Peter Linneman On Unemployment, The Economy And What Asset Classes To Look Out For Now

The U.S. economic recovery from the coronavirus pandemic is well underway. In early June, The Wall Street Journal reported that, thanks to consumers with trillions of dollars in extra savings and businesses that are eager to hire, plus supportive government policies, this recovery will be unlike anything seen in recent history. 

This doesn’t mean, however, that the rebound is without its challenges. The WSJ also reported that supply and labor shortages are stalling the expected economic rehabilitation. So what can we expect from the coming months? What do Q2 2021 numbers tell us about what lies ahead, how long these labor shortages will last and which asset classes are smart investments moving forward? 

Peter Linneman is the principal of Linneman Associates, the CEO and founder of American Land Fund and of KL Realty, and previously served as the Albert Sussman Professor of Real Estate, Finance, and Public Policy at the Wharton School of the University of Pennsylvania. On this week’s Walker Webcast, Linneman sat down with Willy Walker to address these questions and more. 

What Will The Recovery Look Like? 

Linneman said that while it is clear that life is returning to normal if you look at barometers like how many people are returning to sports stadiums, he believes that wild cards like the emerging coronavirus variants and the possibility of new ones could hinder the economic recovery. 

As for the labor shortage, Linneman said that it has been largely influenced by the government boosting unemployment benefits during the pandemic and that the shortage will ease up once those benefits expire in September. 

“This well-intended policy is holding back a job growth spurt of 3 to 4 million jobs,” Linneman said. “When we get to the other side of Sept. 6, when the benefits expire, those jobs are going to come. That may mean we have to butterfly around a little in July and August, but there will be tremendous speed in September, October and November.” 

The Dynamics Of Labor 

Linneman said he feels confident that people are going to return to the office because it is where they are most productive. He said that all of the analysis he has seen has shown that while people are getting work done, it is taking them 20% to 25% more time to complete it. 

While companies can absorb this discrepancy in the short term, they won’t be able to forever, Linneman said, and people will lose compensation as a result. He said employees will eventually take on the hassles that come with going into the office in exchange for not losing that compensation. 

Additionally, he said that people who moved away from major cities like New York to permanently work from home elsewhere will soon be returning. Linneman referenced Morgan Stanley CEO James Gorman, who said that if people feel safe in restaurants, at ballgames and going to a party, they should come to work where the setup is even safer. 

Thoughts On Q2 2021 

Walker brought up Linneman’s famous Linneman Letter, a quarterly publication in which Linneman analyzes the ever-changing economic and geopolitical environment and how it relates to commercial real estate. 

In the most recent letter, Linneman pointed out that it is tough to look at numbers on a year-to-year basis because of how distorted the year has been, but by and large, things like the GDP, unemployment rate and profits after tax are lagging from where they were before the pandemic.

“GDP is about where it was in 2019, but it should be 4% higher,” Linneman said. “We’ve made progress, but we still have a good distance to go until we are truly, truly healthy.” 

Despite this, he said he remains positive about the economic outlook. He said that while Covid-19 fears, driven by new strains, could slow the economy, nothing else will be able to stop its growth, and we can look forward to a comeback of the Roaring '20s. 

“We have huge amounts of cash, we have debt service for businesses and for households very low by any kind of historic standard, most excesses have been eliminated, and we’re going to see high employment within a year,” Linneman said. 

Assets To Look Out For 

Linneman said he is confident that since there is a lot of money out there chasing a lot of assets, asset values will continue to rise, especially since he believes the Federal Reserve will continue to keep interest rates low because it believes it is the best way to stimulate the economy. 

As for which assets to invest in, Linneman said that multifamily is primed to be able to take advantage of the rates staying low while asset values rise, more so than office or retail. 

“You can get a terrific multifamily loan right now, but the same can’t be said for office or retail,” Linneman said. 

Along with multifamily, Linneman said he is bullish on the hospitality market as people gear up to travel again, and he is even feeling positive about brick-and-mortar retail, as people are eager to get out of the house and shop again. He added that he expects industrial to continue to rise due to what he calls the “3X” factor, referring to the fact that when consumers purchase something online, it takes up about three times the amount of square footage of warehouse space compared to if they bought it in a store. 

“Many people haven’t figured out this 3X  phenomenon,” Linneman said. “This gives industrial a good runway and good growth fundamentals.” 

As for office, while Linneman said he believes people will soon be returning to workspaces, he said it still isn't a great bet right now. 

“Do I think it could come back? Yes,” Linneman said. “But there’s a chance I could be wrong."

On July 14, Walker will host Greg Carvel, a professional hockey coach who has helped coach two different NHL teams to the Stanley Cup Final and led the UMass hockey team to win the NCAA championship this year. Register here for the event.

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

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