Latest / Real Investor Radio Podcast / Ep 72 | Dr. Peter Linneman on Real Estate Trends and Economic Forecasts

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Ep 72 | Dr. Peter Linneman on Real Estate Trends and Economic Forecasts · Real Investor Radio Podcast

• Craig Fuhr (00:12) Hey, welcome back to Real Investor Radio. I'm Craig Fure joined again by the great Jack Bevere. Jack, it's great to see you. Jack BeVier (00:20) Yes, sir. Good morning. Craig Fuhr (00:22) Well, we, we have had, many esteemed guests on the podcast over the past 12 or so months, Jack, and I would encourage folks to go back and listen to some of the great content that we've put out for better real estate investors. we're pretty proud of the stuff that we've done. And today, is no exception. really excited, to have on our guests today, Peter Lineman. I don't want to, Jack and I usually start off with a little bit of banter, Peter, but your time is way more valuable. So we'll just jump right in. by way of intro, I'll just say that Peter is the CEO and founder of Lineman and Associates, American Land Fund and KL Realty. And for the nearly 45 years, Dr. Lineman has given his unique blend of scholarly rigor. and practical business insight. And it's one of accolades from all over the world, including the Pension Real Estate Association's prestigious Grascamp Award, Wharton School Zell Lari Real Estate Center's Lifetime Achievement Award. He received a special achievement award from Realty Stock Magazine and was named one of 25 most influential people in real estate by Realtor Magazine. He's also been named one of the 100 most powerful people in New York real estate. I don't know how we ever agreed to get them on the show, Jack, but we're so thankful that you've taken the time to join us, Dr. Lineman. Really just can't thank you enough for your time. Very gracious of you. Peter Linneman (01:42) You're kind to have me, so I look forward to it. Craig Fuhr (01:46) Well, we we touched on a few bullet points prior to pressing record. I'll let Jack just start things off. We're excited to have a you know, fairly lengthy discussion with you about a wide range of topics. Jack BeVier (01:58) So yeah, thanks for joining us. I'll say that I mentioned this before, I was an undergrad at the University of Pennsylvania back in the early 2000s and had the pleasure of crashing a couple of your lectures in a packed house. literally the constraint on who could show up was literally seats. So it was a standing room only kind of affair. So it was easy to figure out who was crashing and who was actually registered in the course and I was one of the the unlawfuls But enjoyed it enjoyed it very very much. So I was excited to get you to join us on the podcast So thanks for that Craig Fuhr (02:34) Peter, I'll just say, you know, I Jack is generally unflappable regarding most things. And we've had on a wide range of guests on the show. I don't think I've ever seen him so giddy as to have you on the show. So again, thanks. Thanks for joining us. Peter Linneman (02:49) Well, maybe he had a drink this morning. I don't know. That's the other possibility. Jack BeVier (02:53) Yeah, this time of year, it's been known to happen with increasing frequency. So, I'd love to get your take. You published a quarterly newsletter about all things real estate, covers all asset classes, which is exceptional. It's really long form content, dives deep on the data. And you come to very independent conclusions. I've seen probably more contrarian opinions. that have been right off of it often been right and strong opinions on policy that come out of that newsletter. So it's a it's a really interesting read. I would love to get your take on the feds move just yesterday. Right. They dropped a quarter point, but notably revised their expectations that the fed dot plot moved pretty significantly in terms of one one and two year projections for where we're going to land and how quickly we're going to land, so to speak. So I wanted to get your take on the Fed's actions recently. You've been pretty critical in the past of specifically the timing of their action or lack thereof. do you think that they're back on track yet? Were you finally getting good Fed policy? Peter Linneman (03:59) Well, that's asking too much to get good Fed policy. Look, I think it was like around the first of July. The Fed had basically indicated there were going to be no more cuts in 2024. And the market got very dour that there would be no more cuts. And I was on a webcast and I think fairly prominently said there'll be three more rate cuts. in 2024. And I had no inside information. I just looked at the data and I didn't see how they could avoid it even if they were irresponsible. And I'll come back to that. The reason I point that out is not to show how brilliant I am because in the remainder of 2024, they not only cut three times, they cut 100 basis points over that time period. but rather the feds are terrible predictor of themselves. And that's an important thing to remember. So as you pointed out, they cut yesterday by 25 basis points, but basically said, don't look for much in 2025. And it was the, I think the first part of the cut got the market excited. And then they heard the last part and people got very dour. and the market crashed, the long-term rate skyrocketed, you can go through a whole lot of things. And I think the fundamental thing is they forget the Fed's a terrible predictor of themselves. It was only five months ago, the Fed said they weren't going to raise any more in all likelihood in 2024. Now, how is it that I thought they would cut and where do I think they're at? Pretty simple. Two ways to view it, but... Let me take the simplest. Since the Fed took the interest rate to 5.5%, since that moment when it hit 5.5%, inflation has fallen by 4 to 5%. But the interest rate has only fallen one percentage point. Or if you say it in basis points, 400 to 500 basis points fall in