The Most Insightful Hour in CRE Part 22 with Dr. Peter Linneman, Leading Economist, Professor Emeritus, The Wharton School of Business
Willy Walker: Good afternoon, everyone, and welcome to my 22nd Walker Webcast with my friend, Peter Linneman. Hi, Peter. Good afternoon.
Dr. Peter Linneman: Good afternoon. 22. Wow, I knew we'd done a lot, but it's been a pleasure.
Willy Walker: It has. It has indeed, and we have so much to cover in this hour. This quarterly Linneman Letter is as good as ever. It has some new data in it and some new analysis that I thought were insightful, yet in some instances, didn't give me the conclusions that I was hoping for. I want to dive into that. But Peter, before we jump into our typical discussion, you and I were both at the late Sam Zell's conference in Chicago a couple of weeks ago with about 75 of the top investors and owners of commercial real estate. You hosted a fantastic roundtable discussion. What was your general takeaway from that? We've met for two days, but it was really a day's worth of contact. What was your takeaway from people's comments?
Dr. Peter Linneman: So, I'd give three. One was a lot of uncertainty still out there, but the fog may be clearing a bit. Some of the fog is economic; some of it is policy; some of it is when this capital market comes back. I'd say there's still a sense of uncertainty, but there might be a little clearing of the fall. That would be one. Second, (and you knew this probably better than anyone there), the banks are coming back. Six months ago, the tenor was banks looking to run their books down. That has switched to build their books up and their problem is now, if somebody pays me off, I've not only got to place that loan, but I've got to get a new loan as well. That was a sea change over, say, the previous year. Equity will come as that debt comes. The third was the difficulty of development to make sense. I think we all knew that, but what I found very interesting is, at one point we were in a conversation and the main participants carrying forward the conversation on developing were the Dell operation, the Lefrak operation, the Ofer operation, Pritzker operation, Gates operation— really high wealth, long-term, not looking to flip. I don't need to time it, Neil Bloom. I don't need to time it. I've got a good piece of land. If I'm a year early, I'm a year early. I am not saying no one else was developing. But that was the tenor that if you have that kind of capacity and you could be right or wrong by a year and weather it, I found it very interesting.
Willy Walker: I would add, Peter, a fourth point from my perspective, which was just office. We sat in that room a year ago, and all of the big office owners were basically hiding under their seats, hoping you wouldn't call on them to tell you how bad the market was and the fact that there was no financing bid out there for their assets. As you and I both saw one after the other, after the others, most particularly with assets in Manhattan, Class A assets, but there was a lot of, I don't want to say crowing going on, because nobody was acting that way, but there was a dramatic shift in their outlook as it relates to leasing rates, financing opportunities, and sales opportunities for Class A office in Manhattan.
Dr. Peter Linneman: I threw in one other: the office stock is shrinking. Yes, there's development going on, but we heard of some conversions to residential, but some just being torn down and new, more suburban in that regard, just being torn down. A new plan will come in there, whether it's residential or retail or whatever. So, I think you're right; that made a tremendous amount of progress in a year.
Willy Walker: The one other thing I would add on that is that I interviewed Owen Thomas out here in Denver at the last ULI conference in late May, early June. And in that, we were talking about going back to the office. You and I will get to this in our discussion today. One of the things that Owen said was, you’ve got to remember that economic growth, GDP growth, companies expanding and taking more office space is wildly more important to the office market than ‘back to office’ and whether we get to 60 percent participation rates or 75 percent participation rates, etc., etc. I do think that the underlying economic backdrop, which you and I are just about to dive into, is far more important than back-to-office policies that obviously are taking up a lot of discussion time. I want to dive into that a little bit later.
Dr. Peter Linneman: Just one thing, I think you’re 100 percent right, and I think Owen's 100 percent right. You know the multifamily data better than anybody. To the surprise of a lot of people, D.C. has been one of the best performing residential markets over the last year, both in single and multi, after it kind of froze on the election, right? It kind of froze on the elections. By the way, the Bay Area is also showing good strength. I'm not saying out of the ballpark. My interpretation, Willy, is that people got hired. Let's just say with D.C., you graduated from university, you got hired by the government, the FTC, or somebody, in 2020, 2021, 2022, 2023, 2024, and you didn't move there. You stayed wherever you were.
Willy Walker: You moved to Denver, Colorado, where you love the outdoors and the space. Now you've had to move back to D.C.
Dr. Peter Linneman: Suddenly, Trump said, ‘You've got to come in,’ and they came in. So even though the federal government has reduced its labor force since Trump came into office, they've reduced it, I think, to 56,000. You figure half of that's in D.C., just for a ballpark, right? Even though that's down, D.C. was hot on residential because you had to actually move there to go to work.
