Walker Webcast: Guest Peter Linneman Chats About Capital, Asset Types – and Yes, Fed Cuts

With Q2 2024 winding down, it’s time to look back and anticipate what’s to come. On June 19, 2024, the Walker Webcast did just that in its broadcast from Chicago. There, host Willy Walker (Chairman and CEO of Walker & Dunlop) and guest Peter Linneman (Founder and President of Linneman Associates) discussed trends and conversations from the Bennett Zell Classic Roundtable that they attended. The event offered access to what Walker dubbed as a collection of the greatest real estate and finance minds in the business.

Walker and Linneman said they took two things away from their conversations with others. First, “most of them have bought into the notion of higher rates for longer,” Linneman said. “I disagree with that. I believe the rates come down this year.” The second consensus is that capital for projects exists. But it’s sticking around on the sidelines.

According to Linneman, it’s still there because lenders and equity partners aren’t paid to take certain types of risks. “Basically, they’re paid to do things when others are doing things,” he added. “But they’re not generally paid to take the risk of doing things when others aren’t.”

Understanding Office

Walker and Linneman also touched on various real estate sectors, with much discussion centered around what’s happening with the office sector. One focus topic was the relevance of Kastle Systems Data, which measures space usage through card swipes and other technology. “It’s the only data that’s broad, so it gets used,” Linneman said. “It shows about 55%, 60%, at most of places getting used.”

However, in discussing the issue with building owners with their security systems, “they show basically back to normal occupancy on Tuesday, Wednesday and Thursday, and some number like 75% on Monday,” Linneman said. Furthermore, not all buildings have Kastle Systems, suggesting that recorded attendance is lower than in reality.

Linneman also introduced a “back-of-the-napkin” calculation regarding office vacancy, suggesting that the supply pipeline is the delta between today’s vacancy rate and that of 2019. “If you had a big supply pipeline, like 3% a year, coming on for four years, the vacancy rate rose by 12 percentage points,” he said. However, the rate might have increased from 10% to 12% in a low-growth market where little was coming online.

Furthermore, “demand didn’t grow, even though employment grew, which was kind of a surprise,” Linneman said. Because demand didn’t increase along with supply, “it doesn’t take a genius to figure out that’s going to be a challenge,” Linneman said. “And it doesn’t take a lot to soften the market.”

An Industrial Discussion

On the other hand, industrial is doing quite well. “It’s probably the most favored asset class today,” Walker said. “The crazy days of 1% vacancy are gone. It’s normalizing closer to 3% vacancy, which in any other asset class, you’d sit there and say, ‘That’s the greatest day ever.’”

Linneman agreed that the 1%-2% vacancy was too low. “It’s great for the owner, but it’s too low from an operating efficiency for the economic point of view,” he said. Meanwhile, the increase in supply and pullback in demand isn’t a concern. Furthermore, “where you used to have ten tenants walking through the space, and you now have four, you only need one of them, or two, to get some kind of bidding,” Linneman said. “It’s different from no one walking through.”

Finally, industrial, especially warehouse industrial, has a short build time. “It’s easy to say, ‘Let’s hold off starting a new one for six months or a year,’” Linneman said.

What’s Needed to Meet Housing Demand

The host and guest also addressed the current shortage in single-family housing. Despite the higher mortgage rates and home prices, Linneman said about 3 million single-family homes are undersupplied in the industry. “To solve this, we’d need about 1 million to 1.1 million every year for the next decade just to deal with the new net population,” was Linneman’s estimate.

But it will be a struggle to achieve that, partly due to NIMBYism and local zoning requirements. Additionally, “there’s going to be a down cycle during that time, where capital will dry up for a year or two, so you likely won’t hit that pace,” Linneman said. “It’s just a hard one to make up.”

What About Rate Cuts?

Returning to the question about the Federal Reserve’s cuts in the Effective Federal Funds Rate (EFFR), Linneman continued to hold to his prediction that rates will come down. He predicted three rate cuts by the end of 2024.

“The Fed has been a terrible predictor of itself,” he observed. “Going back two months before their fastest rate increase, and they said, ‘Don’t worry, we’re not going to raise.’” Linneman also said that the Federal Reserve will eventually understand that the housing metrics used – lagging rent growth and owner equivalent rent – aren’t ideal for measuring inflation or determining rate cuts. “I do think the Fed will surprise themselves and lower faster,” Linneman said, adding that the three rate cuts will total 75 basis points.

When Walker asked Linneman whether it was a good idea to go forward with real estate projects or pause, Linneman said “going” would be the best option. However, the hard part is getting that capital. “Capital doesn’t want to go, and most of us need capital partners or lenders to get us there,” Linneman said. “This gets back to the fact that they’re not paid to take that risk. But when it breaks, it breaks quickly. Everyone comes in. Then they’re paid to take those risks.”

On-demand replays of the June 19 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.