inflation, but only 100 basis points fall in the interest rate. What does that sound like? Sounds like too little too late, right? Which is, I'm not saying they should have cut 400 to 500. That's not quite the point. The point is they were late going up and they overreacted going up. They're late coming down. They misguided going up. It was a matter of weeks. before the most rapid increase in the short-term rate that they said were in no hurry to raise the rate. And then six weeks later, they're in the most rapid increase in modern times. So again, I stress they're late, they overreact. I don't know what guides them at times. And they're just not in the right place. Was a cut a good thing? Absolutely. cut is a thing. And in fact, let's come to the second thing. Why did I say in July or at the end of June? Inflation, depending on how you measure it, is somewhere between 1.5 % and 2.5%. And it's been there for the last six to eight months. And you say, well, that's a big range, 1.5 to 2.5%. It depends how you measure it. It depends where you live. Do you rent or do you own? Do you drive a lot? Do you not drive a lot? Do you eat out a lot? Do you not eat out a lot? So if you ask for Americans, somewhere between 1.5 % and 2.5%. Let me just call it 2 % just for a number, right? So I don't have to keep using the range. The short-term rate on safe lending should be what, 75 basis points over that? Maybe 100? How risky is it to lend to the US government for 30 days? So let's give it 75 basis points over inflation. That would say 2.75. And if you think inflation is 2.5%, it's 3.25%. They're still at 4.5%. So they're still very high. They're still very high by that metric. Jack BeVier (07:54) Mm-hmm. Mm-hmm. Peter Linneman (08:19) And that's all I saw back in June and July. I figured, in fact, I think I kind of famously said sooner or later, probably later, good sense will set in. So we're on a course of a one and a half to two and a half percent inflation. All of the inflation happened because of the pandemic and the shutdown here and around the world. Otherwise, we'd have still been ticking along at one and a half to 2 % inflation. There's no reason to think we wouldn't have. But we had supply chain issues and we had stimulus and so forth. And I remind people, and I'll ask you, Jack and Craig, suppose we were sitting here in 2019, December 2019, and I said to you, we're going to shut down a third of the US economy. You're not going to be able to get elective surgery. won't be able to go to the baseball games, won't be able to go to the football games, not the basketball games, can't travel to Europe, nobody can travel here, blah, blah, blah, right? And we're gonna shut down businesses for six months to two years, depending on the country and the location. How long would it take for the economy to recover from that? Well, first you'd have said, that's impossible. It'll never happen. Well, we'd all been wrong. And the second is, I think we've all said, well, if it does happen, it'll take five years or so for the economy to it. Well, we're five years out. And the economy is still just shaking it off, right? Still just, it's like, how long does it take you from being out in really, really cold, damp, windy weather, underdressed, to warm up? You don't warm up in two minutes. You get less cold in two minutes, but you don't warm up. That's what's going on. So I think looking forward, they're going to cut at least three times in 2025. Why? Because the inflation rate is somewhere between one and a half and two and a half. That says the interest rate should be somewhere between two, seven, five and three and a quarter. There's no reason that it doesn't go there other than stubbornness at the Fed. Jack BeVier (10:28) Do you think that they, do you think it was a political statement? Cause part of it was, you Hey, we're unsure of what, what Trump's policies are going to be and what effect those policies may have on the economy. So they were kind of hedging, right? Because they're not sure what to expect yet. So do think there's some, politics in this, in this readjustment? Peter Linneman (10:45) I don't think there's huge politics. think it's fair to say that we wouldn't have known, they wouldn't have, let's suppose Harris won and now we're having this conversation. But let's say the Republicans took the Senate and the House as they did. You still wouldn't know what policies were going to be because you had all these sun setting tax laws. You had Harris, wanted to raise the taxes, but you had a Democratic, excuse me, a Republican Senate and a Republican, you still wouldn't know, right, what was going on. You still wouldn't know spending plans. You wouldn't know deficits, et cetera. So we aren't going to know until we know. So I think maybe tiny, tiny, but not big. I don't see much in Trump policies. I'm not a political person at all. I don't see much in his policies that is notably noninflationary. And I didn't see much in Harris' that were notably noninflationary. They both like to spend like mad. They both would have had to deal with Congress. They would have spent on some different things, right? the uncertainties would be different. So I don't think there was a lot of politics. I'm reminded 50 years ago, I was a graduate student of Milton Friedman's and other faculty at the University of Chicago and I was taking a class with Milton Friedman. And I remember him saying, the Fed is always late, they're always arrogant, they always overreact, they always think they have much greater control over the economy than they do. I don't see anything. In the subsequent 50 years or 51 years or how many 51 years, excuse me, I don't see anything that makes me change my view, which is to say I think it's the institutional DNA. I just think it's the institution. Jack BeVier (12:39) So why aren't they... Go ahead, Craig. Craig Fuhr (12:39) I think it was also, go ahead, Jay. I think it was also Friedman that said that