In this special live episode of Leaning In, Trademark CEO Terry Montesi is joined by returning guest and renowned economist Dr. Peter Linneman to break down what’s shaping the economic landscape as we move through 2025.
From inflation and interest rates to capital flows, consumer shifts, and real estate dynamics, Peter offers grounded insights and a healthy dose of perspective on where we’ve been—and where we may be headed.
Whether you’re navigating strategy in retail, real estate, or simply trying to make sense of a volatile market, this conversation delivers clarity, not noise.
🎧 Stream now and follow Leaning In for more conversations on what’s shaping the future of commercial real estate.
Transcript
Terry Montesi: Well, Peter, good afternoon.
Peter Linneman: Good afternoon.
Terry Montesi: Hey, this is so timely. Thanks, as always, for joining us. And it just feels so timely that we’re talking today in this period of intense uncertainty, as we were talking about. And I would love to start by getting you to help talk my friends and listeners off the ledge as we were discussing, because you’ve made such great points over time in this regard. So, I’m going to let you start by just kind of addressing the uncertainty and how and if that should affect our behavior today.
Peter Linneman: So there’s always uncertainty. I mean, I’m 74 years old and every year of my life, you can make a long list of things that are uncertain and dangerous, not just uncertain, but dangerous, truly dangerous. And I was in a conversation about a week ago with someone in their early 20s, and they said, oh, well, the world’s never been more dangerous than this. And as I was telling you, I was reading about the hundred year wars. And I said, well, that was more dangerous during the hundred year wars. And I said, it would come as a surprise to my father and all those young boys on the beaches of Iwo Jima or Normandy that today is the most dangerous time in history, because I think they would have had a dispute about that. And I’m being American-centric in that regard, but look, there’s always uncertainty. Most of the uncertainty, though, has very little to do with what we do. So I’ll go back last week. Is the Fed going to cut the interest rate? Is the Fed going to cut the interest rate? Maybe they’re going to not cut it. Maybe they’re… was uncertainty about that. They didn’t cut it. You know what happened? The sun still rose and the sun still set. Did you have to make some adjustments depending on them not cutting it? Of course. Are there some people worse off because they didn’t cut it? Of course. Are there some people better off because they didn’t cut it? Of course. If they had cut it, the sun would have still come up, sun would have still went down. Some people would have been happy, some would have been sad. If your life, in our business, if your life depends on something like the Fed cutting 25 basis points, you got a problem. You really have a problem. It doesn’t mean it has no bearing, but you’re in the business of making five, 10, 15 year investments. Go back and tell me 10 years ago when you were making an investment, all the things that worried you, they didn’t turn out to be the determinants of was it a good investment or not. They really didn’t. And in fact, if I quizzed you right now and said, go back to 2015 and the things that consumed you in terms of uncertain, I don’t mean just you, anybody, you can’t even remember what they were. I’m being a little glib, but you really can’t remember what they were. Somebody said, oh, these are precarious times. All times are precarious. These are unusual times. All times are unusual. These are unprecedented. All times are unprecedented. One of the joys of living to my age and I hope much longer is you realize that once-in-a-lifetime events happen about every four years. It’s not the same once-in-a-lifetime event. But once-in-a-lifetime events occur all the time, and part of the investment business is to not be captive to once-in-a-lifetime events. You know when you make an investment today, if you made an investment decision today, you know with pretty much total certainty some once in a lifetime event is going to occur in the next five years. You know that. You don’t know what it’s going to be, but do you trust your abilities to adjust to whatever it is? And go back to COVID and the shutdown of the world’s economy and you couldn’t fly to Europe and you couldn’t fly to Asia. If we could survive that, we can survive all this other stuff. And if there was ever a testimony to resiliency, fundamental ability, overcoming uncertainty, the fact that five years ago, the world was in chaos and today it’s where it’s at says we can weather it, as long as you have the constitution to weather it.
Terry Montesi: Well, speaking of the constitution, it made me think of a question as a follow-up. A lot of people, and we didn’t use his name or say specifically, but a lot of people feel like it’s never been like this because we’ve never had a president that’s just so out of control, trying to do so much, so unpredictable. And people say, and the guardrails just don’t seem to be there. Our system doesn’t seem to be able to control him. Do you have any observations about that?