Willy Walker: I'm going to take issue with your projections on what the good multifamily markets are in 2027, specifically on that issue. But one of the other things that you point out in the letter is that D.C. office occupancy is up 600 basis points since June of last year. While it's still in the mid to low 50s, which isn't like the Texas markets, which are all in the middle 60s, it has moved from the high 40s into the low 50s because of this change. So, it's not insignificant for office, and it's also not insignificant for multi.
Dr. Peter Linneman: Think about it. If I'm there to work with the government, not for the government but with the government, and they aren't there, why am I there? But if they're there, I'd rather be in front of them if I can be, because, in fact, it will have a better impact. So yeah, absolutely. In fact, you may remember, you kind of called me on it, but I said D.C. would be a surprise. Remember that about three sessions ago? So far, I'm right. Even though they're losing employment, right? That's the wild card of it. They're losing federal employment.
Willy Walker: Well, they're losing federal employment, but then you pass the BBB, and you sit there and say, ‘Okay, there's still a ton of government spending that's going on’ and the Accenture's and all the other firms that work with the federal government are just sitting there saying, ‘Add people. They are going to cut down on staff in the federal government if they need people and resources to work on this stuff. So, they're going to increase their contracting.’ I did see that somebody proactively said, ‘Oh, it was Oracle.’ Oracle proactively today, in the Wall Street Journal, says that they're cutting their billing rates to the federal government. I think Larry Ellison and Oracle are being very smart to sit there and say, ‘We're going to cut our rates and we're going to do more.’
Dr. Peter Linneman: I'll give you one other. We just had the most recent data come out just after the Linneman Letter went to press, but as of a month ago, the federal government had gotten rid of, I'm doing from memory, 48,000 workers since January, and state and local governments had added 49,000 workers, so the government as a whole. Well, then last month's employment data that came out a week ago was that it was about 147,000 job growth, of which about 74,000 was government and federal, which was down seven. State and local governments are hiring like hell. Whether it's giving the middle finger to the Trumps, or whether it is that they have pent-up needs, I don't know. But state and local are hiring quite dramatically.
Willy Walker: There are a couple of things that you say at the top of the Letter, which I'm going to try and jump through only because I want to get you to dive in on my final point. You say, first of all, to some degree, ignore the noise—that there's a lot of noise coming out of D.C. Don't pay attention to it because we know that at the end of the day, the U.S. Economy is going to continue to grow. I do put a little bit of a question mark on that, Peter, in the sense that Porsche and Daimler-Benz both came out yesterday and today talking about their quarterly sales volumes being down close to 10 percent. I sit there and I say to myself, ‘It's great to kind of not listen to the noise, but as it relates to tariffs and trade policy, that's hitting those two automobile manufacturers very significantly right now.’ I understand your point about the bluster and all that coming out of D.C., but there are some very significant economic realities that are hitting the top line and the bottom line of some major companies as it relates to overall trade policy.
Dr. Peter Linneman: But the second sentence of the Daimler Portia. Due to the Japanese sales drop.
Willy Walker: Chinese.
Dr. Peter Linneman: Chinese sales drop.
Willy Walker: 100 percent. China and Europe were down. The U.S. was fine, so I hear you on that.
Dr. Peter Linneman: I meant China. That was, to me in a way, more interesting than the down, that it was basically all China.
Willy Walker: But you've got to think about the Chinese who are in a trade war with the U.S. You're an owner of a Chinese company that is exported to the United States and these tariffs come on, and you say, ‘Maybe now is not the time for me to go buy that Porsche or that Mercedes Benz.’ So, the point being is, yes, it's that market that's brought it down, but it's clearly a derivative effect of what's going on with the United States.
Dr. Peter Linneman: Yes, but it also underscores it's a derivative effect, right? It says there's a lot of margin for the adjustment effect. So, in the first order, you would think it'd be massive. It's less massive than you think because there are a lot of back doors, right? And take the extreme Russia, all these sanctions that are put on Russia, right? Endless numbers of sanctions have been put on Russia over the last years. Yet their economy kind of still goes forward because there's a lot of back doors. I don't mean back doors even in an untoward way. There's just a lot of margin for adjustment. Now you would then correctly say, ‘Yeah, but they've been hurt.’ And that's absolutely true. But those are extraordinary. We're not going to do business sort of with this kind of phenomena.