only governments can create inflation. It could be the extra $2.5 trillion that was influx. What is your take on incoming Congress, Congress, and the Trump administration on being more austere in terms of federal spending? Peter Linneman (12:59) So to me to go back, said that inflation is always, he meant large inflation, is always and everywhere a monetary phenomenon. And when he spoke, that was true. However, now I go back to what we experienced. We shut down the world's economy. We shrunk supply of almost everything because businesses went out of business, workers stopped working. Craig Fuhr (13:09) Right, right. Peter Linneman (13:28) et cetera, et cetera. As demand came back, as we opened up, we just didn't have enough supply. And across the economy, across the world, including in countries that didn't spend very much during the shutdown because they had no money to spend. Think of the African countries. They had no money to spend, but they got inflation. Why? Supply got short. Now, Milton actually said to us the reason is because he could not imagine an economy where the supply of everything is in short supply. And when he spoke, I couldn't believe it either. But as we sat in late 2020, 2021 and early 22, it was true. We were in short supply of almost everything. And that boosted and that created the big inflation. It also created a lot of supply come online for everything. Did the excessive spending by government boosted? A bit, a bit. But if we'd had a lot of supply, it wouldn't have been nearly as big in effect, not nearly as big. And when did you see inflation come down? It wasn't when spending stopped. The government's still been spending like mad. as inflation has been falling. But what happened was that supply came back. Just think of apartments, right? You had a shortage of apartments in 2021, and you don't have a shortage of apartments in 2024, right? And that's because rents went way up because of the shortage, OI went up, people built, blah, blah, blah, blah, blah. Why did rents stop going up? It wasn't because the government stopped spending. because they kept spending. It was because supply adjusted. So I'm a little dismissive. I don't want to totally dismiss it. And there's been some research on this. I'm a little dismissive of the spending. Now, Craig, let me come to your question, because that's just backdrop. If you look at Trump's first three years and you compare it to Biden's last two years, why do I do that? I don't think it's fair to grade Trump on 2020, because that was an extraordinary event in world history. And I don't think it's fair to grade Biden on 2021, because it's the same statement and well into 22. So I always tried, I Jack, you would say the reputation, I always tried to be a fair grader. Didn't always succeed, but I tried. So if you compare the first three years of Trump to the last two years of Biden, Jack BeVier (15:50) COVID. Craig Fuhr (15:52) Hmm. Peter Linneman (16:18) Biden had more spending than Trump. But Trump had a lot of spending. It's not like they had some wonderfully balanced budget. So I see a lot of difference on what they spend on. Big difference in what they spend, but not that they spend. And by the way, not to make this a tribute, an homage to Milton Friedman, Craig Fuhr (16:37) Mm-hmm. Peter Linneman (16:42) He was a very clever guy. I also remember Milton saying, it is not whether we have a surplus or deficit. It's whether the things the government is spending on are productive or unproductive. And if we had a surplus and yet the government was doing massive amounts of unproductive spending, that's not good. If we have a deficit and the government is doing massive amounts of productive spending. Jack BeVier (16:57) Mm-hmm. Peter Linneman (17:11) keep it up, right? And so you cannot just link deficits to good or bad. It's the spending, is the spending good or bad? And that's a program by program by program. And nobody wants to do that homework of program by program by program. That's too much work. By the way, I always said, you know, needless to say, I'm not a Keynesian. Jack BeVier (17:13) that. Craig Fuhr (17:21) Mm-hmm. Right. Peter Linneman (17:38) And so you have this Keynesian narrative that if we spend money, it will help the economy, will stimulate the economy. And I always said, well, okay, let's say the government went out and spent a trillion dollars buying weapons to execute 99 % of the population. You think that would be good for the economy? Of course not, because it's horribly unproductive. Yes, but they spent a trillion dollar and the multiplier effect and the, go, no, no, no, no. you actually have to look at what they're doing with the money. If they came up with a trillion dollars of spending and eradicated all cancers forever and ever, I don't care if I have a surplus or deficit, that's enormously productive, right? So I always try to encourage people to get out of this mindset of deficit, good or bad, government spending, stimulus, et cetera. Craig Fuhr (18:23) Mm-hmm. Jack BeVier (18:25) huh. So you would say that, is it fair to say that you think that the Fed is still in restrictive territory, inflation is already quelled, and there's no reason why they shouldn't be continuing to drop because all they're doing is distorting the yield curve right now and keeping the short end too high. that over the course of 2025, it's most likely that the short end of the curve, we see a normalized yield curve in 2025 and Peter Linneman (18:57) Yeah, print it. You just said it. Print it. That's exactly what I believe. And I go back to what I started with Jack, which is inflation has fallen by four or 500 basis points and the short-term interest rate has only fallen by 100. That's distortionary, right? That's just too high of a real rate of return for doing nothing with my money. If I can get that much return, Literally doing nothing, right? I'm not committing it long term. I'm committing it to no risk and I'm committing