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The most insightful hour in CRE: Mid-year edition 2023

July 12, 2023

The most insightful hour in CRE: Mid-year edition 2023

Dr. Peter Linneman

Leading Economist, Professor Emeritus, The Wharton School of Business

In a recent edition of the Walker Webcast, our fan-favorite commercial real estate expert, Dr. Peter Linneman shares his perspective on CRE.

In a recent edition of the Walker Webcast, one of our fan-favorite guests, Dr. Peter Linneman, came back for his quarterly economic update. An internationally acclaimed economist and expert on the real estate space, Peter is also the principal of Linneman Associates, his consulting and research firm. There, he publishes his quarterly Linneman Letter, covering the happenings of the economy and the real estate sector. He is also the CEO and founder of the American Land Fund and KL Realty.

Peter’s recent predictions

When Peter was on the Walker Webcast last July, he made some bold predictions, most of which came true. For instance, when stocks were falling last year amid rising interest rates, Peter proclaimed that you shouldn’t bet against the US economy for the long term, and he was right.

Peter also said that the reopening of China would be crucial to the reduction of inflation, which was correct. He made the prediction that oil prices would not remain at the near all-time high they achieved, and they have since fallen roughly 35 percent.

High interest rates and the job market

The ever-growing job market has been a focus of many economists and the Fed. Many believe that growth in the job market is inherently bad for inflation. However, Peter made an excellent point against this. Government entities at the local, state, and federal level make up around 35 percent of the US economy, and the healthcare/medical sector makes up another 18 percent.

These two sectors alone make up slightly more than half of the economy. Peter made the case that no one is going to delay a surgery they need because of interest rates. Additionally, there have been countless headlines about layoffs, but not one of them has been focused on government entities. In fact, many government and medical facilities are chronically understaffed. Given the fact that these two behemoth industries don’t seem to be slowing down anytime soon, job growth likely won’t either. This means that roughly half of the US economy is almost completely interest-rate insensitive.

The state of speculative real estate development

Despite the interest rate headwinds that the real estate market is experiencing at the moment, Peter pointed out that there is still a fair bit of speculative development happening. Much of the development is, surprisingly, within the high-end office market. This is shocking, given the severe slowdown we’ve seen within the market.

However, office is not the only space seeing speculative development. We’re also seeing a good bit of multifamily being built, which is inherently speculative, as well as some industrial development. We are undersupplied from a multifamily standpoint, and industrial projects are relatively easy to build, so starting/stopping is relatively frictionless.

Consumer spending amidst high interest rates

Given the state of rates currently, you might expect consumers to be facing financially tough times. The opposite is true. The average consumer is fairly well-capitalized, and there are plenty of job opportunities for them to change jobs if they desire to do so.

Overall, consumer wealth is higher than it was three to four years ago, and many people have more than enough cash to pay off their outstanding debts. Most people have incomes that have outpaced inflation, and around 42 percent of people with mortgages were able to lock in incredibly low rates on 30-year loans.

This isn’t to say that no one is having financial difficulties though. There will always be people who are down on their luck, and can’t find a job, or are facing debts that they simply can’t pay back. However, Peter asserted that the average consumer is in a great spot.

Is now the time to invest in real estate?

Peter shared a very simple principle that he relies on in times like these: if you have capital and courage when others don’t, there’s a good chance you’ll do very well for yourself. At this point in time in the real estate market, many simply don’t have either of these things. Peter shared his opinion that there are some great deals that exist if you can secure funding and take some very calculated risks. Unfortunately, though, most people don’t like to be contrarian. Instead, they like to move with the flow and buy when others are buying or sell when others are selling.

The doctor’s advice going forward

Peter has a large, varied commercial real estate investment portfolio, so I always like to hear what he’ll be doing with it in the coming months. When I posed this question to Peter, he said he would be looking to buy and hold apartments through REITs. Assuming capital is available, he would also be looking to do some development in the apartment and industrial spaces, simply because by the time he starts drawing down on a construction loan, interest rates will likely be much lower. This, of course, would result in the project turning out much better than what was projected in the initial numbers. Peter also mentioned that he would stay away from the office space completely and he would not make any moves in hospitality and retail.

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