Willy Walker: So, you didn't have issues with the BBB as it relates to basically sort of borrowing from tomorrow for today, yet you underscore your consistent comment about profligate spending in the wrong place rather than the right place. I get that. You say that the CBO estimate on the $2.4 trillion cost of the BBP is probably exaggerated by a trillion dollars because they don't take into account any of the growth that you think comes from the tax cuts. You are not concerned about Q1 GDP being down slightly because your case is that producers were stockpiling prior to tariffs and therefore that was why GDP stepped down. To get to my question, you talk about tariffs going from 3 percent to 20 percent. If the president gets his 20 percent across the board, you think that's about 200 basis points of GDP growth, obviously a very significant hit to GDP. And yet, you and I spoke, maybe when we were in Chicago, maybe it was before that, Peter, where I asked you “How valuable is $65 a barrel oil to GDP?” So, in context of the 200 basis points that you think come out of GDP, if the tariffs move forward, talk for a moment about the offset of $65 oil because even without peace in Ukraine, and I do believe that oil was down in the 65 level because of the thought that we would come to some type of ceasefire and resolution to that conflict and therefore Russian oil would start flowing again. That has clearly not happened. But as of yesterday, we're at 67 bucks a barrel because the United States of America is pumping out close to 14 million barrels a day of oil today, which is the most oil ever produced by any country in the history of mankind. So, talk for a moment about that offset of 65 bucks a barrel if it stays there to your loss of GDP due to tariffs.
Dr. Peter Linneman: So just on the tariff loss, we're not going to lose as much as he originally came out with. I think it's going to go from about an average tariff of about $3 per $100 actually imported to maybe $5. And that's detrimental. It could be $6. So that's harmful. But it's not going to be $20. The oil is interesting. There's a chart I've done in Linneman Letter for years, which is the real price of oil, and the current price of the oil is almost exactly the average real price of oil that is adjusted for inflation of the last 70 years. And so, the most interesting thing to me is we have a war that's keeping Russia restrained, whatever you want to call it. We just had a bombing of the six largest producers of petroleum in the world in Iran, and oil shot all the way up to $78 or $80 and then retrenched. Didn’t go to 110. Didn't go to 120, didn't go 150. Why? You said it. The US and fracking have recreated that world. And there's one other and the Wall Street finally got it the other day, Guyana. And you've heard me mention Guyana a couple of times. Guyana is a dirt-poor place, and they've got a lot of oil. And if you're in a dirt-poor place, you start pumping that oil. When you look at Guyana's output increase from basically zero two years ago to something like 600 million barrels today, they're just beginning because the only way they enter, quote, our world is pump like mad and they're not part of OPEC. So, the fact that the oil world has changed doesn't mean prices can't go up. They could even go to 80 or 90. By the way, 20 years ago, if we'd have bombed Iran, where would oil have gone? It would have gone to 150, right? Without a doubt.
Willy Walker: Without a doubt.
Dr. Peter Linneman: That tells you the power of oil. It's still volatile, but it tells you the power of fracking in the U.S. You now have that the largest producer is a relatively stable place and it's a place where we're a net exporter instead of a net importer— huge change in the game, huge changes in the game for the U.S. and the world.
Willy Walker: So, if you think that the tariff rate goes from 3 percent to 5 percent, not 20 percent, you're going to take about 50 basis points off of GDP growth in that step up. So, what does 65 bucks a barrel for oil add to the GDP number and then net, where do you think GDP growth is?
Dr. Peter Linneman: So, knock 20 of it off, 20 bps of it or 50, 80 bps off. It's a powerful, powerful force.
Willy Walker: But it doesn't knock it off. It adds it. You're saying it adds it.
Dr. Peter Linneman: That's right. It knocks off the negative. Willy, one of the funny things, and I don't think people realize this, you know when they release the CPI numbers or the PC numbers and it'll say exclusive of food and oil, it's not truly exclusive of oil. Why? It's exclusive of oil, but it's not exclusive of the fact that you and I are using oil right now.
Willy Walker: Right.
Dr. Peter Linneman: In like lots of things we're doing. I'm not saying they should, they're not lying, but it shows how ubiquitous it is, is all I'm saying. So, it's footprint, if you will, its multiplier. It's probably one of the largest multipliers. The only multiplier that I could imagine being bigger than oil, oil and gas, if you will, is probably human capital is the only bigger multiplier, right? If we're healthier and there are more of us, it's a huge multiplier.
Willy Walker: So, I wasn't going to go to this now. I had this much later on, but since you just raised CPI, let's just dive down that rabbit hole for two seconds. The latest rent without owner equivalent rent in it is 1.5 percent and you and I have spent plenty of time and anyone who's new to the Walker Webcast and wants to hear Peter and me go endlessly into why owner equivalent rent shouldn't be part of the CPI calculation, go back and look at Walker Linneman, number 13, 18, 17, as many as you want to look at.
Dr. Peter Linneman: Or read it.