it to something completely liquid. Why would I ever invest in real estate or anything illiquid or long or risky? So if you're going to give me the kind of return spread over inflation that I normally got only by doing something risky or illiquid or long term. Why would I do liquid long-term, etc.? So it's very distortionary. It has dried up a lot of capital flows. In real estate, it's dried up a lot of capital flows. What's the good? Go ahead. Jack BeVier (19:57) Yeah. Would you say that's the driver? So why is the 10 year above four and a half right now? You would say because we're paying four and a half for the 30 day and as soon as we get rid of that distortion, long end money will move to longer dated securities and drive the long end of the curve down a bit? Peter Linneman (20:24) Yes, yes, except to be by the way, if I just wanted to make the answer pleasant for myself, I'd say you're exactly right, Jack. And in fact, I said that yesterday morning before the rate cut in a presentation I did to a board. But then you'd say, why the 10 year treasury yield jump yesterday? Right. And you go, gee, I wish you hadn't asked me that. Right? Because they should rotate the other way. And the answer is, honestly, I can never figure out traders, which is just an honest statement. It's a punt, but it's an honest statement. Right? And the other thing is, if you made me say, think people are putting too much faith in the Fed being a good predictor of themselves. And I would take the two, I would go back. The two most recent episodes is we're in no hurry to raise the interest rates and they went from zero to five and a half percent in whatever it was, 14 months or something, whatever the real number was. Well, that was a terrible job of predicting yourself. And then you say, well, we're not in May, you're saying we're not gonna cut rates probably anymore in 2024. And you do a hundred basis points cut. If you believe the Fed is a good predictor of themselves, yeah, I can see why those reactions might occur. They're a terrible predictor of themselves. I'm not even saying that like it's bad that they're a terrible, it's just a factual statement. Maybe they should, well, I would say they should be a terrible predictor of themselves given how bad their policy has been that eventually they see their error and adjust. God bless. Jack BeVier (22:10) Interesting. So what's your perspective on why they haven't come down more already? Like just just that. Like, you know, why are we still in restrictive territory? You don't perceive downside in I gather you don't perceive much downside in dropping short term rates. Peter Linneman (22:25) I see almost no downside in dropping short-term rates. Most of the economy is interest rate insensitive to the short-term. There are sectors that are very sensitive. Development is very sensitive. Auto purchases are very sensitive. Housing is fairly sensitive. Manufacturing is fairly sensitive. But I jokingly say, but it's true, if I were to have a heart attack right now, and somebody said, well, let's call an emergency and get him to the hospital. I'm not gonna say, not until they cut the interest rate another 100 basis points. mean, it's not, or someone about to deliver a baby yesterday morning was not saying, I'm gonna wait and see what Powell's gonna do with interest rates in the afternoon, right? Completely insensitive. When you sent your kids to school today, Did the interest rate enter your mind as you sent them to school? No. So by the way, if you were thinking about buying a car, you may have become more likely to buy a car because the interest rate being down a little bit on short-term loans. So I think the DNA of the institution is to lag, to be very slow, to believe that what they've done is right. That's all of us, right? All of us believe that what we've done is right. And it's very hard to move away from a position that what I've done was right when it's not. And I think they also have misread inflation without going into all the technicals. And I know you guys read me so you know what I'm going to quickly summarize. A quarter of when you see, this is for your listeners, when you hear the consumer price index rose 2.5 % over the last year. 25 % of the consumer price index is for an item that no one has ever or will ever purchase. And it is the price that homeowners pay in rent to themselves. Jack BeVier (24:35) And moreover, perception, what they think, it's actually survey-based. It's like what the homeowner thinks the rent would be, which is even worse, right? Because who the hell knows? How the hell do they know? Yeah. Peter Linneman (24:42) Which is even worse because who the hell... If you came to me, I'm pretty sophisticated, you're pretty sophisticated. If you came to me and said, I don't even, I mean, I come up with an answer, but it's kind of a bullshit answer, right? I mean, who thinks that way? And by the way, if you're gonna say, remember, if I'm paying it to myself, I'm receiving it myself, so nobody's ever paid this. That's very different than say you and some of your listeners who own homes that are renting them out to other people. That's a real question. What are you renting your home for? Right? That's a real question. You know, a single family home for. But what are you renting to yourself? 