Peter Linneman Sees CRE Weakness In Texas, Florida And The U.S.’ Cash-Heavy Population

Texas and Florida have been the darlings of the pandemic-era commercial real estate world. In what seemed like a daily occurrence, new companies would announce they were uprooting from California to settle in Dallas or Austin. The business world swooned at the prospect of a new “Wall Street South” in Miami. 

But the two markets have some fatal flaws, according to former Wharton School of the University of Pennsylvania professor Peter Linneman. In his firm’s quarterly trends newsletter, the real estate analyst placed Miami, Tampa and Orlando on his list of the weakest markets for multifamily by the end of 2022. Houston, Austin and Dallas made the list of the weakest markets for office. 

On this week’s Walker Webcast, Linneman gave a fairly simple explanation for why he ranked the markets as poor. He said he believes that even though there is demand for new residential space in Florida and office space in Texas, that demand is eclipsed by the supply of new buildings being brought to market in the next two years.

“It’s not that I don’t like these cities in the long term, but there’s a lot of supply relative to demand,” Linneman said. “When people make a mistake in real estate, it’s usually focusing on demand rather than demand fundamentals relative to supply.”

Charleston, South Carolina, Denver and Chicago also made Linneman’s list of the weakest markets for multifamily demand. These cities, along with the markets in Florida, already had a large amount of unoccupied multifamily supply. As the coronavirus pandemic hit, their downtowns emptied out, all while new product was being delivered. Linneman predicted that until the supply pipeline begins to slow down in 2022, these cities — Charleston especially — will have a rough year for multifamily leasing.

The trend is longer-term in Texas. Houston and Dallas have topped the lists of U.S. cities for office growth for decades, Linneman said, but supply growth has always edged out demand growth by a few basis points. 

“I love the economies in these cities, and I love the demand side,” Linneman said. “But if the demand is growing at 3% per year and supply is growing at 4% per year, a market where supply outruns demand is always going to be weak.”

The markets topping Linneman’s list for multifamily included Southern California’s Orange County and Inland Empire, Detroit, Cleveland and New York. 

The Roaring ‘20s?

Among the most peculiar consequences of the pandemic is just how much more cash on hand Americans have. For many years, the amount of money on deposit at U.S. banks in checking and savings accounts has hovered around $3 trillion. In 2021, though, that number has topped $9 trillion. A more cash-rich population has myriad consequences for investors both in and out of real estate, said Linneman, who in January discussed the possibility of a new cash-fueled Roaring ’20s.

Because they didn’t have destinations to fly to or shops to visit, many millennials found themselves saving more of their paychecks, allowing them to put together down payments for houses. That extra cash has bolstered demand for single-family homes. But as the economy reopens, Linneman said he thinks millennials may quickly return to spending more heavily, especially on experiences.

“You’re going to see more season tickets and concert tickets sold,” Linneman said. “People say, ‘I didn’t get to take a vacation last year, so I’ll take a super-vacation this year.’”

But along with long-term saving and buying houses, Linneman said he expects Americans to invest about a third of their cash. Passive assets like index funds are likelier to see a boost than heavily managed investments or private equity. All that extra cash chasing assets is likely to propel inflation in stocks and alternative assets like commercial real estate, with building prices climbing higher and cap rates dropping. Even cap rates around the low fours and high threes may look like great investments, Walker & Dunlop CEO Willy Walker said, when compared with the bond market and dividends, which have failed to throw off cash during the pandemic.

Overall, Linneman said he is bullish on the future for the national economy and real estate in particular. He argued that the only reason that the U.S. is seeing fits and starts in its recovery is a kind of emotional volatility from investors.

“We see increased beta in the short term on asset values because of fear and greed,” Linneman said. “People see prices rise and they plow more money in; they get fearful and they pull it out. We know who the enemy is. It’s us.”

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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