Peter Linneman On CRE Uncertainty, Interest Rate Cuts And The Housing Squeeze

Commercial real estate may still be experiencing uncertainty, but the fog is lifting a bit, said Peter Linneman, economist and former professor at the Wharton School of the University of Pennsylvania, on this week’s Walker Webcast, hosted by Walker & Dunlop CEO Willy Walker.

Linneman said the haze clouding the CRE market is due to multiple factors. Some of it is economic, while some is policy-driven. And some of it hinges on when capital markets will start to recover: Will it be a slow comeback or a sudden surge of capital coming back with a vengeance? 

While the uncertainty has yet to completely dissipate, there are encouraging signs that the market is heading in the right direction. 

Linneman said banks are starting to test the waters again, developers are starting to play the long game and office assets have made a “tremendous amount of progress” since last year. For Walker, this brought to mind recent comments from BXP CEO Owen Thomas.

“One of the things [he] said was you’ve got to remember that economic growth, GDP growth and companies expanding and taking more office space is wildly more important to the office market than ‘back-to-office’ and whether we get to 60% or 75% participation rates,” Walker said. “The underlying economic backdrop is far more important.”

In his most recent quarterly newsletter, Linneman urged CRE professionals to ignore the noise coming out of Washington, D.C., because significant economic realities continue to hit the bottom lines of major companies. For instance, Walker noted that Porsche and Mercedes-Benz second-quarter sales volumes were down 6% and 9%, respectively.

“This [sales decline] was basically all in China,” Linneman said. “It also underscores a derivative effect. There's a lot of margins for adjustment so that, at first glance, you’d think [the impact] would be massive. It's less massive than you think because there's a lot of back doors.”

Linneman’s newsletter also revealed that he is not concerned that GDP was slightly down in Q1. This is largely because producers were stockpiling prior to President Trump’s sweeping tariffs. But if the president gets his 20% tariff across the board, GDP will take a hit of 200 basis points, he predicted. 

However, this is unlikely to occur. The most likely scenario is an average tariff of $3 per $100 — perhaps $5 or $6 — which would still be “detrimental,” Linneman said. 

Regarding inflation, Linneman said that from 1983 to the onset of the coronavirus, inflation has been 1.5% to 2.5% with very little volatility. In 2020, this narrative flipped on its head. Inflation suddenly spiked — whether that’s due to supply chain issues or money supply problems is still debated. 

Today, these sources of inflation have largely subsided, according to the New York Fed index.

“The supply chain issues have been completely gone for a year-and-a-half now, and by the Fed's data on monetary creation, they've only increased the money supply by about 2% over the last year,” Linneman said. “You're back down to where you were. The world starts looking like the world we had from 1984 to 2019.”

It seems as though the Fed is committed to not letting inflation come back, he added.

“It reminds me of a Vin Diesel movie where the bad guy has already been taken out but they keep shooting, and the Vin Diesel character finally comes up and taps him on the shoulder and says, ‘I think they're dead,’” Linneman said jokingly. “We need somebody to come tap the Fed on the shoulder and say, ‘I think [rising inflation] is dead.’”

He added that President Trump has floated the idea of nominating a new Fed chair so that Jerome Powell essentially loses his power, and that it wouldn’t necessarily be a bad thing.

“[President Trump] is not wrong about everything,” Linneman said. “He’s dead on [in this case].”

Steadfast in his prediction from the Linneman Letter, he said that ultimately, the Fed will cut interest rates by 100 basis points by year-end. Walker remained skeptical of this prediction, so the two placed a bet on whose prediction would come true.

“I don't really want to kiss your feet again next year, but I’ll make a bet,” Walker said. “Since I'm on the under, if the Fed lowers rates by 100 basis points or more, I owe you a pair of New Balances in January of next year. If not, you owe me a pair of On Clouds.”

Additionally, Walker and Linneman touched upon three outlying data points in Linneman’s newsletter: Median family home prices, multifamily starts and office vacancy. 

In almost every other economic metric Linneman tracked pre-Covid versus today, there was high single-digit or low-double-digit growth. These three outliers had data points in the high 40% to 50% range, Walker said, with median home price up 58%, multifamily starts down 47% and office vacancy up 48% compared to before Covid. 

The most shocking figure of this data set is median home prices rising so dramatically, Walker said.

“You say your home renovation index is a great leading indicator of home sales because everyone goes out to Home Depot and buys all these supplies to fix and sell their home,” Walker said. “I read that and thought, no way they're fixing up their house to sell it. They're fixing it up to stay.”

Linneman hinted that Walker was correct, this index is slightly skewed as a leading indicator because the “lock-in” mortgage effect is impacting the single-family market and will continue to have a huge impact moving forward until rates decrease. 

The big housing squeeze affects today’s renters who would be buying second-hand or existing homes, Linneman said. They're the ones staying in multifamily longer, and this won’t change unless something dramatic happens.

“State and local municipalities, let's be honest, they've said that they want affordable housing,” Linneman said. “The truth is, they really don't. If they did, they would [have it].”

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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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