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The Walker Webcast
Dr. Peter Linneman, Leading Economist, Professor Emeritus, The Wharton School of Business - Part 24
01:05:01
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- [00:11]
A
Join Willie Walker, Walker and Dunlop's Chairman and CEO as we bring you fresh perspectives about leadership, business, the economy and commercial real estate. Willie hosts a diverse network of leaders as they share wisdom that cuts across industry lines. His guests are experts in their fields, from leading economists and CEOs to Harvard and Yale professors and everything in between. Our one goal is simple, providing you with unique insights, unparalleled data and real time market analyses.
- [00:44]
B
Chase, thank you for having me here. And I would say that my colleague Mitch Resnick, who runs our asset management group, asked me to come do this and thought about the idea of having Peter do it. And this is a great opportunity for Peter and I to do our quarterly discussion and everyone here is, if you will, getting the data early. This will be rebroadcast on Wednesday in our normal cycle of a Walker webcast. And Peter, I see that you're there. Hello my friend, I'm here.
- [01:18]
C
I wish from a temperature point of view, I sure wish I was there.
- [01:22]
B
Yeah, I will tell you, I landed here, I flew down from Denver where it's quite cold right now. Some of you who watched the football game yesterday saw exactly how cold it was in Denver. And I will tell you a lot better to be in Southern California right now, Peter, than in Denver or in Philadelphia.
- [01:37]
C
Yeah, I was waiting for them to bring you in a quarterback there in the, in the fourth quarter, but apparently not.
- [01:45]
B
Yeah. All right, here we go. I've got a little, I got a couple of things to do before we dive into the conversation. The first thing is that some of you may recall that in 2024, Peter had started the year saying that we were going to get three Fed rate cuts and we got to around May or June of that year. The Fed had not cut, nobody, no economist, the dot plot, nobody thought the Fed was going to cut. And Peter said, I think they're going to be three rate cuts this year. And I said to him, you are kidding me. And we were in Philadelphia together and I said to him, I will kiss your feet if we end up getting three rate cuts this year. So sure enough, we got three rate cuts in 2024 and in our January of last year meeting, I, I got down on my knees and I kissed Peter's feet. And so then again last year, and I'm going to run through a couple of his predictions before we dive into the conversation. Peter at this time last year said we were going to get 100 basis points of cuts. We got no cuts in the first part of the year. And then yet again Everyone said, we're not going to see the cuts this year. And Peter said, we're going to have three cuts. So I said to him, well, I kissed your feet last year, and so I don't want to do that again, but maybe if we get three cuts, I'll buy you a pair of shoes. And if we don't get three cuts, you owe me new a pair of shoes. So as everyone in this room knows, we got three Fed rate cuts in 2025. So these are some extremely large New Balance sneakers that I purchased for you, Peter, that are going to be shipped to you. And on the back of the left one, it says 3x25. So three cuts in 25 on the other one. Yeah. Well done, Peter. Again, you earn that shoe on the other one. You and I have had a long standing, sort of fun tease about which business school is a better business school on Wharton where you taught, or Harvard, where I went. And we have both jabbed one another. And so on the way out here, I was like, I gotta see whether Harvard is actually higher than Wharton in the current polling of best business schools. And sure enough, no. Wharton's like number one on most of them and Harvard's like two or three. And then I went and said, but what school's alumni base is the wealthiest alumni base? Because you go to business school to make money. And let's see you as the wealthiest alumni base. And sure enough, Harvard comes back resoundingly as the most wealthy alumni base. So on the back of this one, it says HBS with a dollar sign at the end of it. And so you can wear your New Balance around with both 3x for 25 and HBS$ sign. We will ship those to you.
- [04:29]
C
Many thanks.
- [04:31]
B
So, Peter, I want to, I want to jump through a couple of things that you said last year just to kind of give the, the group a sense of how accurate you were in a couple instances, not so much. Just because the returns in the stock market and where oil have gone have been so dramatically greater than what anyone could have reasonably expected that you sort of underwent on those two. But you're on the basis points. We already talked about that on gdp growth in 2025. I said you were convinced that we were going to get Trump was going to get Ukraine resolved. And I said to you, so if Trump comes in and Ukraine gets resolved.
- [05:15]
C
What do you think?
- [05:15]
B
And you said, it's going to be somewhere around 2.9 or 2.8. I said, if he comes in and Ukraine doesn't get resolved, what Is it? And he says 2.5 to 2.7 GDP growth. We don't have the actual annual numbers, but you were right around 3% GDP growth, which is what we got to last year. I said, dower, S and P. You said, I'll go with S and P. It'll be up 7 to 9%. S. P was up 18, as everybody knows. I asked you about crude oil. It was at $76 a year ago. You said it'll drop to 70 to 68 bucks a barrel. As everyone knows, it's at 58 to 60 bucks a barrel, so dramatically lower than what anyone could have predicted there. I asked you about whether banks would start calling loans, and I thought your response to that was fantastic, which was, those loans they say are due this year, they're not actually due. They're due when the property actually functions once again. And I think that we all saw that quite a bit during the year. You said that. We also, you said, would Trump have workers back into the office? And remember, this was before Trump actually took over on January 20th. And you were exactly right on his executive order to get federal workers back in to the office. And then the question that I asked you that a lot of people have gone back to is I said to you, what asset class do you like? And you said, well, if you want to stay rich, multifamily, if you want to get rich, office. And then I turned to you and said, well, if you've done stay rich and get rich, I guess what get. What's get poor. And you said data centers. And then the final one that I asked you was how long the bromance between Elon Musk and Donald Trump would last for. And your overrunner on that was six months and he lasted for five. So I think you were, you were, you were pretty spot on there as it relates to the bromance between Elon and the President. Peter, in our last meeting in October, you said you didn't have enough data to be able to give people a sense of where the market was going. And in your most recent Linneman letter, the data feels to some degree outdated. A lot of the data that you're talking about is Q2.25 and Q3 25. We have no Q4 data. And it feels a little bit like we're still driving the car, at least with the windshield covered with a good, good sheet of ice. If not, you know, we've got the, we got the defrost going, but it's hard to see through it right now how do you. Has your attitude changed as it relates to the markets? As we boom 2026, it started to.
