July 10, 2018

Dr. Peter Linneman shares his insights and perspective as part of the RealNex Webinar Series

Earlier this week, I had the pleasure of hosting Dr. Peter Linneman as part of the RealNex Webinar Series. As always, he shared a wealth of information, rapid fire in our hour-long session. Peter was optimistic about the economy, where we are in the cycle and the balance within commercial real estate markets. While you can follow the links to the full replay and the deck, here are my 10 key takeaways.

• Even though real USA GDP is at an all-time high, growing at 3.8% and accelerating, we are running $3.4 Trillion below long-term trend. Over the past decade we have accumulated a GDP shortfall of $20 Trillion to trend…an amount almost equal to current GDP.

• Recoveries don’t end until there are excesses in the economy and we are running 80 bp below norm. Nearly half of reduced growth is due to the housing sector not recovering to potential.

• Trade issues are overblown. They will not impact the big picture. There will be winners and losers, with little impact on a net basis.

• We have added 8 million employees to the workforce since 2008. We are adding 2.3 million per year with only 2.5 million being added to the economy. This pace is expected to continue as more people leave the sidelines and return to the workforce.

• Homeownership peaked at an artificially high level of 69% and troughed at 62%. Expect to continue to recovery to long term potential of 67% from current level of about 64%. Millennials want to own, are moving into home owning years and once again “Grandma” has the down payment.

• Current Fed Discount Rate is at zero in real terms adjusted for inflation. Long term average is 1%. Expect it to approach that 50-75 bp over next 1-2 years.

• On the Trade deficit, even though we are exporting more goods and services than ever we are still running at a deficit. Foreigners can either buy our goods, services or assets. “They buy less of our goods and services because they really want our assets. This is because we are the safest, most transparent, most liquid and honest market in the world – we aren’t safe, transparent, liquid or honest – just more than everyone else…We really have a capital surplus exactly equal to our trade deficit.”

• “People worry that rising interest rates will impact cap rates and erode real estate returns… Historically, price returns have done better in periods of rising rates than falling rates. This is because periods of rising rates tend to be in growing economies with lots of capital. The key to pricing is access to capital – In the 2007 interest rates were much higher and cap rates were about the same as they are today. In 2009 and 2010 interest rates were very low but no money was available.”

• “As long as you can hold on to your property, you’ll do ok almost any time, including if today is the worst time you could have bought.”

• The Canary Chart – Of the 40 canaries, 22 have died. Cycles don’t end until 80% have died. We have a good couple of years left before the market turns but start to position for that cycle to come.

These macro views set the stage for specific discussion of supply, demand and pricing for each major CRE asset class. Please watch the recording and review the deck for a comprehensive overview of the economy and its impact on the commercial real estate market.