Willy Walker: With the owner equivalent out, you're at 1.5, and annualized April to May was 0.8 percent. So, you're basically, and then one of the other things that they have in there, Peter, which you pointed out in the Letter, was that they had rents. Owner equivalent rent is something.
Dr. Peter Linneman: Nobody pays rent.
Willy Walker: People clearly rent, but their rent calculation says that between August of ‘23 and May of ‘25, rents in America were up 8 percent. You actually put forward in the Letter that if anyone listening to this who owns apartments was able to get 8 percent rent growth between August ‘23 and May ’25, call you because you'll send them a soda can or something.
Dr. Peter Linneman: By the way, my phone has been silent.
Willy Walker: Crickets, crickets. So, my point is, as it goes to that then, if you think that CPI is at 1.5, okay, and you basically think that the short rate should then be about 2.25 to 2.50 and you think the 10-year then should be somewhere around 3.75 to 4.50.
Dr. Peter Linneman: And 50 to 350 to four.
Willy Walker: Oh, I like that. We like the under on that.
Dr. Peter Linneman: Step back from the inflation just a second. From about 1983 or so until the onset of the recovery from COVID, what had inflation been? Inflation had been 1.5 percent to 2.5 percent, with a little volatility, and over time getting closer to 1.50 percent to two, okay? And then we had supply chain issues and monetary expansion issues, okay? You could argue which did it. I believe it's the supply issues, but you could believe it was the money supply. It doesn't matter. They both spike at the same time. Okay, what's happened to the supply chain issues? By the New York Fed's index, the supply-chain issues are gone, completely gone for a year and a half now. And by the Fed's data on monetary creation, they've only increased the money supply by like 2 percent over the last year. So, the sources of inflation, which are either money creation or supply chain issues, are long gone. You're back down to where you were and is it surprising, you're back down to where you were when the world starts looking like the world we had from ‘84 to 2019? And the Fed, I mean this jokingly, but they are committed to not letting inflation come back and reminds me of like a Vin Diesel movie where the number three bad guy gets horrible person and some victim of his shoots him and shoots him and shoots them and they reload and shoot him and shoot and the Vin Diesel character finally comes up and taps him on the shoulder and says “I think they're dead. you can stop.” You know that scene? We need somebody to come tap the Fed on the shoulder and say, “I think they're dead.”
Willy Walker: Well, I mean, look, the president of the United States is tapping him on the shoulder and the President of the United States is threatening to put in a phantom… nominate the new Fed chair. So basically, Jerome Powell loses his power.
Dr. Peter Linneman: But he's not wrong about everything.
Willy Walker: Look, hold it, hang on a second. The president of the United States today, someone wrote to me the other day, said might be the most powerful individual we have seen in our lifetime. I'm not, I mean, President Trump is on a complete roll right now, whether you like it or whether you hate it. He is on a roll. He is getting what he wants, and he is leading. You may not like where he's leading us, and you may love where he is leading us. But the bottom line is, we have someone in the Oval Office today who is very clearly leading. But back to rates, your prediction and it was a year ago on this call, where you made a prediction on how many Fed rate cuts we were going to get. I said, “There is absolutely no way we're going to get there.” And you were right, and I was wrong. But your current prediction is, we're going to get a hundred basis points out of the Fed funds rate between now and the end of the year.
Dr. Peter Linneman: Everybody thinks I’m crazy at this point when I'm saying that.
Willy Walker: 100 percent.
Dr. Peter Linneman: Just as crazy as they thought I was a year ago.
Willy Walker: Most banks have two at best right now. That was one of the other things that you and I debated last year, whether I would give you credit for two rate cuts in the 50 basis point cut that they did in September. It didn't matter. You still won the bet. But by the way, you're going to go with a hundred points. I will take the under on that. I don't think they'll get to a hundred. So, here's the question. I don't really want to kiss your feet again. I think you wear New Balance, and I like Ons. So, you want to make a bet? I'm on the under, on less than a hundred, you say a hundred and I owe you a pair of New Balance in January of next year if they got a hundred. You owe me a pair of Ons in my spot. It's great.
Dr. Peter Linneman: Sounds good. And the only problem is now we'll have the winner have to pay a tax on it since it's public.
Willy Walker: Yeah, well, I think your New Balance are made in America and they are.
Dr. Peter Linneman: At least they claim to be.
