Wharton Professor Says Post-Election Civil Unrest Is Biggest Economic 'Wild Card'

At the end of March, former Wharton professor Peter Linneman warned the real estate markets about the possibility of civil unrest, arguing that nationwide job losses and the psychological toll of a shutdown would lead to violence. His dire predictions were realized as police brutality and protests became flash points in cities across the nation in the ensuing months.

Now, Linneman thinks the same sort of civil unrest is the largest “wild card” that could throw a wrench into the national recovery from the coronavirus, eclipsing even uncertainty about the spread of the virus itself. The match that would set off another wave of unrest, though, is the presidential election.

“Whatever happens post-election in terms of civil unrest, no matter whether it begins from the right, the left or both — hopefully neither — could bring tremendous damage that sets the economy back by six months,” Linneman said on Wednesday’s Walker & Dunlop Walker Webcast.

The November elections, the rising number of coronavirus cases and ongoing vaccine trials all contribute to uncertainty in the economy as the U.S. heads into the fourth quarter of 2020. But Linneman said that the possibility of civil unrest constitutes the largest unknown.

While investors have a fairly strong handle on the economic effects of a potential Biden or Trump administration — or of the news of a vaccine or therapeutic for the coronavirus — they may not have considered the ramifications of more mass protests. The possibility of further damage to streets and buildings, or the imposition of curfews in American cities in response to the election results — or the lack thereof — could disrupt both local and national economic markets.

One of the most surprising parts of the discussion for Linneman is just how inured Americans seem to be toward the idea of violence erupting in the wake of the election.

“Do the following experiment: Ask your acquaintances and friends, ‘Do you think there will be notable violence if Trump wins?’ and the same question for if Biden wins,” Linneman said. “My guess is that you’re going to hear a lot of yeses. If there’s a lag between the election and the results, that could foment violence.”

Walker & Dunlop CEO Willy Walker asked Linneman what he thought about investors who are considering taking their money out of assets in the stock market until the dust settles from the election. Linneman responded that such a move probably doesn’t make sense for any long-term investor, considering how tricky it would be to time re-entry into the market.

“Traders and hedge fund managers are the ones who can play those games,” Linneman said. “But long-term investors should get ready for a bumpy November, December and even January. There’s going to be a lot of days where you say to yourself, ‘I should have sold.’”

However, despite his predictions of volatility, Linneman was bullish on how real estate investments will fare in the coronavirus recovery. The most recent Linneman Letter, a quarterly economic forecast published by the professor’s research firm, Linneman Associates, argues that real estate investment trusts are still undervalued by around 22% in the public markets, up from an eye-popping 53% undervaluation estimate in March. Linneman believes that REITs will outperform their valuations because they tend to own higher-end assets. As lower-end assets fail, consolidation would power growth at these REIT-owned properties.

The outlook is also surprisingly bright for brick-and-mortar retail, Linneman thinks. Even at the height of the shutdown, his firm estimates, only 16.1% of retail spending came from e-commerce. 

“I’m frankly amazed not at what brick-and-mortar could do, but what e-commerce could not do, namely, sell groceries profitably,” Linneman said. “This was the perfect storm to test if e-commerce could overtake brick-and-mortar for good, and e-commerce failed miserably.”

Linneman also admitted that he had incorrectly predicted a long-term drought in the single-family housing market earlier in the spring. While job losses did hit American’s paychecks, six months of “involuntary saving” — with canceled vacations and fewer restaurant outings — meant that many families suddenly realized they had enough money for a down payment, Linneman said. 

But even with the surge in single-family sales, Linneman was hardly less optimistic about multifamily. He predicted a drop-off in the pipeline of new multifamily projects, which would drive up demand for the existing stock of housing. That being said, he warned against believing in multifamily deals “below replacement costs,” given that he expects construction materials and labor costs to drop over the next five years.

All told, the coming holiday season is still set to be a time of prosperity for the real estate industry, and Linneman closed with a hope that listeners would think of those less fortunate.

“Don’t lose sight of fact that the people on this call are relatively blessed,” he said. “Try to reach out and help somebody. There are people out there, who though they may have been ‘hurting’ in general for many decades, [are] now really hurting. We can see that vividly both in our own communities and around the world.”

On Oct. 28, Walker will host former University of Texas Chancellor and Navy Adm. William H. McRaven, to discuss foreign policy and education in the time of COVID-19. Register here for the event.

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