25 % of CPI is that. It has been running 5 to 7%. while the other 80,000 items that are in the CPI have been running 1 to 2.25%, depending on the time period. So if you only look at things that people purchase, inflation has been 1.5 to 2 % for some time. It's only if you add one item, which no one has ever purchased, that it goes to two and a half, three, three and a half, depending on the time. So I think they don't appreciate, I'm not saying they're not aware of, I don't think they appreciate the absurdity of it, which is I'm in my policy, I'm giving a weight to something nobody has ever bought. That's kind of crazy. Jack BeVier (26:29) Yeah. The, our perspective or perspective that we have is just, you know, just renting properties and selling individual houses to homeowners and lending, making a lot of loans to folks who do that. The, you know, the market has was like crawling up, you know, for the better part, you know, through the first half of the year. But I would say that if you asked me what have prices and in both nominal housing prices and rental prices done over the last quarter, specifically the past 90 days. that it is flat to down in a lot of places. are like price cuts are the, the, the predominant trend, not housing prices continue to increase. So I think that we're, I just think that we're, but we're not going to see that data until, you know, until all the public records update. in February, they'll tell us, Hey, by the way, the fourth quarter was really shitty. And we'll be like, yeah, no kidding. I'll be like, yeah, no kidding. Peter Linneman (27:11) They laugh. Jack BeVier (27:22) But like right now I don't perceive any kind of owner equivalent rent increases, you know, and from a practical perspective, but it's still not being published that way. Yeah. Peter Linneman (27:27) No, I totally agree. You're closer to the single family rental side, but I can see what Invitation Homes is doing and I can see what, and I, you know, I can see what apartments are doing. And they're not rising like CPI says they're rising. I can tell you that. And there's a whole bunch of reasons for that that we don't have time for. I think they over trust the data. I'm sure there's a lot of things outside of housing that you and I don't have the same sort of nuance feel for. It just so happens that housing has been the bugaboo this time around and we know the wiring. I kept saying, why doesn't the Fed just pick up the phone, call you and say, what's happening to your homes? Call Cortland. They've got like 120,000 apartments. Call Greystar. They have like 800,000 apartments. Look at equity residential and look at Avalon. And you would have seen that the rental information is way below the data that's coming in, way below. And they didn't have that sense of nuance. There's an interesting phenomena. This is not just a harp on the Fed. They're human. And if I was there, I'd be making mistakes as well. you have to remember I talked about 50, 51 years ago, 52 years ago. By 1986, we had no real inflation anymore. inflation became a passe topic. Let me just say by 1984, just to make the math of what I'm about to do easy. By 1984, Inflation was kind of a passe topic, big topic in the late 60s all through the 70s into the very early 80s and then becomes passe because it gets down to one, two, three percent. Why is that relevant? It says it became a passe topic for economics students to study. So, you you studied what was cool. and you did research on what was cool and research was being done on what was cool. Now, why is that relevant? Well, you basically stopped studying inflation in 1984. Imagine you got your PhD in 1984. Okay, you studied inflation, but anybody after you didn't. That was 40 years ago. You were 29 when you got your PhD. You're 69 today. You're probably not still working. If you are, you're me, 73 years old, way past his sell date. But at least I studied inflation. And it's interesting somebody like Larry Summers got a lot of press because Larry Summers studied economics in a period where you studied inflation. Now go to who works at the Fed, in the staff. The staff is full of a bunch of, and I'm not knocking them. They're a bunch of 32 year olds. Okay. And they finished their PhD five years ago. There was nobody in their studies that were studying inflation because why did you spend a lot of time studying from 2014 to 2019 inflation when it's running one to 2 %? Okay. So they went through their PhDs, not really getting it. They're not steeped in it. It would be as if we had a return of smallpox and there's no doctors who know how to deal with it, right? We just have no doctors who know how to deal with it. And you can imagine, not because the doctors are bad, not because they, who, do you think they spend a lot of time teaching smallpox disease control in medical school these days? Of course not. There was a time where they spent a lot of time. training people about smallpox or polio. Polio is another one. There was a time when they trained people a lot on polio, not so much. So that's also part of the Fed's problem is they don't have people who were trained to study inflation on the study of inflation. Jack BeVier (31:43) So if, okay, we'll take all that. As a result, in 2025, do you think that this is all gonna play out in that time period and we'll see mortgage rates, we'll see the short rates coming down, we'll see a normalized yield curve, we'll see money move to longer dated securities, and as a result, we'll see mortgage rates drive down, if so, by how much? Peter Linneman (32:06) So if. Craig Fuhr (32:07) And if I could just add, Dr, know, 2025 is going to be 12 months like most years. I'd love your take on sort of like, you know, January through April versus like sort of, you know, how the year might end up. Peter Linneman (32:08) Yeah, sure, bye, da. Okay, so I think January, February will be some normalization. You'll see the long rate come down 30, 40, 50 basis points saying we overreacted to the Fed statement. Cooler heads prevail. And it'll end, you know, maybe ends March around 4.1, something like that on the 10 year. The Fed isn't going to do anything on the short rate in January, absent some strange event. not because they just told us they're going to be for a month. So for a month and probably two months. However, as you move to the middle of the year, I think you're going to see two rate cuts, let's say from April to August. Jack BeVier (32:53) Yeah, Trump. You're gonna wait to see what Trump does, yeah. Peter Linneman (33:06) and April through July, you'll see two cuts in the short rate. You'll see because