The Most Insightful Hour in CRE with Dr. Peter Linneman

We’re back again with many people’s favorite segment on the Walker Webcast—our quarterly check-in with Dr. Peter Linneman of Linneman Associates, author of the Linneman Letter. In an hour packed with some of the best commercial real estate content on the web, we discussed everything from the average consumer’s financial health to bank default rates and delinquencies. 

Where is true rental headed?

Housing costs comprise a considerable amount of CPI, and according to the data, single-family rentals are up nearly 6 percent year-over-year.  Unfortunately, the CPI calculation uses a figure known as owner’s equivalent rent—a figure gathered through a survey of homeowners who tell the surveyor what they would rent their house for if they were looking to rent it out.  Oftentimes, these homeowners are not well-versed in their local rental markets, so they can over- or underestimate the true value of their homes.  

In today’s case, it would seem that homeowners are overvaluing their homes considerably. Zelman (A Walker & Dunlop Company) tracks actual single-family rental rates, and they’re up just over three percent year-over-year.  Additionally, nearly two-thirds of all households own their home, meaning there is only a marginal increase in ownership costs—equal to the increase in maintenance and property taxes/insurance.

Why are office spaces not in demand?

Peter has been predicting for a while now that workers will return to the office. However, they simply haven’t, which has led to continued distress in the commercial office space. Coupling this with the fact that $80 billion is flowing into new office construction, there is considerable cause for concern. While some of this money is going toward expensive buildouts, a lot of the money is being spent on the highest-end office space, with the thought that companies will move to the newest, shiniest spaces.  

Despite the continued turbulence in the commercial office space, banks are choosing to work with borrowers to restructure debts because they simply do not want to take the buildings back.  If they were to foreclose on these office spaces, they would need to put a considerable amount of money into them in many cases, or sell them off for pennies on the dollar—two outcomes that are less than ideal.

Is consumer confidence declining?

In his research, Peter calculates his own unemployment rate, which recently has differed quite a bit from the government figures.  Right now, Peter believes the true unemployment rate is around 6.6 percent, whereas the government has the unemployment rate pegged closer to 3.8 percent.  This, of course, is not a minor difference, with Peter’s figure being nearly twice the governmental figure. This discrepancy is likely caused by the fact that there are many unemployed people who are either being counted as employed or being excluded from the count. Peter believes another potential reason for this discrepancy is that people aged 62 and older who left the workplace when COVID started simply haven’t returned.  

Additionally, the consumer confidence index is considerably lower than its peak in 2019. This is likely due to the fact that many people’s lives were significantly disrupted when the pandemic came about. Peter believes that a large portion of people who are either unemployed or underemployed believe that they would have been in a much better place financially had the pandemic never happened.

The future of single-family and multifamily development

In the Linneman Letter, Peter stated that he believed there would be $800-$900 billion spent on new single-family development in 2024—roughly ten times the amount of money being put into commercial office. This would result in roughly 1.1 million new homes being delivered this year.  Additionally, he believes that there will be roughly 350,000 multifamily buildings delivered this year, with both single and multi-family deliveries tapering off over the coming years.  

Although Peter believes that delivery figures will taper off over the next couple of years, there are two different thought processes behind these conclusions. Peter believes that it’s very hard to get past 1.1 million new single-family homes built, simply because of pushback from citizens in municipalities across the country.  Everyone seems to have the “not in my back yard” mentality in the hot areas where developers are looking to build, which makes approval of developments challenging. Peter believes multifamily will slow, simply because cost of capital has increased considerably, while rental growth has slowed at the same time. This, of course, makes building multifamily less attractive for developers and investors alike.

End of year Fed funds rate outlook

In the most recent Linneman Letter, Peter mentioned that he expected the Fed to cut rates by 75-200 basis points in 2024.  Although the recent inflation readings might cause some to backtrack on a statement like that, Peter remains firm in his beliefs. At the end of the day, he believes that inflation is being grossly overstated by the backward-looking indicators and practically fictitious figures, like the owner’s equivalent rent. Peter believes that inflation is actually a lot lower than the CPI figures are telling us, and that the Fed will eventually come to terms with that at some point this year. This will inevitably lead the Fed to begin cutting rates.  

However, on the flip side, there is a good chance that the Fed keeps rates exactly where they are, simply due to the fact that the vast majority of the economy is not sensitive to short-term interest rates. This means if interest rates remain higher for longer, only a handful of sectors, like autos and housing, will feel the burn. As long as the job market remains strong, and GDP figures continue to grow, the Fed has little reason to begin the rate cut.

Want more? 

To see our list of upcoming guests, be sure to check out the Walker Webcast.