Willy Walker: Exactly. Talking about inflation is actually a good place to talk about one thing as it relates to construction, because you did mention at the top of the call about how challenging it is to make construction numbers work right now. I will say in the multifamily space, one of the most exciting things for people who own assets in multifamily is that for all of the forward look that says it is going to be an undersupplied market—and there was a Real Page number that came out this week, Peter, with absorption in Q2 that made my jaw drop—we have seen an unprecedented amount of absorption in the multifamily market over the last year with unprecedented deliveries due to the fact that single family is so thoroughly unaffordable that no one's moving out of multi into single. All these developers in the multi-space are looking at the cost of development and all of the issues as it relates to labor, to the cost of cement, things of that nature. And to your point, they're holding back on building, which for owners of assets is putting forth a very, very attractive scenario for rent bumps in ‘26 and ‘27 and ‘28. As it relates to inflationary pressure, you point out that lumber costs are way down. You point out that gypsum and cement costs are still at all-time highs. Why is it that we have seen gypsum and cement stay so high while all the other input costs have come, not crashing down, but have at least reverted back to their normal trends?
Dr. Peter Linneman: I don't totally have the answer. If I had to give an answer, it's a little more in the weeds than I think it is because there is, remember, a lot of construction occurring.
Willy Walker: Yeah.
Dr. Peter Linneman: And data centers, government building that's going, you know, the Build Back America, whatever it was called, the infrastructure bill. There is a lot of construction still going on. So, if you look at the aggregate construction, there is still a lot of construction going on that's keeping those elements up.
Willy Walker: The other thing on that is that gypsum is also used in agriculture, and the agricultural industry is pulling a lot of the gypsum from the construction industry or the parts that go into it. And then also we import, I believe, 22 percent of our cement from Canada and Mexico. Because of all the things that are going on from a trade policy standpoint, those supplies into the U.S. have also had some issues as it relates to pricing those imports.
Dr. Peter Linneman: By the way, just one of the things I think is an interesting chart in the Linneman Letter is that we have that index of materials kind of cost over a long period of time. Turner also does. It basically rises over the long term about 1 percent above inflation. That's because of the labor component. The materials part basically tracks inflation over a long term because it's an adjustable item, right? You extract a bit more, you make a bit more, there are lags, and there are demand surges. I think that's what people have to remind themselves is that if anything has a reversion to the mean, it tends to be the inputs other than labor in construction.
Willy Walker: You and I have talked about this a little bit in the past, but there's a stat in the Letter that's talking about GDP going from 26 trillion pre-COVID to 30 trillion today. And then you give a GDP per capita number, which says that it's gone from $81,000 per US citizen to $89,000 over that period of time. My question, and you see that, and you say, “Wow, that's quite something— $8,000 of additional GDP per capita.” And you say, “Wow, that's great.” Everyone's kind of benefiting from that. My question to you is this, are there the top 1 percent of the U.S. population and not even the top one percent of the U.S. population, like the top million people who've benefited from that growth in GDP and the other 360 million people are sitting there watching that number go, but it doesn't come back to them?
Dr. Peter Linneman: That's the main headline, if you will. It's just not true. If you delve into the data, it's actually been the lower earners who have done better over that, better in a percentage sense over that period. Obviously, they haven't done as well in absolute dollars. 10 percent of $300,000 is different from 10 percent or $50,000. But in a percent each growth, it's actually been lower. And by the way, that shouldn't surprise you, because if you go back to when a lot of that occurred, it occurred when we had huge labor shortages for every kind of labor. We didn't have a shortage of entrepreneurs. We had a shortage there for a couple of years of just workers, just normal people, right? They have benefited. And then you go down one level, not down. You then say, "Well, what about retirees, right?” Well, they're pretty insulated, because Social Security is indexed and to the extent, they're 401k types, their 401ks have done quite well over that period if they had a kind of normal 401k, right? And so they've done well. So obviously has someone making $500,000 done better when they got a 9 percent increase than somebody earning 50,000 getting an 11 percent increase? In absolute dollars, of course, but it has not been the stereotype that it's all gone to the top. It just is not true. By the way, on wealth, the wealth variant, that's the income variant. The wealth variant is pretty simple. The wealth variant is if you were 23 years old and you had no wealth; you're now 26 years old and you still have no wealth. That's no surprise. You've not changed, right? If you had no wealth, your wealth hasn't grown a lot over that time period. And yes, the Bezos's and such have had enormous wealth increase. But if you look at society at large, what's the main driver of the wealth increase? It's two things. The stock market is rebounded and that's the 401ks for people, which is not spendable for most in the meantime, but as part of their wealth. And the other is their home value.
Willy Walker: Oh, how's it?
Dr. Peter Linneman: Home value. And by the way, the home value is up to 200, you know this, somebody who had a $180,000 home five years ago. So, it's a low-price home. That's now $215,000, and somebody who had a 400,000. So again, it's been across the board. The dollar gain is more, but it's actually been across the spectrum.