- [07:59]
C
Get clearer, not clear clearer in early December as data did trickle out and as we saw the holiday season occur, shopping wise, retail wise, and it was a pretty good retail season during the shopping season. Why is that relevant? It means people had money. I'm not saying they're the richest spending in history, but they had money. And what worried me is we weren't seeing official data and I worried that we would see really bad retail results. As I saw good retail results. It actually pre. Come on. People are shopping because they feel relatively good and that's what we saw. And that improved my attitude a lot. And then since then we've had data come out and the data has basically been pretty good. Not stunning, pretty good. Nobody's losing their jobs, but we're not hiring a lot of people. We're not hiring a lot of people because we don't have as many immigrants coming in to be hired. That's not the only reason, but that's one of the reasons. And the other reason we're not hiring a lot is that people are uncertain. You know, we had the Middle east, we had all the tariff stuff, we had the shutdown, et cetera. And employers basically said we're going to find a way to keep growing over the next few months but not add a lot of bodies. And can you do that for a while? Of course. Can you do that forever? No, that's. The beatings will continue until morale improves. Operating model and it works for a little bit. So I think we're at the end of a Beatings will continue till morale improves. You're going to start seeing employment improve, though, absent an inflow of immigrants with we probably had, from what I can best tell, zero net immigrants this last year, a combination of legal, illegal people leaving US Citizens, et cetera. And that's a blow to population growth, which is a blow to employment growth. And I'll give one other thing. You were very sweet and now you talked about my rate forecasts. I think we're going to get much bigger cuts this year than people think. I believe that they should cut rates probably 50 basis points this year to make them neutral. And you're going to get a couple of Trump appointees this year, and they're not because Trump says so, but because he's going to pick people who believe we should cut interest rates more than 50 basis points. And so I would not be surprised at all if this year we get 75 to 100 basis points, cuts back end loaded once a year, again in the year. That would be a big stimulus to manufacturing and auto and things like that. And you'll get a spurt of growth from that because it's been, we haven't had manufacturing grow for three years.
- [11:20]
B
Your sense would then be that on Wednesday we will get no cut. But wouldn't you think that the new Fed chair, and right now it's only men who are in consideration on the list when the new Fed chair comes in, that he would want to move aggressively to start cutting?
- [11:37]
C
Yes, but it is a consensus body, by the way, you may remember about two years ago or a year and a half ago, I said it was not healthy to have no dissent. And we finally got some dissent, which is good that we finally got some dissent. I view dissent as healthy and. But I don't think a new chairman walks in and says, okay, let's do 75 basis points in a month. They're not going to do that culturally, they're not going to do that. They're going to bleed out those raises over six months, seven months, eight months. So, yes, a new chair will want to do that. No, they won't be able to do that. I think people are going to be surprised at how much the rates get cut this year. I think they're going to overcut this year in the sense of, I really believe, look, the effective rate is 3.6, 3.7. Inflation net of shelter is 2.1% over the last two years, 2.1% a year over the last two years. For the 30 years prior to the pandemic, it was 2.2%. So for the last two years, we're exactly where we've been for the 30 years prior to the pandemic. And I only take the pandemic out because it jumbled everything. Right? So we're back. If you say it's 2.2%, absent shelter, which we've talked about is mismeasured, add 75 basis points, add 50 basis points, real return, and you're up to the kind of 2.75 range to 3%, they've got to cut sort of at least 50 basis points. And you can see somebody saying, while we're at it, let's do 75 to 100.
- [13:32]
B
You point out in this quarterly letter that rent growth per the CPI over the last two years has been up 3.3% in the CPI. And you make the statement, ask any owner of multifamily properties in the country whether they've been able to raise rents 3.3% over the last two years and you'll find about two of them. Why is it that the data is so bad even on that one, the owner equivalent one you and I've spent a bunch of time talking about that. Nobody pays owner equivalent rent. So the idea that they survey people of what they would rent their house out for is just a, it's, it's a strange way of doing it and probably doesn't work anymore. But you can understand how that data is inaccurate. I don't get how their data feed on rent growth in America is so inaccurate.
- [14:15]
C
I can't disagree with you. I've tried to figure it out and to be honest, I can't. I can't see. It's not a data lag. There was a time, if you go back two years ago, it was a data lag in that their data lags about six months versus reality. But as you know, over the last, what, 18 months? It doesn't matter if it lags six months or not. The answer has basically been the average is zero. I don't care if it's a six month leg or contemporaneous. It's been sort of zero. And I really, really can't figure it out. It obviously has to do with what they're sampling. Yes, I know there are apartments out in small towns and such. I own such an apartment. And it's gone up sort of 1 2% over that time period. It's not just a bunch of those doing it. And for every one of those, you've got downtown, you know, Austin or Phoenix or something, really pulling it down. So I really don't understand how they get there.
- [15:23]
B
I think one of the things that's so hard for most people right now to try and reconcile, Peter, and your data this quarter shows it, is that the macro economy is, is roaring. When you look at the stock market, when you, when you look at where the 10 year is relative to where it was, when you look at, you know, 4.3% unemployment, while up from historic lows, it's still very healthy. All the markers would say to you that the macro look is very strong for the US right now. And yet commercial real estate in almost all asset classes, and we'll dive in in a moment to the specific ones that actually are doing okay, but commercial real estate writ large is, is suffering. And you sit there and you sort of say, you know, you've got office values down by 30% from pre pandemic, you've got multifamily values 30% from pre pandemic. You've got retail values on, on shopping centers down 20% since pre pandemic. Hospitality around the same. And the question here is, when do the macro drivers kick in to the point where some of these asset classes can start to see rent growth, see value growth, and we start to get the next cycle in commercial real estate, it feels like we're sort of in no man's land right now.
