Once a quarter, the Walker Webcasts offers its “Most Insightful Hour in CRE.” During these sessions, Walker & Dunlop’s Chairman and CEO, Willy Walker, hosts renowned economist Peter Linneman.

The first Walker Webcast of 2024 took place on Jan. 10, bringing the two together for the 16th time. Linneman and Walker touched on debt (consumer, household, and federal), the Federal Reserve, inflation, and housing issues.

Linneman’s Inflation Truth

No one argues that inflation has been a factor in the recent past and current economic volatility. But Linneman believed the Federal Reserve had been out of touch concerning the numbers that continued to drive its interest rate policies. Rather than examining year-over-year Personal Consumption Expenditures, Linneman suggested it’s better to annualize the monthly figures. With this method, inflation has been closer to 1% and 2% over the past few months.

“If I’m right about inflation, it’s actually around 2%,” he said. “Because of that, a 5½% short-term rate is insane.” Just as insane as when inflation was at 2%, and the short-term rate was 0%, he added.

Furthermore, much of the economy is attempting to return to “trend,” which Linneman called “pent-up demand.” At the same time, “you have about 20% of the economy being damped by interest rate increases,” he said. “This impacts construction, banking-related items and automobile purchases – things that relate to short-term money.”

Assuming cuts of the Effective Federal Funds Rate in 2024, “you’re going to stop artificially hurting these sectors that are sensitive to short-term rates,” Linneman said. That will help industries – like auto – get back to trend and ramp up activity. More people will be willing to buy cars, he said, because loans won’t be quite so expensive.

The Housing Market: Not Enough Homes

Linneman and Walker spent time talking about the single-family housing shortage. Linneman explained that the current shortage can trace its roots back to 2002, which started the wave of overbuilding. Then came the housing market collapse, the Great Financial Crisis, and the construction halt. “We were still adding people, and it used up some excess for about four years,” Linneman said. But then came a shortfall and a decline in building, mainly due to NIMBYism.

Yet that shortfall is “also the best thing multifamily has going for it,” Linneman said. “People are going to rent longer and build up money for their down payments.” He indicated that those renting for upwards of 18 years will likely have to rent for at least three or four more years. “That’s a huge percentage change in rental demand right there,” he commented.

To Invest? Or Not

Another discussion centered on whether now is the time to invest in real estate. The most recent Linneman Letter suggested that it is; investing during times of capital market volatility can lead to outsized returns up to 10 years down the line.

But Linneman pointed out that today’s real estate investors are making what he called “Type 2 Investing Errors.” This is defined as people who don’t invest when they should.

“I think people are plugging into models in a sensible way but are missing the fact that in times of capital market disarray, you come back seven to ten years later and find you did better than okay,” he said. “That’s not factored into the models.” Opportunities are available, he added, but fear is keeping many investors on the sidelines.

The Other Real Estate Sectors

Linneman and Walker discussed the outlook for construction in other real estate sectors. Walker indicated that in construction dollars, 15% was headed to office, 7% dedicated to retail and 4% is slated toward hospitality. Meanwhile, 24% of construction dollars are dedicated to multifamily, while a whopping 48% is going toward industrial builds.

According to Linneman, online shopping continues to drive the industrial sector. “As online sales increase, they use a lot more warehouse space than traditional retail users,” Linneman said. He mentioned the line from the movie “It’s a Wonderful Life” that every time a bell rings, an angel receives their wings. “Every time you see something bought online, it means a whole lot more warehouse space is needed,” he said.

The fact that office is getting some share of the construction dollars interested Linneman. “Essentially, you have the model which is ‘if I build it, they will come,’ because office tenants want the latest and greatest,” he explained. “The idea is they’ll just obsolete the old stuff. Otherwise, the construction levels in the office don’t make any sense.”

Linneman Offers Predictions

At the close of the session, with Walker’s prompting, Linneman made the following predictions:

• The Federal Reserve will make five cuts on the EFFR

• The 10-year Treasury will be at between 3½% to 4½% by the end of 2024

• The stock market will be up by more than 7%

• The price of oil will be between $68 to $70 per barrel

On-demand replays of the Jan. 10 Walker Webcast are available through the Walker Webcast channels on YouTube, Spotify and Apple.