Willy Walker: So, I want to dive in on a couple of things in there and I want to try and make it so you and I can get through all this because there's so much in there that I want your perspective on. You do a comparison of pre-COVID to where we are today in prices and growth on all sorts of different things, real GDP, I mean, everything out there. What's interesting about it is that most of the things you track have sort of high-single-digit, low-double-digit growth between pre-COVID and today. There are three outliers. There's almost nothing in 20 percent. There's almost nothing in 30 percent and then you get into 40 percent and it's high 40s and low 50s. There are only three of them and the median home price is up 58 percent, multifamily starts are down 47 percent and office vacancy is up 48 percent.
Dr. Peter Linneman: So, let's take the first two. Do you think they're related? Yeah, of course they are. The fact that home prices are up so dramatically.
Willy Walker: Careful, careful what you point out because I'm going to bring some data to you in a second. It doesn't make any sense on what multifamily markets you think are going well. But anyway, hang on a second. So, this gets back to the consumer, okay? So, you then go on to talk about this, that you talk about, that the de-levering of the U.S. household makes it so that as prices in single-family homes have gone up 58 percent, the relation to disposable personal income has gone down 11 percent. In other words, you have a stat in there that talks about the median average price to disposable U. S. income is down 11 percent, even though prices have gone up 58 percent. How can that be?
Dr. Peter Linneman: Asset appreciation, income appreciation. It's that simple, right? It's that simple. I mean, I went to Catholic school in a working-class town, and we learned how to do ratios and it's both the numerator and the denominator. Right?
Willy Walker: It's that simple. Clearly, they didn't teach us that at the vocational school that I went to, but it's all good.
Dr. Peter Linneman: Yeah, there's a school in Boston that doesn't teach that. They only look focused on the numerator to the denominator. We focused on both.
Willy Walker: So here it is, the stat is that total household debt as a percentage of disposable personal income stood at 87.9 percent in Q4 of ‘19. Okay, let me repeat that. So, household debt as a percentage of personal disposable income stood at 88 percent at the end of 2019 and today it is at 76 percent. That is down 12 percentage points
Dr. Peter Linneman: Right, and where's that from? By the way, the thing that makes the headline is not what you just said. The thing that makes the headline is what? It got to a low of like, when there was nothing to buy, literally there was nothing to buy in 2020. You couldn't go out, you couldn't go to the ball game, you couldn't travel. It got down to what, like 50 percent, something like that. And now, and what got the headline is it's jumped up. Not that it's still below. Why is it still below? I'm doing this number off top of my head. You may know the actual number off the top of your head. It's something like 37 percent of all American households have a mortgage at 3 percent or less. Now, when you compare that to say 2019 or any other quote normal year, you wouldn't have had that. You would think of the savings of just two percentage points. That's two percentage points of savings, that popular, two percentage points of savings on a mortgage that's 80 percent of the value of your home. That's a lot of spare money. And then you go, I'm doing this from memory, Willy, but isn't it, it's, then it's like 17 percent or between three and three and a half percent mortgage. And then there's another 12 between three and a half and four. So, you have something like 60 percent of the population, 60 percent of homeowners have a mortgage less than any historical norm by at least 150 to 300 basis points. That's why the ratio is down.
Willy Walker: That’s why I have an issue with your home renovation index. So you state in the Letter, which is great data, that the home renovation index is a great leading indicator of home sales. Because everyone goes and they go out to Home Depot, and they buy all these supplies and they come home, and they repaint the deck and they clean up the bathroom because they're going to sell their home. So, you're basically saying in your home renovation index, get ready because home sales are going to come up because everyone's going to Home Depot and buying other stuff. I read that and I say, “No way. They're fixing up their house because they're not going to sell it and they want to make it nicer because they are going to stay in the house.’
Dr. Peter Linneman: And I think that's a kind of inflection point. I think you're right. It's not an either-or. It's both. Obviously, there is both, and it was always a both, but it was more the former, namely fixing it up to get ready to sell. And you're probably right that it's probably more, I'm not going to sell, and I'm going to live here for four more years, and can I add a room? Can I fix up the basement? Not to sell, but to live for three or four more years than I thought I was going to live. I think you're dead on that. You're right that, therefore, the robustness of that as a leading indicator is certainly skewed because we know this mortgage part. By the way, Willy, we were the first people I ever heard talk about this locked-in low mortgage rate thing. No one was talking about that two years ago; three years ago, we were talking about it. It's a huge impact. The shortage of housing is huge, huge, and it's not going to go away. The shortage of single-family homes is not going away in a hurry.
Willy Walker: The one thing that you remember I said at our meeting in Chicago was just the Trump administration using Ozones as well as trying to take BLM land. They may try to circumnavigate the NIMBYism that exists at the local level and just do some land grants to build affordable housing and single-family housing.
