The July 12 quarterly appearance by commercial real estate economist Peter Linneman on the Walker Webcast coincided with the release of data showing that the Consumer Price Index reached a two-year low in June, a sign that inflation is being tamed. Nonetheless, Walker & Dunlop CEO Willy Walker quoted CNBC host Steve Liesman, who reported that 92% of those polled by the network expect the Federal Reserve to resume increasing the federal funds rate later this month, following last month’s pause. 

Linneman sees light at the end of the interest-rate tunnel. In his quarterly Linneman Letter, he predicted that the Fed would realize the error of its ways and start cutting rates by the end of the summer. That the central bank has kept up rate increases for this long could be attributed to “groupthink,” Linneman said on Wednesday’s webcast. 

He likened the Fed’s current monetary policy to the creation of Super Bowl ads that bomb so badly that they’re never seen again after the game or to the chaotic U.S. exit from Afghanistan in 2021. Neither was the work of people who were evil or stupid, he said. Instead, these groups fell prey to insular thinking. 

Looking at the CPI over the past six months, “you come out to around 2.7% annualized inflation,” Linneman said. Accordingly, a federal funds rate that’s about 230 to 255 basis points above inflation doesn’t make sense, he argued; ideally the rate should be 25 to 50 bps over inflation. 

Referring to the target rate of inflation the Fed intends to achieve, he added, “The Fed keeps saying ‘2%, 2%, 2%’ like it was handed down from Mount Sinai. It’s a made-up number. It’s not derived from a study of what’s optimal.” 

In each edition of the Linneman Letter, the veteran economist and Linneman Associates founder surveys both the macroeconomic landscape and the state of the major CRE sectors. He rates these indicators on a scale of one to five dead canaries, after the now-discontinued practice of sending the birds into coal mines to detect toxic gases before allowing miners to proceed.  

Only the Fed’s monetary policy warranted a relatively high four-canary rating in the newest Linneman Letter. For all of the alarmist headlines we’ve seen lately, CRE rated only one dead canary, and that one was assigned for speculative development in a few sectors: office, multifamily and industrial. 

The hour-long webcast provided a review of Linneman’s predictions from a year ago, which generally panned out with the exception of his belief that office occupancy would rebound. Looking into the near future, Walker asked Linneman how he’d advise a diversified CRE investor to proceed during Q3. 

For the most part, Linneman advised holding the current portfolio, and investing in the apartment sector through REITs, “only because it’s more actionable quickly. If I had capital available, I would be trying to do apartment development. I’d be trying to do industrial development. Why? Because I think by the time I start drawing down my construction loan, interest rates are going to be a lot lower than my pro forma.” 

On-demand replays of the June 12 webcast are available through Walker & Dunlop’s YouTube channel.