Peter Linneman On ‘The Year Of Normalization’ And Why CRE Will Be An Attractive Investment

What is in store for commercial real estate in 2022? On this week’s Walker Webcast, Walker & Dunlop CEO Willy Walker put that question, among others, to one of CRE’s best-known and respected experts, Peter Linneman.

Linneman is the founding principal of real estate advisory firm Linneman Associates, the CEO of American Land Fund and KL Realty, and is a retired professor of the Wharton School of Business. Linneman has published more than 100 scholarly articles and his widely read book Real Estate Finance and Investments: Risks and Opportunities is in its fourth edition.

He also publishes the Linneman Letter quarterly report, a respected source of CRE insights that Walker cited numerous times during their conversation. Walker began the chat by calling Linneman “amazingly prescient” in his largely correct predictions for 2021, including that CRE cap rates would revert to pre-pandemic levels.

Linneman’s first prediction for 2022 was that the Federal Reserve will raise cap rates three times, or 75 basis points, this year. He also predicted growth in gross domestic product of 4.5% for both 2022 and 2023, and agreed with Walker that “this economy has legs.” 

Walker asked him why he thought many Americans don’t seem to share his bullish attitude at the moment.

“I think the main thing the consumer is missing is the massive strength of the U.S. economy,” Linneman said. “I was reflecting on this the other day. What lesson did I take away from the last 22 months? Let's say the lesson I took away is ‘don't bet against the U.S. economy.’”

He suggested the public is prone to “negativity bias” due to a constant barrage of negative news coverage. That blinkered viewpoint, he said, ignores the country’s ability to navigate multiple crises at once while maintaining a healthy economy.

“Twenty-two months from the beginning of the pandemic, real GDP is 1.5% higher, which is essentially flat per capita, and industrial output is essentially 99% of what it was pre-pandemic,” Linneman said. “You kind of go, ‘Oh my God, with all that [turmoil], we were able to do that?'” 

Walker asked him what could trip up the U.S. economy at this point. Linneman said his main concern was the government imposing price controls to try to fight inflation.

“The last thing we need are price controls,” he said. “These high prices that are occurring are resulting from shortfalls in capacity. And the high prices are sending up flares saying, ‘bring capacity here.’ What price controls would do is eliminate the signals of ‘bring capacity here.’ And that would really harm the economy, that's what really could derail us this year.”

As for CRE, Linneman said the industry continues to be a solid investment compared to other markets such as bonds.

“You don't have a fighting chance in the bond market,” he said. But in CRE, “not only is the relative return higher, it's the only place I’ve got a fighting chance to get a return.”

Linneman then shared observations on CRE sectors including retail, multifamily and office. 

Walker pointed out that Linneman has taken the contrarian view that brick-and-mortar retailers would perform better than what was widely expected during the pandemic. Indeed, brick-and-mortar retail sales for the month of November 2021 were $525B, Walker said, or 14% above the pre-Covid peak of $460B. Meanwhile, e-commerce sales in Q3 2021 accounted for only 13% of retail sales. 

“Basically, six-and-a half out of every seven-and-a-half dollars of retail goes through brick,” Linneman said. “And the fact that online is growing faster than brick doesn't mean brick isn't growing. The best thing that happened [to retail] during the shutdown and during the pandemic is it pushed a whole bunch of bad retailers out of business.”

Housing was next on the docket; specifically, the lack of affordable housing for buyers who want to move from an apartment to their first single-family home. Linneman took issue with an argument made by frequent Walker Webcast guest Ivy Zelman that the country is on the cusp of a period of overproduction of housing.

“Single-family home prices have outstripped inflation by a good margin, and multifamily rents have outstripped inflation by a good margin,” Linneman said. “That doesn't happen if you have too much supply.”

Linneman defended his recent prediction that office will begin to pick up steam in the second half of 2022, and will even approach a state resembling normalcy in 2023 in many office markets. He said people might return to the office sooner than many expect as a result of the ubiquity of the omicron variant, which might eliminate the most popular argument for working from home.

“I think the fact that so many people have gotten it and they've known people who've gotten it [means] ‘OK, what's my excuse [now] for not going back to the office?’” he said.

Linneman said investment money is “coming off the sidelines” and back into CRE, particularly industrial. He also said he was increasingly optimistic about well-operated retail and hospitality businesses.

Overall, Linneman said he is bullish about the U.S. economy. 

“My view [is] the U.S. economy is in for a real good next two years, and probably a good next seven,” he said. “If you asked me what the year 2022 is going to be known for, it's going to be the year of normalization. It's going to be the year of normalization of jobs. It's going to be the year of normalization of health. It's going to be the year of normalization of going back to the office.” 

On Jan. 12, Walker will host professional tennis champion Jim Courier. Check here for updates.

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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