Peter Linneman: Well, my first reaction is those people haven’t read history. I mean, you can go back through the history of this country and lots and lots of contentious times and lots and lots of unprecedented political events, including assassinations, just civil wars. I love it when people, again, it’s like what I was saying about my father and his peers would have thought it was a little bit more dangerous when they’re at Iwo Jima than today. Can you imagine during the Civil War? People talk about contentious, people talk about things never happening like this before. They suspended habeas corpus in our country. I’m not blaming Lincoln. I’m just saying we’ve got a long and varied history of presidents and Congress tap dancing with one another and Supreme Court. I mean, it was before my time, but FDR saying I’m going to pack the court because they didn’t come out with the decisions I wanted. That wasn’t lightly talked about. He tried to implement it. You talk about guardrails. And by the way, I’ve so far mentioned two legendary presidents. So I’m old enough to remember Nixon being effectively forced to leave; you talk about guardrails and unprecedented and so forth. And we survived. And so I don’t get caught up in that. There are some policies that this president, like every preceding president, tries to implement that I’m in favor of. And there are some policies I look at and I go I have no idea what they’re thinking, how can they be that dumb? And I felt that way every administration of my life, every administration. And the only difference is I’m not really political. So I look at it and say, here we are again, some policies I like, some policies I really don’t like. And one of the things I realized is I have no right to have the policies I like to be implemented. I have a right to vote on people, but I have no right to have the policies I want to be implemented. And there is an element, now I’ll probably catch a lot of grief for this, or you’ll catch grief, there is a lot of whining kid. Like, they’re not doing the policy I want. They’re not doing the policy. You don’t, you have no right to have the policy you want. Get over it.
Terry Montesi: Oh, I’m good with that. I’ll endorse that. Okay, so next, again, something very timely. The not so beautiful word of the day is tariffs. They’ve set the capital and stock markets into quite a tizzy. What is your view on tariffs and their importance, their impact on our lives and on real estate?
Peter Linneman: So I’m a Milton Friedman libertarian, so free markets and open markets and so forth. So it’s not going to surprise you that I think tariffs in general are not terribly productive. And in fact, all a tariff is is a tax. It’s all it is. And I would say the same thing about all taxes, whether it’s an income tax or a VAT tax or a capital gains tax or a corporate tax or an estate tax, they all distort economic incentives and they all reduce economic activity, and the research shows that very clearly. And a tariff is just another tax in the same sense and a state tax is just another tax. It distorts in a different way, it distorts different things. Is it good for economic growth to have more distortions? No, of course not. By the way, why do we have taxes? We don’t have taxes to help the economy grow. We have taxes because we think we want to raise revenue or we want to reward certain people for certain behaviors politically, etc. That’s the honest statement of taxes, or punish people, cigarette taxes. We want to punish people for certain behavior of cigarette smoking. But they’re not good for the economy. So if I told you we raised a tax a little bit on a small part of the economy, some people are going to feel it, but not most of us. If you told me that you’re going to raise taxes a lot, like a real a lot, on, I don’t know, 10% of the economy, it’s going to have an effect. Is it going to help some people? Of course. Some people benefit from whatever taxes and some people get hurt from whatever taxes. Is it going to help the economy in general? No. All a tariff is is a big tax on 10% of the economy. Imports are roughly three trillion dollars a year on a $30 trillion economy. And if it’s a small increase, it’s not good, but it’s not catastrophic. But the increase that was at one time being seemingly talked about, it’s hard to know, was about $20 per $100 imported. If you went the combination of where we import from and what we buy from where we buy it, it was about being talked about like around $20 a hundred, on a hundred. And remember that’s 20% tax. That’s a big tax. And it has been $3. So if you went from $3 tax on 10% of the economy to 20% tax on 10% of the economy, that’s going to hurt. It’s going to knock a point or more, maybe as much as two points off of GDP. It will lessen its impact over time because people adjust. They’re not going to buy the same things in the same way. They’re going to adjust. But of course, that would hurt. It appears, you tell me, but it appears it’s more likely to end up some number between $5 and $10 per hundred, still to be determined depending on the deals. Going from $3 to $5 on a hundred, not a big deal. It will affect people. It will hurt the economy. But going to 20 would have hurt a lot. By the way, when you- people wonder, where’s he get this phrase, all the big- what was it, big, beautiful tax revenues? It’s not hard. If you have 3 trillion and you put a 20% tax on it, it’s $600 billion. Now, it won’t be that because all projections of tax revenues like that end up short because people adjust. They adjust on the income tax, they adjust on capital gains, they adjust on the state, they adjust on… So, it would never have been 20 per se, but yeah, I mean, if it was at 20%, it would be 600 billion, which is a lot more than when it was at 3%, seven times higher than when it was at 3%. So tariffs are not good. They would have an odd effect, Terry, on pricing, prices. Let’s just say, I’m just making up a number, inflation absent an increase in tariffs is going to be 2%. I’m just going to keep the math simple. And then we put on a tariff, that set of tariffs that raises prices, well, let’s say one and a half percentage points. So, you’d go from 2% inflation to 3.5% inflation. Because it would push the price up. What happens the year after that? And I’m making it a year. It could be faster, could be slower. After that, it goes back to 2%. Why? Because unless you keep increasing the tariff, the price isn’t going to go back down, but it’s not going to keep rising because of tariffs. It may rise because of other things. So it has this odd effect of look inflationary as they take effect. Prices stay high, but it no longer is inflationary thereafter. So it’s a little tricky. People have a hard time grasping that.
