‘Do Not Bet Against The U.S. Economy’: Peter Linneman On Resilience, Growth And What Lies Ahead

Economist, professor and researcher Peter Linneman has one message for the American people: Do not bet against the U.S. economy. 

On this week’s Walker Webcast, Linneman, who is the founding principal of real estate advisory firm Linneman Associates, the CEO of American Land Fund and KL Realty, and a retired professor of the Wharton School of Business, explained to Walker & Dunlop CEO Willy Walker why he believes the economy will stay strong and what lies ahead for commercial real estate. 

Linneman started off by saying that throughout each year of his 71-year life, he has seen seven or eight things that have threatened the economy. But despite those threats, the economy moves forward — even during the last two years as the country faced a pandemic, an economic shutdown, a divisive election, civil unrest, closed schools and more. 

“In spite of that, real GDP is probably 3.5% higher than February 2020, employment is only down 1%, industrial output is only down 1%, consumer balance sheets are in good shape and business is up,” he said. 

Walker brought up that in Linneman’s quarterly letter, he mentioned being amused by “hair on fire” pundits who are warning of an economic meltdown if interest rates rise. Linneman said that a year from now, he expects interest rates to be about where they were in 2019. And in 2019, no one was panicking about rates and they were in fact commenting on how low rates were. 

“I would tell listeners to assume that a year from now, you're back in a 2019 interest rate environment, so start preparing for it emotionally, financially,” Linneman said. 

He added that he believes the economic recovery from the pandemic “has legs,” but it will still take a few years for the country to catch up and eventually reach the level of growth it would have seen if Covid-19 had never appeared. The wild cards that could impact economic growth, he said, are additional variants as well as price and wage controls. 

“It's like fooling with Mother Nature, right?” he said. “Once you do this price, there's an effect on another. That's what we found out during the shutdown — you shut down one thing, you also shut down a lot of other things. So the biggest risk to the recovery is not interest rates, it's not inflation. It's wage and price controls.”

Moving on to CRE, Linneman warned that there may be too much speculative real estate development happening in the industrial sector. He said that the demand fundamentals are there, but with the level of development currently happening, the industry may be pushing it right now.

Walker brought up Linneman’s list of 23 "red hot cities" and 19 "hot" cities based on growth and employment rates and asked if CRE investors should be focused on these areas or try their luck in a colder city where they can get a discount.

Linneman said that when it comes to deciding where to invest, demand growth is only half of the equation and supply growth matters, too. 

“Generally, over a three-to-five-year period, supply and demand are going to grow about the same,” Linneman said. “If you're a developer, you want to be where the demand is — period — because you're in the business of servicing growth, with your fees and creating product and so forth. If you're a hold investor, you care about both supply and demand.” 

Shifting to housing, Walker asked Linneman about the country’s growing affordability issues and whether that gives “additional legs” to the “golden era of multifamily” that he had talked about previously. Linneman said it absolutely does since people will always have to live somewhere and if single-family housing is handicapped, multifamily will benefit, adding that the market looks good “on a fundamental basis.” 

Linneman also said that he is optimistic about the office recovery, despite the fact that many people are still working from home. He said that as people slowly begin to return, the numbers will rise, and once 55% to 65% of people are back in their office, the rest will return in order to remain part of the group, ensure they get the best assignments and “protect their turf.” 

“There’s a social tipping point,” he said. 

Finally, Linneman revealed his thoughts on retail and why he’s not interested in anything other than “good” retail properties in strong locations. He said that famed businessman Alfred Taubman once told him that in multifamily, investors can buy cheap, lower the rents and eventually make money. But in retail, they can’t buy cheap enough to make it work. 

“He told me that when it comes to retail, owners will never be able to control the price of Cheerios,” Linneman said. “And if they can’t control the price of Cheerios, they can’t control spending patterns.” 

On April 13, Walker will interview Amor Towles, author of the No. 1 New York Times bestseller The Lincoln Highway. Register here. 

This article was produced in collaboration between Studio B and Walker & Dunlop. Bisnow news staff was not involved in the production of this content.

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