'So Good Even Our Politicians Can’t Screw It Up': Peter Linneman On The U.S. Economy

“Look at the data.” 

That is the message economist and former Wharton School of the University of Pennsylvania professor Peter Linneman had on this week’s Walker Webcast. Linneman gave Walker & Dunlop CEO Willy Walker his thoughts on inflation, the state of the commercial real estate market and the “too many levels of stupid” that are impacting the economy. 

Linneman said inflation data shows that producer prices haven't been rising and, in some cases, have actually been falling. Supply chain issues, too, have been improving. 

But despite these points, the Federal Reserve is continuing to raise interest rates until unemployment rises, he said. This is one of the “levels of stupid” that Linneman said is contributing to high inflation rates because he believes the Fed isn't taking into account the large percentage of jobs in today’s economy that are interest rate-insensitive. 

“State, local and federal governments are roughly 35% of the U.S. economy, and healthcare is roughly 18% of the economy,” he said. “Those two sectors alone are 53% of the economy. Is anybody not going to get a hip replaced because of interest rates? Is anybody not going to take care of their glaucoma because of interest rates? Is anybody in the government not going to get hired because of interest rates?” 

Walker said that in his quarterly Linneman Letter, Linneman predicted the Fed will start cutting rates by the end of the summer. However, the signs don't seem to be pointing that direction. Despite that, Linneman said it is so obvious that rates need to go down it will have to happen eventually.

According to Linneman, the issue is that the Fed has fallen victim to groupthink. Linneman compared the Fed to the people who make unsuccessful Super Bowl commercials: A group of people think something is funny or insightful, they show it to some other people who agree because the first group liked it, and disasters end up being created. 

“Smart people, working hard, delivered dumb results,” Linneman said. “And it is the danger of groupthink.” 

Still, Linneman remains bullish on the strength of the economy overall. 

“You've heard me say the U.S. economy is so good even our politicians can't screw it up,” he said. “And that's true. You know, I'm 72, and I've seen a lot of politicians come and go. I've seen a lot of Congresses, I've seen a lot of presidents, and even our politicians can't screw up our economy.”

Moving on to CRE, Linneman said he is seeing three pockets of speculative real estate where investment is booming. The first pocket is high-quality office space, which is still being developed despite high office vacancy rates. The second pocket is multifamily, where starts are rising even with high interest rates. The final pocket is industrial, which has strong demand and doesn't take long to build, he said. 

In the most recent Linneman Letter, Linneman said that only 92 funds closed in the first quarter, representing $23B in capital, the lowest number since 2013. Walker asked him his thoughts on this, since now should be a good time to invest in CRE. 

The problem is that most people don't want to be contrarians, Linneman said. Investors are following along with the hesitancy that many others are feeling about investing in the market right now, he said. In moments when there are lender strikes, like in early 2010, many people feel like it will never end, only to discover that in three or four years they are awash with money, he said. 

“If you can get in when there's no money and stick around until it's awash with money, you do well on a capital-intensive asset,” Linneman said. “But you've got to be a little patient. It's not a flip. You've got to focus on decent real estate because you've got to get to the other side.” 

The webcast closed out with Walker and Linneman doing a quick rundown of where various assets stand. In the Linneman Letter, Linneman said he believes the multifamily sector is fundamentally strong, but many markets have aggressive supply pipelines. He said the weakest multifamily markets by the end of 2024 are going to be Jacksonville, Florida; Salt Lake City; Raleigh and Durham, North Carolina; San Antonio; and Nashville, Tennessee. He said the strongest will be New York, San Diego, Boston, Seattle and Orange County, California.

“You've got to look at demand and supply growth,” he said. “So you can get some cities where there's not a lot of demand growth but there's even less supply growth. And you can get cities where there's a lot of demand growth and stunning supply growth.”

Linneman said he also feels bullish on the retail market, since consumer confidence is strong and the demand for brick-and-mortar stores is there but the supply is insufficient. He said there was $1.7T in retail sales in Q1, and only 15% came from online sales. 

“There's no new supply being added to speak of,” Linneman said. “But there's demand growth because there's income growth, right? How can you not like it?”