Terry Montesi: It has a short term inflationary effect. So, inflation, that’s our next topic. So, it’s continued to cool off. And in fact, we got some good news on CPI today. Although there’s some potential pressures in certain spots and the tariffs are scaring some people. Where’s your head and forecast on inflation?
Peter Linneman: So let’s take the number that just came out this morning on CPI. CPI was 2.4% year over year. However, if you dig in that index, it says the rents that people paid you for your apartments went up 4% last year. Now I don’t know every property in your portfolio, but I know in talking to people, I know from CoStar data, I know from Yardie data, the closer answer is around zero. I think CoStar just came out with something that said San Francisco was the highest last year at like 4.3%. And then you quickly got down to in the top 10 being 2% and then you’ve got a hundred markets, most of them zero-ish. So I have no idea how the CPI said rents were up by 4%, but it did, that’s baked into that number.
Terry Montesi: And the housing portion of CPI is?
Peter Linneman: The rent actually paid by renters is 12% of CPI. So mismeasuring it really matters. And the second is this owner equivalent rent. How much rent did you pay to yourself and how much higher is it than the rent you paid to yourself last year? First of all, you don’t know how much rent you’re paying yourself. And secondly, how do you know what you were paying yourself last year because you don’t even know what it means? That’s 25% of the index. So, this number that no one buys, has ever bought, or ever will buy is a quarter of CPI. It rose 4.3% in the past year. So you have two items, one which nobody buys and the other which nobody’s paying that high a rate increase, created the 2.4% inflation. Take those two items out. It’s all you have to do. And it’s CPI less shelter. Just look at CPI less shelter, go to FRED, that’s Federal Reserve, St. Louis, and just do FRED CPI less shelter. This is not even a number I calculate, I just look at. And it was 1.4% in the past year. That is to say, if you take out owner equivalent rent, which nobody buys, and you take out rent, which is massively higher in its increase than anybody I know got, inflation’s 1.4% over the past year. And that’s basically what’s been happening for the last several months.
Terry Montesi: And on those housing calculations, don’t they take the trailing six months?
Peter Linneman: It’s a very complex calculation. It’s very flawed. Suffice it to say it lags by about six months. I don’t even blame CPI. CPI is what it is. I blame policymakers for not looking beyond because if I told you the rate of inflation for everything people buy except those who pay rent to a landlord is 1.4%. Why are you concerned about inflation? Why are you concerned? Why do you have the interest rate at 4.5% when inflation’s running, let’s call it 1.5%. It makes no sense. Do you really deserve a real return of 300 basis points to go overnight on something safe? I don’t think so. By having that real return so high, you’re discouraging people from going long, illiquid, and risky. So you’re even discouraging them from going in 10 year treasuries because they’re not as liquid and they’re riskier than the short term money. So we’ve got a huge incentive right now still in the system keeping a lot of money on the sideline because the Fed has the rate too high, and that means the return for doing nothing is too high. And we don’t want the return for doing nothing being very high. And so when you come to our business, is it surprising that capital, which is coming back, much as we said it would, but capital’s coming back, but it’s coming back more slowly. And the reason is inflation has fallen by 4 or 500 basis points. And during that time, they lowered the interest rates by about 100 basis points. It’s too high. And it’s distorting capital distributions away from risk, which is real estate, illiquid, which is real estate, long-term, which is real estate.
Terry Montesi: Got it. Thank you. And you have a sense of, and I know you have an opinion, as I read it recently, of whether we’re headed for a soft landing, because you’re projecting growth. What do we need to watch out for that might lead to a recession?
