

July 20, 2022

Most insightful hour in CRE: Dr. Peter Linneman on rates, inflation, global tensions, and more

Dr. Peter Linneman

Leading Economist, Former Wharton Professor

Today, Willy is joined by Dr. Peter Linneman for their quarterly update conversation about the state of the economy and CRE.

Willy is joined by Dr. Peter Linneman for their quarterly update conversation. Before diving into the discussion, Willy shares highlights from the Walker & Dunlop Summer Conference and the annual Marshall Bennett Classic. Segueing into the latest Linneman Letter, which begins by listing the problems confronting the U.S. 

The U.S. economy, Peter believes, is a powerful force that will keep going no matter what. It is a remarkable achievement that the economy is 3% larger than it was before COVID. What could potentially go severely wrong would be if we got waging price controls, if the war went nuclear, and if the war spilled over into other NATO countries. There is also the chance that we could be taking ourselves into a recession. 

Though inflation is currently higher than Peter and the Fed previously thought it would be, he still does believe that it is transitory. With 23% of the labor force collecting unemployment insurance, it isn't surprising that supply has not yet caught back up with demand. China is still shut down in some places, making manufacturing expansion more difficult. Additionally, shipping, freight, and oil prices are down. Peter predicts that oil prices will come down below 80 within the year as supply adjusts. People often lose sight of how quickly supply adjusts. As Europe looks to the U.S. for goods and services, it could add 40-80 basis points of GDP growth to our economy. The U.S. is good at weapons and weapon systems and didn't previously do much trading with Russia or Ukraine. The U.S. is the second largest producer of oil in the world. The American industries of farming and energy are ones Peter has confidence in. 

Even if the Fed gets rid of $5 trillion on its balance sheet over the next five years, Peter thinks it won't be a shock because there is enough liquidity in the market to absorb it. On the monetary side, there has been so much recent capital pumped into the system sitting on both the consumers' and state balance sheets. The Fed is unlikely to be able to control this as it relates to long-term interest rates. The globalization of money has made this even more difficult. Since the beginning of the pandemic, the M2 is $6 trillion higher, $5 trillion of which sits in cash and is not circulating as wealth. Peter does not see the 20% national debt to equity ratio to be of concern now. He reveals that he has never been concerned by the federal debt but rather by whether or not we got our money's worth. At a national level, the debt U.S. citizens owe themselves is neutral at a national level, but not on a personal level. The higher personal debts become, the more politicized the issue.  

Of the 20 economic indicators the Linneman team tracks, 15 of them are currently beating trends. Corporations have $1 trillion more than normal in cash, while households have $4 trillion more than normal in cash. This means that overall, the country is still relatively restrained. The first quarter GDP was negative, and over 1 million jobs were added, meaning we didn't shrink. As Peter has always said, cap rates don't adjust based on interest rates but on capital flows. In The Linneman Letter, he states that the cap will go down by 2026. Banks are not lending now out of fear, even though there is enough money to do so. The strength of the dollar right now is increasing the incentive for foreign capital within the U.S. 

The report also demonstrates brick-and-mortar retail stores are doing surprisingly well in contrast to online sales. On the multi-side, Peter predicts development well above trend. He points to the return to major coastal cities after many people sought real estate in middle American sub-markets during the last few years. As the episode draws to a close, Peter identifies why the Biden presidency is so unpopular.

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