- [16:33]
C
So the. There's the two parts to the value, right? There's the rent and occupancy, and there's the capital flows, right? The market side of how they value it, the rent and occupancy. Everybody focuses on demand, which has been pretty good for multi. And even for apartment, I mean, even for office, it's picked up, right, pretty good. What has been the problem is too much supply. And our friend Sam Zell always would say supply is the problem, right? It's not. It's not so often. Demands the problem, it supplies the problem. And we get these spurts and you've been around long enough. I've been around a lot longer. It takes those spurts of supply a while to burn off. As you know, the supply of pipeline of apartments is coming way down. I think it was Jones Lang La Salle had a report I saw maybe in December that said for office, we have historically added about 55,0 million feet a year new supply. In 2026, it's supposed to be 6 million, and in 2027, 3 million. So the norm is 50 million in the next two years, it looks like nine total. That will get healthy quicker than people think. Apartment markets. Let's stay with them for a moment. You know, concessions are killing this. You know, concessions are killing, right? If you had to say anything, concessions. What people forget is that one or two points of vacancy are huge if they're at the right point. And so If I've got 90, let's just say 93% occupancy, it's a struggle because I got to get tenants to try to get to 95. I'm being overly mechanical, so I do concessions. And, you know, some markets, you know better than anybody, some markets are one month, some are four months. And. And okay, if you don't give concessions, you got to give rental cuts or gift cards or something. There are other ways to do it. But what happens when the supply pipeline gets real empty, new units stop coming on every day, and demand keeps growing? Well, you go from 93% occupied to 95, and everybody looks around and says, oh, I don't have to make those concessions. And in a matter of six months you could see two months of concessions disappear simply because I don't have to do it anymore.
- [19:31]
B
If you look at, you were talking about the JLL report on office. If you look at multifamily and the oversupply that we saw come into the market in 2023 into four and into five, everyone was looking at the 2025 new supply and looking at absorption rates and saying supply is starting to tail off. And demand, as you went into 24, into 25 was going strai. And then all of a sudden we got to the back half of 25 and demand dipped with supply. The, the two. I mean it's. We've got a graph in our quarterly deck right now that just, it's amazing because you see demand going up and supply is starting to come down and then all of a sudden demand just starts to curve and come right back down at the back half of 2025. And I think that that's what's giving owners, buyers pause right now. That just sort of says where did those demand drivers go to? That's why everyone's looking to the macro to sort of say is AI responsible for all these job losses? Or are corporations just blaming AI if you will? Because it's a lot better to go talk to investors about increased efficiency due to AI than the fact that you're actually bloated and you're just cutting people because you should have cut them two years ago. And reading through that of what the actual signal is rather than just sort of pinning it up to there's this great technological revolution coming on board. You talk in the letter, Peter, about AI and to call you a little bit pessimistic is probably an understatement. You go back and talk about Cisco and you talk about Cisco going public in 1990 at a, at a dividend and split adjusted 4 cents a share and that it then went up, operated pretty well until 95. And then from 95 to 2000 it went up to $80 a share. And it was looked at as a no miss investment in the new economy of the dot com world and the pipes that we needed to run on for the Internet economy. And then it crashed from $80 a share. I think if I'm remembering correctly, from the write up down to $8.60. And over the last 19 years or 20 years, it has recovered back to $65 a share. But it never got back. It has not yet to get back to its $80 share in 2000. And that was a can't miss investment in the Internet economy. And you put it in there purposefully. I think you're trying to say to all of us, ton of capital going to AI, but beware, we're going to overbuild this. Is that, is that a correct read of your letter?
- [21:56]
C
AI is not wiping out jobs. We are not adding jobs. But it's. We're not losing jobs. We know we're not net losing jobs. And we know from unemployment insurance claims, which come out every week, which is important data to watch, that we have really low unemployment insurance claims. So it's not like mass layoffs are occurring. However, what we did see when you were talking about the tail off in demand, we saw a tail off in job formation, right? That coincided with a tail off in job formation. And part of that is immigration related. Part of that is hesitancy, as I was describing by employers. I don't think that hesitancy lasts forever. I would hope that the immigration, the legal side improves dramatically, but that's a major policy decision. But it was the tail off in jobs that coincided with the tail off in demand that you saw. And I just think we see a pickup in jobs. I don't think we go back to 3 million jobs. We're not adding that many people to the economy. Right. We're adding about 70 basis points of population a year on a base of what, 338 million or 337 million people, and then divide it by household size. So I do think demand is okay. Demand is growing. It'd be nice if it grew faster. Basically, AI can't lose if you're in the AI related service provision, including data centers, you can't lose for the next two or three years. Why? Because so much money has already been committed that just getting that through the system is creating huge margins for everything related to it for several years. You can just do how much supply can. Come on, how much demand. The problem is, anytime I've seen huge margins in an area, it gets overbuilt, it gets oversupplied. By the way, go back to when you were a little boy and Houston overbuilt its office supply, right? Houston eventually used all that office space. It just took eight to 10 years to use it because they built so much. The problem with data centers, is it such a sure thing now if you can get the money that it almost guarantees, you've got a problem out there and is out there 20, 30. I don't know, it's not 2026 and it's not 2027. By the way, the Internet economy still happened, right? And what we were just talking about also happened.
- [24:56]
B
They're not going to show any concerns.
- [24:58]
C
And Cisco's not merely exclusive.