Peter Linneman: Well, I think one and a half things. Any big tax increase, any big tax increase, and I include tariffs as any big tax increase, if they tweak around a little at the edges, like Greg Maddox used to pitch, nibbling at the corner over there, nibbling at the corner over there. If that’s what they do with taxes, even if they raise them, it won’t be great, but it’s not going to derail anything. But any big tax increase would. And imports tariffs are the one being most spoken about in that regard. So that worries me a little. I don’t lose sleep over it because I don’t think they’ll do it as big as $20. I don’t think they’ll do it as big as $10 per hundred. The other one is a half and that is we’ve had an interesting thing happen, although it’s reversed a bit, which is even though the economic data kept coming out good and you saw jobs a week ago, jobs were out terrific, unemployment claims, really good. Even first quarter GDP, even first quarter GDP, which was slightly negative, basically was good. Why? Because consumption was up, healthy, investment was up, very healthy, exports were up, government spending was very slightly negative, which I think is good, but that’s a separate matter. How did we get a negative GDP growth if we had exports growing, if we had investment growing and consumption growing? And the answer was businesses imported about five months of items in three months. And the mathematics of GDP is consumption plus investment, plus government spending, plus exports, minus imports. We’re not going to import five months of goods every three months forever. So if you just said, well, what if we did three months? By the way, why did people do five months of imports in three months? It’s time shifting. And by the way, that time shifting is probably occurring in April. It’s probably still occurring in May. But that negative didn’t bother me in the least because that wasn’t fundamental. That was mathematical, but not fundamental. But a lot of sentiment indexes, the stock market, the stock market in the short term as a sentiment index was down. Consumer confidence, business confidence, etc., down. If sentiment became reality, that could derail. Why do I only give it a half? I give it a half because rarely does sentiment become reality. More typically, reality becomes sentiment. And there’s a lot of reasons for that. One of the reasons is the sentiment indexes, interestingly, when they ask party affiliation of people responding, it’s just bizarre. If you look at consumer sentiment, if the Democrats are in power, their confidence is high, Republicans is low, the election occurs, flips who’s in office, it just flips on a dime. Economics doesn’t flip on a dime. Then four years later, out goes Trump, in comes Biden, it flips again. Four years later, out goes Biden, in comes Trump, it flips again. So it’s hard to have confidence in that as an indicator of economics as opposed to something but not economic. So I don’t think we talk ourselves into it, but there is some slight, there is some slight chance. It reminds me, we’ve all had, it’s around Halloween, it is that damp, windy night. You’re walking back from the theater, you’re going through a park area, and suddenly you’re hearing everything. And you pick up your pace because you know there’s something, and you pick up your pace. And there’s nothing. There’s nothing. If it was sunny still, you would not have, but you let yourself get captured. I’m not Buddhist, but I’m a big believer in a lot of Buddhist principles, one of which is we’re our own biggest enemy. We’re our own biggest enemy. And controlling ourselves eliminates our biggest enemy. And I think that’s true economically. We’re our own biggest enemy. We see things, we fear them more than we should. We let them affect us more than we should. Leave the fright house, leave the fright house.
Terry Montesi: Thanks. So do you have any commentary on what you think the Fed’s likely to do the balance of the year?
Peter Linneman: I think they cut by about a hundred basis points. If you say, remember, I famously said, what, almost a year ago to Willie Walker that the Fed was going to cut, nobody believed it, and they did, and he had to kiss my feet as a result. So, you have a standing offer if you want to kiss my feet as a result. So you have a standing offer if you want to kiss my feet if they go up by a hundred, go down by a hundred. Why do I believe that? I think two reasons. One is-
Terry Montesi: By the way, it’s sure hard to see that in J-PAL’s commentary right now.
Peter Linneman: I don’t disagree, but it was equally hard to see it a year ago in their commentary and they cut a hundred. They’re a terrible predictor of themselves. That may be good, that may be bad, but it’s factually true. Why do I believe it? I told you earlier what I believe inflation is at. When I say I believe it, CPI says it. CPI says it, PCE says it. If you take out an item nobody consumes and you and I both know there’s no way rents paid by renters went up on average 4%. We both know that. I don’t know about all the other items in the index, but I know that one. So when you look at reality, it’s like one and a half percent inflation and it’s been there for several months. I just don’t believe they keep it at 4.5% if inflation is down that level. That’s the primary reason. The second is because I think at the first sign of weakness in the data, and remember, some people thought GDP was going to do it. It didn’t though, because they could see what I saw, which was consumption was up, investment was up, exports were up. It was all this time shifting of imports. I think if we got a weak employment number, let’s just assume next month, employment data comes, or later this month, I should say, if employment comes out later this month and it’s 32,000 jobs, I think they get frightened. I think they cut. They should cut. Autos are way under-consumed. Autos and manufacturing have been hurt by their interest rate. And I think they have a history of overreacting and they have a history of reacting late. And I think they’ll do it again. And the only reason, by the way, the fundamentals would suggest more than 100 basis points, the interest rate should be something like 2.75 to 3%, not 4.5%. They have a lot of margin.