Dr. Peter Linneman: I had never thought of that. I think it's a very good insight. It's one of the reasons I like hanging around with you and other smart people, is that they not only can tweak at the edges, they can actually point out something you hadn't thought about. They could change the whole tenor of things.
Willy Walker: Because they wouldn't give it to the county or the state, and say, ‘You all go through your typical entitlement process.’ They'd say, ‘We're doing this.’
Dr. Peter Linneman: Right. It would end up in court. We know it would end up in court, and I'm not illegal enough to know, but I thought it was brilliant.
Willy Walker: I did see the manufactured housing owner operators, who have basically built incredible businesses. Due to NIMBYism, the tracks of land that they have for manufactured housing have been basically a scarce commodity because of local governments giving a lack of permitting for new affordable manufactured housing communities.
Dr. Peter Linneman: It is that, and by the way, Willy, it's even one step further, is that one of the reasons those manufacturing communities are so attractive is that it's impossible to build affordable homes, right? If you could build affordable homes, the manufactured housing would still be viable, but it'd be a little less. The other thing, Willy, about the shortage of single-family housing that's been built over the last 14 years, that doesn't affect Musk and Bezos, and it probably doesn't affect most of the people listening because that's not the price point of the home you're buying. But when we've under-produced for 14 years single-family housing, the second-hand market, if you will, for homes, there are all those homes that normally would have been built in those 14 years, and somebody would be buying second- hand, so to speak, as a used home, as they don't exist. The squeeze comes on people who would be buying, I'm calling them secondhand homes, but you know what I'm referring to. They would have probably been the second owner, maybe the third owner. They don't exist. A lot of them just didn't get built. That is squeezing a particular group of people. They're the ones who are renting single families. They're the ones who are staying in multi and longer. And I don't see that changing very rapidly. Absent something dramatic like you're describing, right? Where there's a game changer around the state and local, because the state and locals, let's be honest, they've said that they want affordable housing. And the truth is, they really don't. If they want more affordable housing, I'll tell anybody listening how to do it. Have the same governance standards that Houston has.
Willy Walker: Is that something? No, Houston and LA are the two perfect examples. You and I've talked about this before. Houston has done an incredible job of eradicating its homelessness issue and LA has only exacerbated it, and you can take it all back to land entitlement and the fact that in Houston, you can build anything anywhere, and in LA, you can build nothing anywhere.
Dr. Peter Linneman: Yeah. And by the way, Houston's greatest asset, without a doubt, is affordable housing. It's not like Houston's in a gorgeous location. That's a nice place, but it's not like it's gorgeous. It's not unless you like 100 percent humidity all the time. It has one amazing asset, and that is it’s affordable for employers, for people. They can live. All you have to do is copy their playbook.
Willy Walker: As we talk about Houston and manufactured housing, I have to take a quick pause here, Peter. I had not planned on doing this, but I just want to make a point of the catastrophic flooding that took place in Texas this past weekend. It touched so many people, and it has touched us at Walker & Dunlop very personally as an incredible person on our team, Matt Pohl, lost his eight-year-old daughter, Abby, in the flooding that went through Camp Mystic. It has been an exceedingly challenging time for everybody as it relates to the loss of life, and particularly to the loss of all the young girls who were at Camp Mystic. I've talked to Matt, as you can imagine, a number of times since the tragedy struck on Friday. But I will tell you, it's a disaster and it's a tragedy that hits so deeply, and it's so sad. To Matt and to his family and to those listening to the webcast this week, which goes far and wide, our sympathies and our condolences obviously go out to those who lost loved ones in those tragic floods.
Dr. Peter Linneman: Absolutely.
Willy Walker: Peter, I want to mention two other reports you get to and then I want to dive into job growth and markets because I've teased up that I'm going to kind of go after you on your prediction as it relates to good multi-markets based off of job growth and office occupancy. You did mention two things that I just want to point out because I think they're really important. One, you point out the Bureau of Labor Statistics study on unemployment for people in their 20s. And you point to the point that people with an associate degree today have a 2.1 percent unemployment rate. People with a college degree have a 15.3 percent unemployment rate, and people with a master's degree have an 8.4 percent unemployment rate. Stunning, just stunning.
Dr. Peter Linneman: I did not know that. You know, you start reading a study and you think you know what it's going to say and then you read what it says. Just to repeat what Willy said, if you have an associate degree you're basically fully employed, and if you have an advanced degree, you have a hard time finding employment.
Willy Walker: Two other pieces on that. This spring's senior class, the highest unemployment level for jobs out of undergrad this spring, getting jobs in June, are for students with degrees in mathematics and computer science.