- [25:01]
B
If anyone who doesn't read the Linman report, when you pick it up, it's quite intimidating because there's so much data in it. And Peter has all these graphs. But I was sitting there looking, Peter just talked about the unemployment numbers and how the unemployment numbers come out every single week. And we know how many people are out in the marketplace unemployed, looking for a job. And I was looking at that graph in this quarterly Linnemann letter, and I went back and looked at the time it took for somebody who was actively pursuing a job to find a new job. And I look back to the period from 2004 to 2007, and during that period of time, the average job seeker took 10 weeks to find a job. 10 weeks. So then I looked at 2023 to 2025, and lo and behold, the average is exactly the same. Ten weeks. And I sat there and I thought to myself, nobody had an iPhone in 2004. Nobody had a job app to find a job in 2004. And yet with all the technology that we have today, the time to go find a job has not shrunk. And I thought about it in the concept of this bet that we're all making on worker efficiency due to AI. And last week at the real estate roundtable, the head of the Congressional Budget Office was there and he was asked what they have in their 10 year projection as it relates to increased worker productivity due to AI. And he's a very, very intelligent, somewhat wonkish person. And he said, he put his hands on his head and he said, oh, that's such a great question. And he said, we've been studying this and studying this and studying this and we haven't seen anything that convinces us that we're going to get massive worker productivity from AI. So right now, in the CBO budget estimate for the next decade, we have 15 basis points of increased worker productivity. And he said, I know there are plenty of people in this administration who would tell me I'm completely wrong. And it's 5x that number, it's 5x, it's a factor of 5 of increased productivity will find. But he said, so far at the cbo, we haven't seen anything that tells us we ought to increase that from 15 basis points. So Peter, in the letter you talk about 1.5% worker productivity. And you're basically saying, a lot of people are saying that goes up to 2 to 3 to 4, but you're sort of anchored at 1.5. And you're in kind of the, as they say that you're in the show me state mode right now as it relates to the impact of AI.
- [27:34]
C
Yeah, and the only reason I am is that 1.5% is a long term average. Long, long term average. And it was created by electricity, it was created by modern sewage, it was created by, you know, just go through all the breakthroughs, Internet, electricity, for God's sake, airplanes, you know, I mean, you can do all these breakthroughs and you know what we got over time from all that? 1.5% a year, more or less. And I think the party you were describing, I would disagree in that it might boost total productivity a little bit. I just think a lot of the 1.5% is going to come from AI, which is wonderful because if it didn't, we would have much lower productivity growth. In other words, we always have to find new drivers of productivity growth. It was the Internet, it was electricity, it was on and on, but you always got to find a new one because once you've got it, it stops being a big driver. So I think AI will be a large driver, but not change the total growth very much. Now to your, to your really clever, really clever question on the hiring. Look, I think it's not surprising when you think how human beings really go, I lose my job. Some people have cooling off periods. That average is in there, but that's not the mass. You know what most of it is. Give me a couple of weeks to sort this out. You know, I just need a few weeks to figure this out.
- [29:23]
B
And I find that to be interesting because, I mean, we're talking about big numbers here. You know this better than I do. This isn't, this isn't someone leaving Blackstone who has a garden period for six months. And it's also, it's also not someone who has, quite honestly the financial wherewithal probably typically to be able to take a long time off. I just, I find it to be interesting that it's the exact same 10 weeks with all the technological innovation that we've had on apps and the opportunity to go find and match someone up with a job.
- [29:49]
C
Okay, so let me do. Do you tie your shoes a lot faster than you did in 2004? There's a certain.
- [29:58]
B
I've gotten so old, I don't tie shoe. My Shoes anymore, I guess wear slip on shoes now. I don't like tying shoes anymore.
- [30:06]
C
You notice I didn't ask if I do. No. There are certain things where they just have their own life. And I think finding a job on, you know, some people have a job lined up and they're on the job in two weeks.
- [30:20]
B
I, I got it. The only one other one that I'll throw out there quickly. And then I do want to move beyond this, which is just this. Everyone thought that dating apps were going to take the dating market, which was wildly inefficient because you had to be at the right bar at the right time to meet the right person who matched up with what you were. And all of a sudden we had all these apps out there that said you can identify exactly the right person and you can meet them online. And it makes this inefficient market wildly more efficient. And yet marriage rates in America have gone down 25% from 2000 to 2025. So here we've had perfect matching through technology, and yet the marriage rate has gone down dramatically. And I know that there are other drivers to that of people buying homes later, people wanting to, you know, have less children, et cetera, et cetera. So there are demographic trends to that. But you would just think that technology is making these things more efficient. And in those two catego, finding a job and finding a partner, it hasn't done it.
- [31:14]
C
Okay, let me do the marriage one. Now. Just as I say this, I'm. We'll be coming up on our 53rd year of marriage. So what I'm about to say doesn't apply to me. What makes you assume it's not having an efficiency effect? Oh, well, look, so young people who shouldn't be together, not coming together on.
- [31:34]
B
A flight, on the flight down here. On the flight down here. My, my, my assistant McRae said exactly that. And I said, mccrae, I'm not going there with you. So I got it. We're good. That's why I said I part of it. I got it.
- [31:46]
C
53 years. And with one woman, by the way, with one woman.
- [31:49]
B
It's all great. So let's let, let, let's shift gears for a moment because I think that, you know, you continue to say that we have a housing shortage in America, and you've said that we're 4 million homes under built. I don't think that there is a home builder or a multifamily owner in the country who would tell you right now that we got a shortage. So single Family of either of single family or multifamily. We've got oversupply in both the single family homebuilding homebuilders. Right? Now, you read any research report you want. If there was all this demand out there, Peter, of we're under supplied by 4 million homes and every single one of the homebuilders would be building more homes at the entry level, middle level and high level. But they're not. Not one of them is. And you look at multifamily, which is the alternative to it. And we've just talked through the oversupply in multifamily. So how can you stay on the theme that says there were 4 million homes short in America?