Terry Montesi: Let’s shift over to real estate. You talk to a lot of institutional investors. What do you see in the institutional capital market? Where do you see it flowing? Have you seen changes the last few months? I know in our original business, retail, the institutional capital has returned to more than just grocery anchored and they’re more than curious now. They’re actually acting. So what do you see in an institutional capital market?
Peter Linneman: I think institutional capital is coming back. It’s hardly giddy. It’s hardly flying off the shelf. If you look at transactions volumes, they’re still below average. And it’s crude, let’s face it, if transactions volumes are below average, you know capital flows are below average. And if capital flows, if your transaction volumes are 50% higher than normal, you know money is flowing more than normal. So we’re still in a below normal flow, but it’s up from where it was. And it’s been steadily rising, by the way. As that’s occurred, you’ve seen cap rates improve, not plummet, but improve and in some cases be identifiable because, as you know, there were some things, there were just no real transparency. Having said that, it’s still got a long way to go. I think there’s a lot of money out there. There’s a lot of dry powder. There’s a lot of people with money, a lot of institutions with money. Particularly if the stock market stays up, the denominator effect will kick in on some people. So I think there’s a lot of money. We’re in the early stages of recovery. This is probably analogous to 2012, not 2016, ’17, ’18, ’19. This is analogous to 2012 maybe in apartments, it’s analogous to 2013. Office, the least flowing, but at least there’s some flowing. For example, this is public information, Equity Commonwealth, I’m on the board of, and we sold our last property, which was the, what was it, 17 Market, 17 Plaza in Denver which was a high quality office building. If we would have sold that a year earlier, I don’t think you’d have seen many institutional bidders. It was purchased by Lone Star. Now is that the same as Piecers buying it or CalPERS buying it? No, but it isn’t a guy named Bob who has a family office buying it. You did have some of those types of bidders starting to appear. So the money is coming back. I think as you go forward, it will just keep coming back more. Capital is a herd animal. Most investors and lenders are paid to invest and lend when others are also investing and lending. They’re not paid to stick your head out when others aren’t doing it. I mean, there’s exceptions, but as a general rule. So as the herd moves, the herd moves. And it’s always mysterious what started the herd and what kept the herd going, but somehow a herd does and there’s a lot of herd here.
Terry Montesi: In light of the real estate capital markets today, what would you advise real estate investors and developers to be doing now? Sitting tight, leaning in because supply’s down, or shifting their strategy entirely?
Peter Linneman: Look, if you’re going to be a long-time investor, in two senses, you’re going to be trying to do the investments over a lot of years. I then have sort of a vanguard view of investing, which is you don’t know when the peak is, you don’t know when the trough is. You do know when there’s a lot of capital you’re competing against and when there’s not much capital you’re competing against. Statistically, but not with statistical certainty, when there’s not as much capital you’re competing against and you hang on seven to 10 years, you do pretty well. And even if you got in kind of at the peak, come back 10 years later and generally you’ll do pretty well. And take 2007, which that was Equity Office being bought, Artstone being bought, et cetera, Hilton being bought, Extended Stay being bought at record prices. Come back 10 years later and they all turned out in a couple of cases to be spectacular, and a couple of cases turned out to be good. If you’d have judged them three years later, they were all bad. But this is not a game of judging people after three years. It’s looking at fundamentals. It’s looking at the quality of the property and positioning yourself so that you can survive to be around seven to 10 years later. And if you do, especially when you do it when others don’t have money and you do, you’ll generally do pretty well. One other comment, I had a question asked of me the other day, which was, yeah, but the deals don’t pencil. The deals don’t pencil. And I said, it all depends what pencil you use. And let me just take a development deal, for example. And let’s say historically, you’ve said I need 150 basis points spread between the yield on cost and the cap rate, and by the way, as a rule of thumb, that’s probably not a bad place to start. It’s a terrible place to finish. And I said, if you’re in an abnormally scarce capital market and nobody else is developing and you can capitalize yourself to survive 10 years, no matter what happens, which means less debt, you want to develop even if the yield on cost is probably only 110 basis points. Why? Because history would tell us that that 110% spread, when you look back, turned out to have been more like 175 basis points spread. Not in the instant, not the day you put a shovel in the ground, but if you’d have come back five years later, seven years later, turned out well. So, for example, Terry, don’t you wish you could have developed thousands of apartments in 2009 with- or 2002. And by the way, none of them penciled, not none, but basically they couldn’t pencil. Getting acquisitions to pencil was hard. And don’t you wish you’d have bought every apartment? I’m just taking apartments, but retail, you can do it in retail. Don’t you wish you’d have bought every good shopping center in 2002? Don’t you wish you’d have bought every good shopping center in 2009? You would have struggled and you’d have said, what an idiot I must be for, how long, three years? And then 10 years, you’d be telling everybody what a genius you are. And so, look, I taught models, I teach models, I use models, but I try not to be captive to the model.