of the reason Jack was saying of money rotating out as the real rate gets pushed down. You'll see the real, excuse me, you'll see the long rate come down to three seven, three six. You'll get another cut as you get into the fall. Why? Because of what we said, inflation's not gonna be that high. They're going to be moving it down. And when you get to year end, I think what you're looking at is 100 basis points lower, at least on the short end. I'd say 100. So by the way, that still only leaves you at 3.5. It's not like that's such a low rate, right? Not like we're kind of, yeah. And so you get down to 325. I think there's even a chance of Jack BeVier (33:55) Very flat yield curve. Peter Linneman (34:00) but you get down to 325, let's say, and the long rate comes down by December to 45, 44, 46, something like that on the rotation that Jack was describing and inflation staying muted. It will be every year is a hell of a ride. In history, every year seemed like it was a pretty smooth year unless you lived it. And if you lived it and you have a good memory, no year was ever a smooth ride. There was never a smooth ride year if you lived it. Craig Fuhr (34:39) Amen to that. Jack BeVier (34:40) So that's a, I mean, that's, super interesting. Let's talk about how that extrapolates to, to the equity side of things and investing how investors should be thinking about, you know, putting those inputs into their, into their actions for, for 2025. So what's your take on, I read in the report multifamily, you think multifamily cap rates are actually going to come down on a going forward basis? Like, those prices have already bottomed. Like we saw some cap rate increase over the past year or two. you're calling, you know, that, that, that you think is going to, tighten from this point forward. Peter Linneman (35:12) Yeah, multifamily probably bottomed cap rate wise, bottomed four months ago. It's not improved a lot since four months ago, but it's improved. Cap rates, at least in my analysis, have been primarily determined by flow of money. We have way below normal transaction volumes. Just look at the volume of transactions, they're way below normal. There's no... which means there's below normal capital flows. And it's not surprising that cap rates are relatively high. Now, transaction volumes, particularly in multifamily, have picked up a little, and not surprisingly, cap rates have gotten a little better. I think what happens as you move through 2025 is you will see more money flow, we'll get closer to normal volumes of multifamily transactions. Jack BeVier (35:47) Okay, get out of Peter Linneman (36:06) As you get more normalized capital flows, cap rates will come down a bit. I'm not saying they go to two, but they'll come down a bit. And I think by the end of next year, you will get a lot more capital flow and you'll get better movement in cap rates, better feeling cap rates. Meanwhile, I think we've hit the bottom in almost Well, let me put this way, in most rental markets, we've hit bottom somewhere in the last three months through the next six months. And that's because of the supply spurt. Remember, demand is done quite well. So the problem that you have in single-family rental softness and in multifamily softness is not because there aren't renters. It's because there's a lot of product. And supply has dropped dramatically. New starts dropped dramatically over the last year and will stay low. And that means that demand will stay pretty good. Economy will be pretty good. We'll add jobs. We'll have a pretty good economy. I'm not saying through the roof, but we'll pretty good demand. And it will The supply going down means demand will bottom things out. Yes, place like downtown Nashville, little longer. A place like downtown Austin, little longer. Philadelphia, central, little longer because in addition to the supply spurt that came from the shutdown, you also had a tax abatement. sun setting and everybody ran and got their permits before the tax abatement disappeared. So it takes pretty much through 2025 to get Philadelphia to bottom out. But by and large, three months ago to six months from now, multifamily rental, single family rental will have bottomed and you'll start seeing increases. And then I think in 2026, you see rent spikes. Why? Because you still get demand growth and it's going to hit not much got started in 2024, which should have been coming online in 2026. So there'll be a shortage in 2026 and you start seeing some rent spikes in 2026. Jack BeVier (38:34) That makes sense to me. I have this like thesis that affordability is a a big topic. And if you, know, in reading newspaper articles on it, I think that the reader gets the perspective that there's this cap, like that there's this ceiling of on affordability. And once you hit that ceiling, prices can't go any higher because the consumer can't afford it. And I think that that's, I've felt that that's misguided and Craig Fuhr (38:38) Yeah. Jack BeVier (39:02) The main driver being that like it that idea holds consumption constant and and supposes that humans must consume 1100 square feet of housing per capita. And that's just not true. Like you can just get roommates and rent rent. So rents per per property can go up because you put more humans in there. And so we have more household incomes. We just need the household sizes to increase. And so you get roommates and you leave less. Yeah. Peter Linneman (39:27) or grandma, or grandma, grandma subsidizes. But by the way, Jack, you know you're right. Because there's somebody spending 20 % of their income in some market, and those people view 22 % as really unaffordable. Meanwhile, there's somebody in California spending 52 % of their income. They also view it as unaffordable, yet they're doing it because they need to live some. And you're right, yes, they take a little smaller footage, they make room made up, they do it later, they take a mid block house rather than a, you know, there's