- [32:48]
C
By the way, as you know, I'm not the only one who says that.
- [32:50]
B
I know you're not the only one who says that, but I just. I also have a lot of clients, one of whom I spoke to right before this, who just sort of said, I don't get it. We may have an affordability problem in America, but we don't have a supply problem.
- [33:04]
C
Okay, but think about what you just said. Think about what you just said. One of the things I learned in economics is that if the price of something just sort of constantly goes up, even though demand is only growing at a sort of normalized rate, nothing special, you got a shortage problem, Right. You have a shortage, prices don't. I mean, income has not gone up precipitously, it's gone up steadily. Yep. And you've seen home prices over the last, what now 14 years go up. Doesn't matter what the interest rate is. Oh, they may, they may stumble for a month or two or a quarter or two. But basically home prices have gone up, no matter, everywhere. And that says there's a shortage. And we know why there's a shortage. The shortage is certain markets. Not at all markets, certainly. Certain markets, particularly the ones where people want to live, make it very difficult to build. It's not the cost of lumber that's the problem. It's not the cost of copper that's the problem. Those are issues, right? It's the fact that it takes an extra two years to get approvals. There's tremendous risk of putting money out two years early. What if you don't? Et cetera, et cetera, hookup fees. And you know, Joe Jerko at Wharton and Ed Glaeser up at Harvard did a pretty good job of nailing this down in a couple of papers. If you have a sustained shortage, you'll get sustained price increases beyond Any reasonable situation. And that's what's going on. So you can't say there's no shortage and yet prices are out of sight. Therefore, we have an affordability problem. We have the affordability problem because we have a shortage.
- [35:07]
B
So given the disparity in the cost of homeownership and multifamily, which it used to be actually cheaper on a monthly basis to own a single family home on what you would pay on your P and I on your mortgage statement. Today it's the complete inverse and it's significantly more expensive. Why does that not play into multifamily being at 96% occupancy rather than 91?
- [35:30]
C
Ah, because if it wasn't for that, multifamily would be 1 or 2 percentage points even lower. You're right. You're just centering around the wrong point. Imagine if home prices in Texas were the same as home prices in California. The other way around. If California's prices were what they are in Texas, is what I'm trying to say, what would happen, you know, to the demand for apartments in California? It would go way down.
- [36:02]
B
Right, Right.
- [36:04]
C
That's. So you're right in spirit. You're just looking the wrong direction.
- [36:10]
B
Let's shift to back to the macro, because we're looking for the. We're looking at the consumer. One of the things that alerted me to those of you who read the Linnemann letter, he has his canaries in the coal mine to give you warnings about things that are coming up. And some of you who've either listened to the Walker webcast or read the Linnemann letter know that two years ago there literally wasn't a canary in his coal mine other than a misguided Fed. So you look down this whole list of all these different things that he has watched over his entire career saying LBO pricing is out of whack, or people are, you know, paying more for land than they should be paying other. All sorts of different drivers that would say, careful, this is a red, red signal on the market. So two years ago, it was only a misguided Fed. This quarter, you've got. Of the 55 canaries, you've got 12 of them that are dead, Peter. That's over 20% of your canaries are dead lying there saying, flash red, flash red. One of them is speculative real estate. But you put that right on data centers, and you just said that that's not a concern for the next two to three years. So you kind of push that to the side. Second record Buyouts, but that's just a, that's a matter of like pent up demand, is it not? It's not that the pricing that's going on a record buyouts is that misguided, misguided Fed, you've still got out there on two. And then stupid tariffs is a new one that you've added in the last year. So I have to put forth. 2 years ago Stupid tariffs was not a category. Today stupid tariffs has four canaries. So that adds in it. So maybe if we, if we net out of what a like for like comparison was, we've got eight today and we only had four two years ago. Which one of those should we really be focused on as it relates to what's a blinking flashing red?
- [37:49]
C
I think the tariffs are still a risk. And there are risk as we've talked about in that two ways. One, any tax increase hurts the economy in growth, just growth of the economy. It may do wonderful things and people say yes, but it generates tax revenue. Well, why don't we put 100% tax on everything? That'll generate revenue. Just nothing will get produced. So I think the tariffs are a problem. Both that they've gone up. They've gone from about $3, a hundred purchased of imports to probably about $9. All right, that's a big increase on 10% of the economy. It's not as bad as it first looked like it would be. But the second part of it is nobody knows what their tariffs are going to be. And that is a bad thing. I mean, in and of itself, not knowing what my tariffs will be. We just went through, what was it a week ago, right where it was. I'm going to raise the tariffs on all these countries. And then maybe it was a week ago Friday and then a week ago Monday. Nope, not now either. You could take you, you support either one of those. But it's hard to support the vacillating as a separate matter. I mean, certainty is what business thrives on. Certainty is what people thrive on. People are more comfortable in daylight than in dark. Right. Businesses are more comfortable when they can see clearly than when they can't. So that is slowing the economy. There's no doubt that's still out there.
- [39:29]
B
Well, one of the things that I think is so difficult for people to get their arms around is these sort of, if you will, they're not, they're not, I was going to say false narratives, but they're not false narratives in any way.
- [39:38]
C
But.