Terry Montesi: Well, what I hear from you, and tell me if I’m listening, follow fundamentals and don’t over leverage.
Peter Linneman: Don’t over leverage, follow fundamentals, and tune out the noise, tune out the noise.
Terry Montesi: Yeah, and don’t try to time the market.
Peter Linneman: Don’t time the time, tune out the noise. Now there are times, I think that, for example, there is an argument to be made. Let’s go back to the tariffs. I follow it, and if you told me, is it going to end up $20 a hundred? I’d say, I don’t think so. Remember we’re at $3 a hundred before all this started. But if you said, does it end at $6? I’d say, I don’t know. Does it end at $8? I don’t know. Does it end at $11? I don’t know. Does it go back to 3? Could be. There are times when it’s foggy enough, if you’re on a mountaintop walking along and a dense fog moved in, the wise thing to do is nothing at least for a little while, unless there’s a bear on your tail and you got to do something. And so I think there is a sense that we are in a foggy moment, but this is not a uniquely foggy moment. By the way, this would have been a foggy moment if the Democrats had won. Imagine that the Democrats had the same majority in the House, the same majority in the Senate, and controlled the White House by all the same votes. Just imagine that. What would be the big fog right now? How much are they going to increase income taxes? How much are they going to increase capital gains taxes? How much are they going to increase estate taxes? How much are they going to increase corporate taxes? And we wouldn’t know. Because you’d know on Sunday, some member of something would say, I think we’re going to raise taxes to 43% on the top 5% of the income. And then of course, the next day the market would have plunged. And then you would have had somebody say, well, we didn’t really mean that, they were just speculating. And so, I’m not saying the fog would have been as dense, but given the taxes were expiring this year, we were going to have some fog and we still have fog trying to figure out what’s going to happen to broader taxes.
Terry Montesi: Let’s see, let’s go into some different sectors. You have highlighted a shortage of housing and even multifamily starts and multifamily starts slowing. Help us understand the housing shortage, its impact on multifamily, what to be watching for when that changes, and what’s your view on multifamily as an investment today? And I’m really thinking more about ground up multifamily.
Peter Linneman: Yeah, so we got to rewind the tape a little bit. If you go back to 2002, supply and demand for single family, pretty good shape, multi slightly overbuilt, if you go back to that moment. And I’m going to do it at a national level. And then what happened was we had this surge of housing production that was unprecedented, and in four years we built 2.3 million more homes than we needed. And we need about a, I’m just being fast, we need a hundred million homes and we built two and a half million more homes in four years. So that made the housing market real soft, supply demand. And that shut down housing production because it was real soft. We’d already built them, couldn’t get approvals, home builders couldn’t get loans. And so from really 2006 is when the housing surge stops for single family, and it starts going down and then we get to the financial crisis and nobody could get money for anything. So you had a shutdown of housing production basically from 2006 to 2009 related to the overbuilding. The financial crisis, which in large degree was created by that overbuilding, meant nobody got money. Nobody got money in 2009, ’10, ’11, ’12. Meanwhile, we kept growing. We just kept growing. So we not only burned off the overbuilding, we swung to an underbuilding. And in fact, by about 2015, we were about 2 million housing units short.
Terry Montesi: And can I ask you to pause? How and why did that happen? Because I read that it’s the reality, but we’re usually a pretty efficient market, and where there’s demand, we usually fill it. How did that happen?