a whole lot of margins. And as you go around the world, there's no magic number. People pay what they have to pay to get a reasonably decent place to raise their family. It's that simple. And by the way, similarly, we see the same kind of analysis sometimes mistakenly on education, right? Well, can't, tuitions, I've heard for, you know, I suspect your parents, when your parents went to university, people were saying tuition couldn't go any higher because there's a barrier. And then there you are, you're going, it was a lot more expensive and a lot more. And again, there are some items that people are willing to commit their income to. to get what quote they want. Now what they want changes. And we have a lot of leeway in our society, thank God. Not every individual. You realize we spend more eating out than we do on groceries. I mean, that's a society that's got a lot of cushion. I spend a lot of time in Kenya, in rural Kenya. We have a charity there, we deal with people. They don't eat out a lot. They don't eat out a lot. It's too expensive. And when you see us, I'm not, eat out pretty much every night. We carry out or eat out. So I'm not knocking it. I'm just saying it goes to your point, Jack. There's a lot of margin to adjust. A lot of margins to adjust. Jack BeVier (41:34) So what do you think, switching away from Rezzy, what about the other sectors? Industrial has been a darling for a long time, it still seems pretty strong. Retail seems to have recovered as well recently, and office obviously is just still like just is tanked and I guess my question, my main question is, do you think that the office side of things have bottomed out? or particular segments and would you divide that up between is that is there a regional answer? there a class A versus B versus C component to your perspective on this? Peter Linneman (42:06) So with office, if it's good office, and we can have a long discussion about what is good, but if it's good office, it probably bottomed about two quarters ago. Hasn't particularly picked up a lot, but it bottomed. It's flattened out. It stopped falling. If it's not good office, it's still falling. And that's because some of those people in the not good office are moving into the good buildings, right? With lower rents, it happens all the time. So I think from a rent and occupancy, good office has bottomed out. But bad office is still a falling knife. We'll see how far the knife falls. It usually finds a new bottom. From a capital point of view, you are seeing a few green shoots in office. of capital appearing. If we have talked 10 months ago, the only people buying office buildings tended to be a high wealth family here and a high wealth family there. You are starting to see a few institutional purchases. Not a lot, but a few. And of course, that's where the bulk of the money is. So I think it's early in terms of capital flows in office. And of course, it's focusing on better and so forth. If you go to the others, industrial, the economy is going to do well. Demand will be there for space. They had a supply spurt. It's largely getting used up. We went from a real shortage to a slight surplus. Rent's softened. Supply is cut back. So it's in pretty good shape. Capital is flowing. Although again, below, like multifamily, below average transaction volume. So not surprising cap rates are off. If you got more normal transaction volume, you'd see more, you'd see improved cap rates. Retail, retail for, I don't know, my whole career. Bad retail, I never want to own. Good retail is always really hard, but a good sector. What I mean by it's really hard, you're in the business of satisfying ever changing consumer tastes. So of course you're constantly losing tenants. Of course you have to constantly find new tenants because we change what we want and that's the throughput for it. And that has always been, will always be the really hot retailer of today will be a passe retailer of 12 years from now. Taubman used to say, whatever my mother wore, I definitely don't want to wear if I'm the daughter. And that's a little cliche, but it gets a certain image, Whatever, that's what makes Air Jordan, the whole phenomenon, so amazing is the duration. It's not the... Jack BeVier (45:02) Yeah, duration, yeah. Peter Linneman (45:05) the surge, it's the duration of the surge and the heights it kept going to. It's almost unique in retail history. So retail, if you got good retail, it's always hand-to-hand combat to get new tenants, try to keep the old ones, da-da-da, reinvigorate to what people want. If you got bad retail, it's very hard. Hospitality. moving its way forward, moving its way forward, they've been hit by run-up and operating costs. So occupancy is doing okay, but they got hit by run-up and operating costs. So that's squeezed the rent away. Jack BeVier (45:47) The, we're, my partner has a, interest in a office, opportunistic op office fund and the feedback that they're getting is that six months ago, there were a few banks that were lending on office still, but very, very few. And today it's like, none, none of them. It's it's CMBS or cash. And that is the only two ways to buy an office building. As a result, they, the cap rates are great. And it the the challenges sifting through what you what you mentioned, you know, is this good office is resilient. Peter Linneman (46:18) Yeah, and I'll point out, you Sam Zell was a very good friend and people forget that when Sam grave danced in the early 90s in office, he was buying unlevered. I mean, if he could get leverage, he would take it. If he got seller debt or bank would give him a debt, some loan to take it off their hands. But basically he was. doing exactly what you were saying, Jack. Anything he bought, he bought all equity and sorted the capital structure out over the next two or three years by financing and out some money and so forth. So I think that's where office is at, right? Jack BeVier (46:55) Yeah, we started, we