Walker Webcast: Economist Peter Linneman Revises Rate Forecasts, Warns of Data Center Overbuilding

Economist Peter Linneman still believes inflation will ease. But he’s no longer as confident that the Federal Reserve will respond with cuts in the federal funds rate as quickly as he said earlier this year.

Linneman appeared on the Oct. 7 Walker Webcast with host Walker & Dunlop CEO Willy Walker. During the hour-long event, he acknowledged that the conflict in Iran and its impact on oil prices upended his prediction of two to three rate cuts in 2026.

As a result, while he doesn’t see rates coming down any time soon, he doesn’t see them going up, either.

However, oil prices are expected to stabilize at some point, even if at a higher level, which will pull measured inflation down. Once oil becomes non-inflationary, “The Fed will, at some point, lower the rate,” Linneman said.

Linneman, who has long been a critic of the Fed, said that he feels the organization has become the largest short-term economic concern. “They’re going the wrong way,” he said. “And there’s going to be a lag, and it’s not going to take effect instantly.”

Borrowers and Refi Strategies

A higher fed funds rate will affect CRE borrowers, especially those facing refinancing deadlines. Linneman had two pieces of advice.

First, “don’t sell if you don’t have to,” he commented. Second, find a shorter two- or three-year loan to see if market conditions improve.

“That’s contrary to my normal view,” he said, adding that he’s usually a fan of longer-term financing methods. He acknowledged a higher risk by going short but said it could be worth waiting it out until the market improves.

Equity as the Problem

The current environment can reduce the amount of leverage that a property can realistically support. At the same time, equity is still scarce.  Part of the issue is that the stock market is rising, meaning money could remain there rather than flow to commercial real estate development.

“Does someone want to go into a construction loan right now, or do they want to have equity on the sidelines to buy distressed assets that have good occupancy and a capital structure that’s upside down?” he said.

That dynamic could constrain development even when fundamentals suggest new construction makes sense. Investors also face a choice between allocating scarce equity to new development and holding it for distressed acquisition opportunities.

Multifamily as a Beneficiary

Linneman said he anticipates that effective rents should improve as concessions burn off. But he also cautioned against anticipating dramatic face-rent increases, even as he indicated in a recent “Linneman Letter” that rent spikes could occur in the sector during 2027.

As an example, he said that two of his projects have gone from two months of concession to no concessions. “I view that as a notable spike,” he said. “Did we raise the rent? No. But it’s a notable spike. I think that’s what you’re going to see in 2027.”

He remains particularly bullish on Austin, Nashville and Charlotte because they’re markets with high growth and limited construction.

Linneman also cautioned that the timing of rent spikes could be long-term, suggesting that holds should be at least four years.

Office Requires Selectivity

Linneman’s view of office is similarly selective. He pointed to San Francisco, New York and parts of Charlotte as markets showing improving fundamentals, while downtown Los Angeles and Chicago remain considerably weaker.

The difference, he said, is that investors now have access to capital if they demonstrate good market and asset selection. That wasn’t the case two years ago.

“You might have picked all the right places,” Linneman said. “But two and a half years ago, debt would have said no. Equity would have said no, except for the odd family office.”

Even with more capital allocated to the sector, Linneman cautioned against throwing a dart when it comes to decision-making.

“I don’t think you can show up with any old thing and expect to get financing,” he added.

Data Centers: Potentially Too Much, too Soon

Linneman’s biggest real estate warning was data centers, which he recently added to his “canaries in the coal mine” in the Linneman Letter. These are the indicators he watches for emerging problems.

Despite the demand and supply spurt, he’s concerned about yield and that “sooner or later, it’s going to get overbuilt.”

Furthermore, the hyperscalers remain so desperate for space that they’re willing to pay rent premiums.

On the lending side, they’re providing up to 90% of leverage on first mortgages. “Lenders are viewing this as no risk,” Linneman said. “How has that generally turned out in history?”

With lenders and tenants doing something that’s not normally seen, “I think it gets overdeveloped in a strange way,” Linneman commented.

Another concern is inexperienced developers rushing in on the backs of those who know how to build the facilities. With such developers, “I think what you’ll find after a year or more is that nothing will have occurred, except they burned through a lot of your money,” Linneman said.

The Longer View

Linneman said that his preferred real estate investment today would be multifamily in supply-constrained markets that have strong long-term demand. “If I have to cash it in in four or five years, I don’t think data centers are a loss in the next four years, because there’s so much money already committed,” he said.

The broader lesson from Linneman’s revised rate outlook is that oil prices should stabilize or decline, inflation should trend downward, and rates will eventually follow. What he no longer has confidence in is timing or the Fed’s ability or willingness to recognize and act on change.

On-demand replays of the Oct. 9 Walker Webcast are available through the Walker Webcast channels on YouTube, Spotify and Apple. Subscribe to get invites, replays and articles for new Walker Webcast episodes every week.