Peter Linneman: It wiped the sector out and it wiped out a generation of lenders. It literally did. I mean, it literally wiped them out. And you had to kind of retool the whole mindset. And so we had this odd circumstance. It’s arguable that if we’d have never had the overbuilding surge, we would have never gotten that gap. We then got that gap and it got up to about three and a half million homes on a hundred million, shortfall, of something people really want. I mean, if we have a shortfall of 3 million pieces of bubble gum out of the hundred million people want, I don’t think it’ll cause a huge price surge because if the price surges, they’ll move to chewing gum or something. Housing, single-family housing is something people really want and the prices really went up and they went up whether the interest rate was high or low, they went up whether the interest rate was rising or falling. And it stayed for the last six years, no, seven years. It’s basically stayed flat, the shortage. Why? NIMBYs make it hard to make inroads against it. So once it developed, it developed for very unique circumstances, but once it developed, it’s hard to get rid of because NIMBYs will say, okay, I’ll let you have enough for the growth and population, but not enough to make up for sort of 10 years of nothing. And if you don’t make up for the 10 or 12 years of nothing, you have this shortage that still sits there and the prices just keep going up. Now, what does that do? First of all, there’s a physical shortage and people live at home longer or they double up with roommates longer or they rent longer. And they have to rent longer because as long as home prices are going up, you have to save longer to afford the down payment. And it’s the down payment that matters. If I can’t come up with a down payment, it doesn’t matter if I can come up with a monthly, I can’t come up with a down payment. And we saw that vividly during COVID. We saw that in COVID, there was a spurt of home buying. Why? We couldn’t go to the ball game. We couldn’t go to Europe. We couldn’t go to Asia. We couldn’t go to a concert. We couldn’t go out and shop. What did we do? We saved. And people saved as much in one year as they did in four years, literally. They saved as much in a year as they would have done in four years. And what did you have happen? The spurt of home buying because people had the down payment. You add to that that there were sadly a whole bunch of grandmas and grandpas dying three and four and five years earlier because of COVID that left inheritances. And those inheritances allowed people to buy that they would have otherwise had to wait three or four years. So there was a spurt. However, once people stopped dying early in mass, no longer early inheritances, and in fact, there were some people who had already got it, there was a time shift. And the second is we went back to going to Europe and we went back to going to the Caribbean and we went back to going out to eat and going to the ballgame. And once we did that, you went back to a normal savings rate, which means you got to save a long time. So the best thing that’s happening to multifamily, it’s got good demographics, but the best thing is single family housing is seriously underbuilt and I don’t see how NIMBYs will allow it to get undone. And you just have to stay in place longer either with your parents or a roommate or renting on your own while you build up a down payment.
Terry Montesi: Well, thanks for that explanation. So, let’s talk about the consumer and then we’ll talk about retail real estate and then we’ll be ready to wrap. The consumer, there’s some signs that they’re trading down, starting to slow down a little, although we still have a voracious consumer appetite. Higher debt, and I know you follow all this, so do you see any significant trends here that you would be concerned about? And what trends do you see just in general regarding the consumer in say the next six, eight months, 12 months?
Peter Linneman: The consumer’s in pretty good shape. Are there consumers who are not in good shape? Always have been, always will be, always will be. However, having said that, about 42% of all households have locked in a really low mortgage rate by any historic standard, so that the amount of money they’re paying on their mortgage, that 42%, is way below normal, which means they have more money to spend on other things.
Terry Montesi: See, they hold over low locked in permanent mortgages have been a factor to continually buoy the consumer.
Peter Linneman: Yep. Not every consumer.
Terry Montesi: But a lot.
Peter Linneman: A lot of them. Then you go, the second factor, there are a lot of jobs. Employment is high, unemployment is low. I’m not even saying the way we measure it, but jobs, people can get jobs. It’s never easy to get a job, but people can get jobs. Jobs are growing and let’s face it, that’s the most important thing economically to most people day to day. Third, the 65% of households that own their homes have their homes up in value. So their wealth is up. Now they’re not going to act on their wealth, but it’s a nice comfort. Then you go, their debt service is low and the debt service is low even though the interest rate on the short term is fairly high. Their debt’s low because of their mortgages for 42%. So yes, defaults are up. Consumer defaults are up, but they’re up from record lows to still a little below average. I live now, where I live, we’re in an office next to a major hospital. That’s a real emergency. That’s really something to be frightened about when you’re in there and you hear, when you’re on the inside of that and you hear it is not good.
Terry Montesi: Yeah, you can’t really leave, you can’t necessarily leave that fright.
Peter Linneman: But the stock market, let’s say, but the stock market’s down. I’m not even talking about the last couple of days. So as of yesterday, the stock market was where it was at on its way up, on its way up in September last year. And on its way down, I think it’s where it’s at in March. Well, people weren’t slitting their wrists last September about where the stock market was on its way up. They were happy. And so, there’s a sense of, is the consumer in good shape? Yep, they still have large cash reserves. Does everybody have it? No. Are there three people with horrible credit card debt? Of course. Student debt. Student debt, they may actually get serious and collect. I kept saying, and I think you read me say this, which is the scandal of student debt is not how much there is, it’s how few are paying it. And if they’re serious about collecting it, and remember, most of that debt is guaranteed by somebody, parents or someone, most notably parents. And if they get serious about collecting on that debt, it’d be good for the federal budget, it will drain a little out of the consumer. I mean, if you borrow a lot of money and you don’t try to pay it back, you have more money to spend on other things. But the consumer’s in okay shape and the consumer knows how to shop. And again, Terry, over my career, I can’t tell you the number of times people will say things like, the consumer’s about ready to collapse, they’ve got everything they need. And my description is you don’t understand. All an economy has been, at least since the Industrial Revolution, is you and I both work to make shit that neither one of us really need to survive but we like, and we work to get it, and then what we do is do it again the next day.