were fortunate. were buying, my partner started Dominion in 2002. So we were buying throughout the downturn and fortunately it didn't kill us. So we were fortunate enough to be in Atlanta in 2011, buying houses when that market really bottomed. it bottomed, houses that were previously selling for $200,000 were selling for literally 20 and $25,000 at the courthouse steps because they were unfinanceable because it was, and the point was because there was a cash, it was only a cash bid and it was a high operational in, highly operational involved and the institutional capital hadn't got into it yet. And so that, you know, that occurred to me or, know, it's really, that, that experience really drove home for me that it's not that the, that the, the inability to get financing when that really, when there's just no debt bid. the price drops like materially like that's like a quantum that's a moment where the market gets that bad there's like a quantum drop in pricing and it's Peter Linneman (47:52) If there's no money and you are in a capital intensive business, it's not good. It's just not good. You know, if you're in a labor intensive business and there's no labor, it's not good, right? Just common sense. You don't have to go to Wharton to figure that out. But what you said is exactly that. When there's no money out there, for whatever reason, it doesn't matter what the reason is. whether it's a global conflict or whether it's the collapse of the SNLs or interest rates got jacked up or oil crisis or doesn't matter what the reason, there's no money, rates go way up and pricing goes way down. And we're in one of those periods where the movement of the short-term interest rate caused money not to flow and that has affected cap rates. And the analysis I've done detail now, but I give a very simple image of why it is the flow of money that determines cap rates. Think of it this way. Suppose you had to measure how you pick a GPS point in the ocean, 40 yards offshore, and you pick a GPS point, you say, I'm going to measure from the bottom. to the highest part that water touches, okay, to the highest part that water touches at a 90 degree angle straight up, right? What's going to determine how high that water is? Is it how much erosion or buildup of the bottom occurs? Probably not. I mean, it affects it. What's really gonna determine it? Is tied in? Is the tide out? Are the winds high? Are the winds low? Is it raining? Is it not raining? That's the flow. And you can think of interest rates as kind of being the bottom, right? And it changes, right? The bottom changes as sediment comes in and sediment goes out. That doesn't change much the measurement of how high the water is though. What's really changing it most of the time is... is the flow, tides and so forth. And that's why I find cap rate. The other way to think about it intellectually, if no one lends to you, does it matter if the interest rate is low? Jack BeVier (50:11) Yeah, exactly. Peter Linneman (50:12) I mean, and that is somewhat true. There are times when the interest rate is low, but no one will lend to me. Well, that means I have to fund it all with equity. So if I was funding some with debt and some with equity, and now the debt's so afraid that they won't lend to me, you know the equity has to be terrified. So you know the equity is more expensive and all of my capital stack has to be. And somebody says, yes, but the interest rates down. doesn't help me. It doesn't help me the interest rates down if they don't lend. And I think that's what people miss. Jack BeVier (50:52) Well, hey, good. Craig Fuhr (50:52) Jack, have a final question and a request, but you go first and then I'm gonna. Well, Doc, I think Jack mentioned to me before the show today that he's got a book currently on his side by his bed. And I think you are a great contributor to that book. It's the great age for reboot, cracking the longevity code. You mentioned that you were 73. You look like you're about 53. I think you look better than I do, sadly. Jack BeVier (50:57) No, no, no, go for it. I was gonna rap, so. Peter Linneman (51:10) Yeah. Yeah. Craig Fuhr (51:18) That said, not asking for a yes or a no, but man, we would love to have you come back on and talk about that. I just started getting into it. It's fascinating and I think it would be a fascinating listen for our listeners. Peter Linneman (51:23) Bye. I'd be happy to and in fact if we do it'd be great to have see if Mike Royce and conjoin, know, he's the medical, I can do the medical, he does the medical much better. I do the economics of it much better. So maybe Mike and I can come on, he's terrific. Craig Fuhr (51:45) Yeah, for folks who are interested in the topic, would highly encourage you head over to Amazon or your favorite bookstore to pick it up. I'm into about the first 15 pages and it's really fascinating the changes that are coming in longevity just in the next few years. We're not talking 2050 here, we're talking 2030. And so, you know, really, really interesting. Can't thank you enough for your time. It's been absolutely fascinating. Jack BeVier (51:46) That'd be a lot of fun. Peter Linneman (52:06) Thank Craig Fuhr (52:11) Jack, I honestly thought that going to Wharton would be way more geeky than this discussion. But you tend to break it down, Doctor, in a way that we can all consume, and I really appreciate that. Peter Linneman (52:22) I'm not smart enough to be complicated. Happy holidays to you and everyone else. And my only parting word to everyone is be kind and think of others, particularly at this time of year. Craig Fuhr (52:24) Ha ha ha! Yes, sir. Yes, sir. Well, thank you all for joining us, Doc. If you want to keep your browser open until it uploads, that would be great. We'll end this episode. Happy holidays, as Dr. said, and we wish you all a peaceful and prosperous New Year as we head into an exciting 2025. No doubt we'll see you next year. Peter Linneman (52:36) Thank you.