- [39:38]
B
So you just talked about tariffs. Consumer confidence is awful, right? Now you look at the, you look at the conference board numbers that you put in the, in the, in the quarterly letter Conference board index, was it 132 just before the pandemic? It went down to 85 during the pandemic. It's at 88 in November of this year. Okay. It's, it's right about as low as it was during the pandemic. Okay. And yet you mentioned previously that Thanksgiving spending was at all time highs. Okay. So consumer confidence in November of 25 and last I checked that's when Thanksgiving is, was at almost an all time low. And yet spending was at an all time high. You look at gold going over 5,000 today. That's a risk off asset. Yet the Equity markets hit 52 all time highs at the end of 2025 and are at what the Dow is at 49, 400. When I checked earlier today, there seemed to be these, like everyone said tariffs are going to impact the cost of building. And yet in this quarterly letter you talk about the Turner Construction Cost index being up 1.2%, a whopping 1.2% from 2019 to 2025. So what's the number to read here as we have these data points that say at one moment your risk off and at the next moment there's something that's saying everyone else is risk on.
- [41:06]
C
You know, the mark. The stock market's a hard one to say that way. I mean, it's because that is what it is. It's a sentiment index more than a value index in the short term. If you talk about the holiday season, consumer sentiment, consumer confidence, whatever you want to call it was shaky, wasn't depression, but it was shaky. But people had jobs, they weren't losing them and they had money. Right? And you can say that's why they spent. They had jobs, they weren't losing them, they had money. You then say, well, why aren't they more confident? As a whole lot of reasons. So I get that one gold I've benefited from, but I don't get it. I mean, I have a, a friend who has been telling me for three years that this was way before Trump, that it was going to get to like 10,000. And what do I know? And he's looking more likely he's going to be right than the rest of us geniuses, right? So I don't really get gold. I get it, but I don't get this. The huge, it should behave like a zero coupon, more or less. Right. There are a lot of contradictory signals go Back to where I was at at the end of last year, there were a lot of contradictory signals and not a lot of data to anchor anything on. Now you have contradictory signals, but there's enough data that I can anchor on. We're not terrible. We're going to move forward. We are moving forward. So I feel pretty good. And in fact, I think we'll see. The deregulation that was begun last year, it doesn't pay off the day after deregulation occurs. It pays off over the next several years, and I think we'll start getting dividends from that a bit. Yeah.
- [43:17]
B
No talking about debt for a moment. You and I have talked many times about the national debt. A lot of people are a little bit concerned about the amount of treasuries that we need to float and the ongoing deficit of $2 trillion. You very, I think effectively talk about the fact that with national net wealth of $175 trillion that, and with the economy growing at the rate that it's growing, that we have the luxury of being able to run $2 trillion annual deficits because we're creating $5 trillion of net wealth every year. So net, net. We're adding $3 trillion of net wealth to the value of the United States of America and therefore we can continue to print two annual deficits. You're not saying that that's smart, but you're saying as it relates to something, it's a very important piece to it. You're not saying that you're, you're not endorsing the policy, but you're just saying we are fortunate to have the luxury. So you don't have any.
- [44:11]
C
I can do math is all it says. I can do math. Yeah.
- [44:15]
B
So I know you can do the math. I guess the question is there's a lot of talk about the US and losing allies and being a threat to the world and all that kind of stuff. Do you have any concern about people continuing to buy U. S. Treasuries at 4, 24, 25 or 415?
- [44:30]
C
Well, first of all, most of the treasuries are bought by US Citizens that aren't bought by the government. Most of them are still bought by US Entities. When I say citizens. Right. And as long as we keep creating wealth, we got to put it in something. And among the things we're going to put it in are treasuries. So there's a lot people forget how much wealth is being created. I mean, the amount of wealth being created is stunning. And some of that goes in terms of foreigners, foreigners have really not increased their purchases of US treasuries much over the last 10 years. In fact, as a percent of federal debt, it's gone down. As a percent of GDP, it's gone down. But having said that, they've gone into other assets, right? I mean, they kind of started in debt and moved into apartments and they moved into stocks and they moved into the AI Put it differently. Suppose you're a foreigner and you hate the U.S. let's just. So you're French, so you hate the U.S. you really hate. And by the way, however much you hate the US you really hate Trump. Beyond that. So you have a total hatred of everything in the United States. But you have a lot of money and you want to play AI. Where are you going to do it? You're going to go to China and do it? I don't think so. What, you're going to do it in Spain, Guatemala? I mean, where else are you going to go? And my point is not AI per se, it's that you don't have a lot of choices on big, vibrant, growing wealth creating places. I'll tell you how we could be in a lot of trouble if Europe, Western Europe grew. Now we benefit from their growth. But I was just looking at the numbers, GDP per capita in the UK, real, real GDP per capita is the same as it was in 2007. And it's not a, it's not an endpoint kind of manipulation. Right. It's fundamentally, Germany is the same as it was in 2015. They've created nothing net during those two time periods, by the way, over the time period where over the last decade, Germany, GDP per capita in real terms did not grow and the U.S. grew by 20%. And you say, well, that's not surprising. 20% is about 1.7% a year for 10 years, compounding.
- [47:22]
B
Right?
- [47:23]
C
That's, that's 20%. Right.
- [47:25]
B
But it's also, it's also $35 trillion of net wealth.
- [47:30]
C
You got it? And that's why people come here. Because where else you're going to get that opportunity? Where else? And you say, okay, China, they can put Jack Ma out of business tomorrow. And I mean really put him out of business. I don't care how, whatever. The United States is not perfect, but it's not going to put everybody out of business in the same way you could say China, but, but no, because they do grow. But where else? UK they haven't grown since 2007.