Terry Montesi: Yeah, the retail business is partially about filling needs, but it’s in good part about filling wants.
Peter Linneman: Yeah. And there’s nothing wrong with that.
Terry Montesi: I mean, we have an aspirational sort of society and economy for sure.
Peter Linneman: Yeah. Yeah.
Terry Montesi: How about we’ll finish macro. Real estate, if you were investing your money the next couple of years in commercial real estate, where do you see the opportunities out there?
Peter Linneman: Depends what kind. I’m going to loosely describe two types of opportunities. My friend Darla Moore, this is a phrase I stole from her. She says, I have a bucket of money for stay rich and a bucket of money for get rich. And the bucket of money for get rich is smaller than the bucket of money for stay rich. And it doesn’t mean get rich with certainty. It means I’m going to use that bucket to try to really get abnormal returns. If I were looking to generate not stay rich returns, but get rich returns, I would probably be trying to do into developments right now. Development with like a good supermarket anchored center, for example. Development of multifamily and a growing market, even if, quote, the numbers don’t quite work, if they get kind of close to work in the way we talked about. Office, I don’t think I’d be building office, although if I could get 80% pre-leased, I probably would. I just think it’s hard to get 80%, but obviously, if I could get an 80% pre-lease in office, I’d do that. I’d do it with low debt, but I’d do that. So I think there’s some development I would do to get rich and I’d say office, but you got to be patient and keep your debt down and I would go to higher quality. Then you go to the stay rich, and I like, and I have always liked good retail for stay rich. People are going to buy stuff, and if you’re at a location where they want to buy it and you can manage it to keep it at a location they want to buy. And as you know, one of the things that is odd about shopping centers is sometimes you win when you lose a tenant.
Terry Montesi: The last two years that has been universal.
Peter Linneman: Oh, just think about it. I learned this from Al Taubman years ago. In today’s dollars, you’ve got a shopping center doing let’s say $800 of foot sales. And you’ve got a retailer in there taking 30,000 feet that’s doing 150 in sales. They’re wasting your property. They’re not attracting anybody to that center. They’re not bringing anything to the center. If they go out of business and you can get somebody in there that does $800 a foot, even if you rent to them a little lower than the rent they were paying, you win because the whole center becomes more vibrant and you get it back in higher rents on everybody else as they explained.
Terry Montesi: Peter, that’s been the story with well located malls and department stores the last few years.
Peter Linneman: And is it a lot of work? Yep, that’s why you get paid. So, I like that for hard work, stay rich. I really do. I don’t like bad centers, but I like good centers. And all I mean by a good center is reasonably well-designed, maybe some opportunities for malleability, and it’s a place people want to go. It hasn’t been cut off by a new highway or a new superbox or something. So I like that. I like multifamily, steady income flow, decent property, income drops are not that big, keep your debt down, good capital market there. And industrial would be third. I do think we’re on the cusp of an opportunity that’ll only last a year or two in senior housing. And as you know, senior housing has kind of been a bit of a disappointment for 30 years because for 30 years people are saying the baby boom is aging. And I keep saying yes, a year at a time and they’re 30 years away from that age. Well, the lead age of the baby boom now-
Terry Montesi: And they keep working longer and getting healthier.
Peter Linneman: And so, the mean age of the baby boom now, finally, it’s like 78. And so they’re getting near an age where they’re really beginning to do it. And it’s been a sector that’s kind of disappointed on that story that nobody believes it anymore. And I think there will be a window about a year from now for maybe two years where it actually starts coming true. And they really get there. And all those 80 year olds and 79s and they become 81 and 82 and then everybody’s going to say well of course, but so I kind of like that, maybe a little early for that because I don’t think people believe. Data centers are the darling as you know. I don’t have a great- I mean, obviously we need data centers. The thing that worries me is anything that looks that good short term, in my experience, long term gets overbuilt. And so what worries me about data centers is not that you could do well over the next three years, four years on a data center. What worries me is I just historically see things that are that attractive get overbuilt. And the other thing is I know that they’re getting better, cheaper, and faster racks smaller, but I know they need more things. So does the more things outrun the speed at which it’s better, cheaper, smaller, cooler? And I don’t know, but that is a risk.
Terry Montesi: Yeah, it’s the technology infrastructure business. Well, hey, I have really appreciated our conversation today, Peter. There is a lot going on, and one thing, I always leave these conversations a little more calm, a little less worked up. So if nothing else, thanks for calming our nerves today, and you have a great day.
Peter Linneman: Thank you.