- [48:07]
B
I want to jump through a couple things on credit and then I want to get to specific asset classes in the last couple minutes that we have because you have some insights as it relates to values and which asset classes you think are going to perform well over the next two years between now and the end of 2027. That I think would be very interesting for our audience. But just real quick, during COVID you were very straightforward, Peter, of saying that the unfortunate death of people during COVID accelerated the inheritance of a huge amount of money of those people who died that would have had a longer life expectancy. But Covid, they died in Covid and therefore the inheritance went up. And that was a big driver of single family purchasing power back in 2021 and 2022. You mention the point in this Linnemann letter that 73% of the nation's $176 trillion of net wealth sits with people over 55 years old and that this is going to be a massive transfer of wealth through inheritance as the 55 plus unfortunately are no longer with us and that wealth comes down. It's right now, if you looked at it, everyone under 55 would be inheriting. And again, these are big numbers and there people are going to get a lot more than this and others left, but on average $655,000 in inheritance if those over 55 take their wealth and move it on to the next generation. It's just something to think about, particularly as far as longevity and how long we're all living. And if we keep on living longer and longer, that doesn't come to the next generation as quickly as we think it would. But it's a very interesting point to keep out there. You also talk about the consumer as far as credit and you make the point that credit card delinquencies are right as they have been as far as the long tail historic average. And that while they have come up significantly post pandemic, they're at about 3%, a little bit below 3%, which is actually below the long term average since 1990 on credit card and bank delinquencies so that the consumer on that front looks pretty healthy. Let me go into the actual asset classes that you talk about here, Peter, because you, you bring up recap rates from 2020 to 2025 and you use bank of America data. The total REITS cap rates are up 30 basis points to 5.6 across the board multis up 140 basis points to 6% average cap rate. And again, this is Publix, this is REITs. And I want to, I don't I want to dump to you in a second about the the disparity between Publix and private. But shopping centers up 100 basis points, 7% cap rate on average. Office REITs up 160 basis points to 7.1. Cap rate, self storage up 120 basis points. 6, 3. And the only two that are down are industrial, down by 10 basis points to an average cap rate of 5. And regional malls down 60 basis points to an average cap rate Of 6.4. There's a significant difference between the publics and the privates. You mentioned in the research here, Peter, that on the public side, multifamily average cap rate is now at a 6. On the private side, our data is at about a 5, 5 1. So that's a pretty big disparity between the private markets and the public markets. But then you go on to say that the public markets are undervalued by about 19%. You've been saying that for a while. Should someone go out and just buy the REIT index?
- [51:27]
C
It depends. Yes. And I've done it. Yes. With one footnote, which is you may enter at a discount, which means you're getting a nice cash flow relative to the private alternative. Right. Except they're not heavily leveraged. That's a problem. If you want to play leverage, you get a better yield, let's say, on the public than the private. Do you make the capital gain on the discount? Only if the discount closes during the period you own it. And the fact that the discount hasn't closed, it's bounced around, but it hasn't closed for some time means the money that would arbitrage it isn't flowing in enough mass to arbitrage it. And therefore there's no reason to believe it will flow in a large enough volume to close it. Because this play has been there and it's. And apartments are the best example. When you tell me what the private is, it's a real market. You could argue the regional malls are kind of hypothetical. There's not enough of them to know. But apartments. There's enough of them to know. Yeah. And you see real sales done by the public company and you see what they really got and you see the arbitrage. It is a good place to invest and that you get a bit higher yield, unlevered, but you don't get as much leverage. You don't get a better yield, net net cash on cash, unless you privately lever yourself into it. Right. The rates aren't levered enough. Does that make sense? What I'm saying it does.
- [53:13]
B
So a year ago you liked office. You said office where you can get rich. And you have 12 MSAs that you cover out of 40 in balance now. And you say that by the end of 2027 there are going to be 22 of the 45 imbalance. Excuse me, 45 MSAs you cover and 22 will be there. So some pretty significant improvement. You have the best markets being Austin, Nashville, San Antonio, San Francisco and Denver. What are you seeing from an office standpoint that gives you that kind of conviction?
- [53:48]
C
Employment growth and no new supply. The 9 million feet over two years, instead of 100 million feet being the normal over two years. So you don't have to grow a lot of demand to absorb 9 million feet over two years. That's, that's that simple.
- [54:10]
B
So on industrial, you have almost the exact same as Office. You have 12 markets in balance today. You project 21 in balance by the end of 27. You have best being Denver, Cleveland, Minneapolis, Northern and southern New Jersey. And Detroit seems like an, that's kind of a hodgepodge of cities.
- [54:31]
C
Well, a couple of them are no supply coming on to speak of. Right. And. But they are getting growth. Detroit's getting growth, but there's not a lot of new supply coming on. For example, Cleveland the same way, it's not like Cleveland's demand. Cleveland's growing in terms of economic activity, which is what fills warehouses. Right. Economic activity fills warehouses. So it's growing, but you're just getting not any notable supply. So I think if there's been one mistake I've seen, I remember my first ULI meeting. I went with Al Taubman. Everybody was talking like, what is the best apartment market? What is the best office market? And I kept listening and they named someplace and I finally said, al, doesn't it matter if you're an owner or a builder? Because largely what's good for the owner is not good for the builder and vice versa. And so that's, it's the supply issue that's really at play here in most of these markets. Markets.
- [55:35]
B
So on multi, you have only 5 of 40 covered markets today. In balance, you project that 13 of your 40 will be imbalanced by the end of 27. I have to tell you, that was a disappointing stat. From my perspective. You have best being New York City, Orange County, San Jose, Detroit and Chicago. All supply, is that just a supply?
- [55:59]
C
Almost all supply, by the way, go to the fast growth market. They generally aren't there because Phoenix. Right. Phoenix is if you were to say to me, which is going to grow faster, Phoenix or Detroit? That's not close. Right. It's all. Supply is the issue. I'm not the world's best economist, but I did learn supply and demand and you need both to figure out a market.
- [56:26]
B
You seem to love retail. You have only nine markets in balance today, and you say that by the end of 27, 27 of them are going to be in balance. And you have Philly, Cleveland, San Francisco, Cincinnati and Houston as your favorite markets. Why is retail. Why is retail. Why is retail gonna have this big renaissance?
- [56:45]
C
No building. There's no speculative building in retail, and there just is no speculative building in retail. You've got economic growth. Economic growth will generate sales and you just have nothing being built. You have some repositioning of centers and you have a few places being built where there was no community and now there are roofs after five years, but there's not. How many regional, how many shopping centers have you seen cranes at as you go around the country? That's why I like it, because I believe the economic growth will occur. Not off the charts economic growth and there's no supply. That's. It's that simple.
- [57:33]
B
I would remind people of a stat that Peter has and has underscored for quite some time. And when I try and get a trivia question that I can fool most people at a dinner table with, it's what percentage of US retail sales are online? And typically people jump in and say, oh, 50%. Oh, at least 40%. It was 16% in Q3 of 2025.
- [57:55]
C
Yeah. Not counting auto. Not. So it's not a trick in that you loaded auto kind of stuff in there. So. Yeah, I mean, people don't understand. It's still how most people buy most things most of the time.
- [58:08]
B
So final asset class before I go to your projections. And then we're going to wrap it up on hospitality. You've got 21 markets in line by 27, you like Orange County, Las Vegas, Minneapolis, San Francisco and Boston in that asset class. Is it back to just supply or is that that they've got great convention centers that people want to travel there for tourism, or is it just again, all supplant supply, demand equation, mostly supply.
- [58:35]
C
With just a kind of plowing forward demand. If I had one outlier prediction this year, I'm not a soccer fan, I'm not knocking it. But the, the Europeans didn't come much this last year and the South Americans didn't come much this last year except to Miami I think with the World cup you're going to see the Canadians come down and you're going to see the other foreign countries come in, especially out of Europe. And that will be the thaw. Interestingly, you started seeing the thaw in December of Europeans coming over because it's too damn cold at home and you started seeing them coming here. So I think the thaw with foreigners is going to come. I don't think you're going to see tons of Chinese this next year still. There's still a lot of tension on that one, but it's mostly supply.
- [59:32]
B
A couple quick predictions and then we'll wrap it up. You already said you think we get four rate cuts this year.
- [59:38]
C
Well, rather than counting them on rate cuts, I think, I think 75 basis points for sure. And I would not be at all surprised at 100.
- [59:49]
B
But you're not going to go to 125.
- [59:51]
C
Not 125. Okay.
- [59:53]
B
I keep going on Dow. You keep going to S and P because you like the technology component on the S and p. You said 7 to 9 last year. What's your prediction for 2026?
- [60:01]
C
Probably will cool a bit. I think some of the bloom will come off the rose. I don't see a crash. But if I. If the historic norm is 7 to 8, I think it's looking forward more like 2 or 3 or maybe 0, but not enough to sell because you get killed on the capital gains tax more than you. Than you save on the redeployment.
- [60:30]
B
Oil is right around 60 bucks a barrel. 59. 60 bucks a barrel. That moving up or down?
- [60:36]
C
65, 64, 65, I would say Supreme.
- [60:42]
B
Court rules that tariffs are illegal for the president to do without Congress.
- [60:47]
C
You'll see a better stock market than I just said and you'll see a shitstorm of people trying to figure out how do I get my tariff revenue back. And you'll. I mean, that'll be a real shitstorm. Good for lawyers. And it will help the economy. I mean, I'm not a legal expert to have any opinion, but it would help the economy a bit.
- [61:13]
B
And the House and the Senate after the November midterms, Republican or Democratic?
- [61:19]
C
Okay, so I'll make my prediction. It's not going to be a lot smarter either way would be my first prediction. And if I had to put money up, I'd say it'll go Democrat in the House. I don't know about the Senate going. It'll be closer. You want to know the most amazing fact of last year economic fact of last year that no one knows. Federal government employment is 9% lower than when we spoke last year.
- [61:54]
B
235,000 jobs.
- [61:56]
C
270 when you put in the December numbers. Now, by the way, I don't know anybody, including either of us, who would have said 9% shrinkage. And by the way, no headline on this. You don't see much about this.
- [62:14]
B
But as you point out, that's offset by 115,000 ads at the state and local level.
- [62:20]
C
But you could have maybe had those in addition now. So I think it's been a short term negative to job growth long term. I think it's a great thing and I'm not joking. I think it's a great thing because those people will get jobs and they'll largely get jobs in the private sector. Not all of them, but they'll largely get jobs in the private sector and they'll be involved in creating value instead of redistributing value. And they'll be involved in creating growth instead of burdening growth. And if you think about what government's job is, it's burdening growth and transferring resources. I'm not saying it's. That is the job in some ways. Right. And as everyone who gets hired in the private sector, they get a new job description. Create growth and stop redistributing. And I'm willing to bet you've got a smart audience out there. Nobody knew that. It's like the greatest unpredicted phenomena economically, maybe in my career. Shutting down the economy during COVID surpassed it. That's about it. But I want people to know that simply because how did you not know that you knew Count Arco, you knew Countess Arco. And I talked with Countess Arco regularly and she asked me this last week because she's been in Europe, how are things in the US And I said, well, you know, it's all about Greenland and it's all about. And I said there were no mentions of Epstein. So I have a new index and that is if Epstein's being discussed a lot. There's not a lot. There's not a lot of other stuff happening.
- [64:04]
B
Well, so on, on that one, I was, I liked your libertarian statement. It clearly showed you and Milton Friedman and the two of you back at the University of Chicago way back when and your, your libertarian viewpoint about the world and, and about reducing the size of the federal government. So Peter, as always, so great to dive into the, to the data with you. I've got your shoes which are going to be wait for ship. They're going to be shipped across to you in Philadelphia. And everyone here in Southern California, thank you very much for having us for this really great hour. Peter, great to see you. Thank you.
- [64:36]
C
Thank you.