Dr. Peter Linneman: I was willing to bet.
Willy Walker: That is AI right there.
Dr. Peter Linneman: That is, but I'm willing to bet that there's a category that's harder to get employed and that's if your major was studies, if the word studies was in it, I'm just, I don't know that. I was talking to a friend this morning who adores you. I'm like a jilted lover as I approach these universities in that I love what they did. I love what they're capable of doing. They changed my life. Then I see their failings and I'm like a jilted lover that it just tears me up. But when you see that, you go and you get more training and you're less employable, and yes, you can say AI is part of it, but that's not all of the number we're talking about. Shame on the universities for not advising students, there may not be a job at the end of the rainbow. I've seen that happen. It's very unfortunate, but I was stunned by that, Willy. That's the only reason I put it in.
Willy Walker: This next data point only underscores that, Peter, and that is that you pull up this New York Fed study, which talks about 10 million borrowers are likely to see a reduction in their credit scores due to failure to pay their student loans, and that 43 percent of those federal student loans are not making payments today.
Dr. Peter Linneman: You may remember I said I thought a legitimate question was, when the COVID grace period ended, all these students would be squeezed, all the former students that are paying. And I said no, I just think you're going to just see mass not paying, and they're going to gut out the political system. Now the problem they face is that, whereas I think the Biden administration, if they would have done this, would have worked with them, I think the Trump administration, again, right or wrong, doesn't matter, they're going to say, ‘Look, you took it on. You co-signed, dear parent.’ You know, something like 89 percent or 92 percent of the federal loans are consigned by parents. You're the one who got an advanced degree in how to start a revolution or whatever, right? They don't have a lot of sympathy.
Willy Walker: No, they don't have any sympathy. But your point is the derivative effect here. Just keep in mind 10 million students who took out loans potentially by the Fed study, are going to have their credit scores downgraded. By the way, I don't know whether you noticed this morning, but FHFA just approved for this competitor to FICO to be able to give credit scores that are accepted by Fannie and Freddie just yesterday. I saw that. Really interesting, but staying on topic here, 10 million students could have their credit scores downgraded if they're trying to rent an apartment, if they are trying to go buy a home or get a credit card. That's going to have an impact. The other derivative effect is mom and dad who are on as signatories. When the Trump administration goes after Judy or Johnny didn't pay back their student loans, they're going to go to Peter and Mary, who are the parents. That is going to have an impact on that next generation.
Dr. Peter Linneman: Assuming they could collect, the government has been a miserable debt collector, even when they want to. There was this famous issue. David Cone was a well-known pitcher for the Yankees and Mets, and so forth. There was a time when, I think, Senator Proxmire had this “Golden Fleece” kind of thing. And the government was saying they couldn't find these kids who owed them. A pitcher for the New York Mets was on, and they say, “He owes you; you can find where he's at.” So, whether they will collect is hard to say, right? I'll tell you who I think suffers the most. If it's not going to be apartments, it's going to be DoorDash and Uber. You know, Willy, you're old enough. I'm really old, but kids who aren't making that much use DoorDash. I'm not trying to use them, I'm using them in the way people might say Kleenex, the delivery service. That's an example, right? They use delivery service and cars in a way that I've never seen. So, my wife and I live in Center City, Philadelphia and we mostly carry out food. And so, here's this sweet little 74-year-old couple every night, trundling out. If it's raining, we still trundle out. If it's snowing, we still trundle. We pick up our food three or four blocks away. The young people in our building, they're just having it delivered.
Willy Walker: Yeah, they're saying, ‘Hey, use this thing.’
Dr. Peter Linneman: Exactly!
Willy Walker: That is really interesting because you pointed out, Americans spend more today on dining out than groceries. That is a huge stat to keep in mind. Everyone's talking about the fact that Walmart and Amazon are doing really well because they're selling a lot of groceries. But the trend is to, and obviously, the... The store that's preparing your food still needs to go and buy those groceries, either from Walmart, Amazon, or some other wholesale distributor. So, I'm not trying to say that that's a big pressure on their business, but I thought that data point was fascinating that people spend more on dining out.
Dr. Peter Linneman: And it's even more dramatic than the data I show. You say, why? If you say what's being sold in the grocery stores, it's not just cans of beans. It's increasingly pre-prepared food to be taken out. So, if you kind of put that in as dining out, if you will, it's kind of in a middle zone, it's even more dramatic. As opposed to we're sitting here at home preparing.
Willy Walker: All right, so I want to dive into job growth post-COVID and why on earth you pick the multifamily markets that you pick given the data I'm about to give you. So, top graph, growth cities. Job losses in the pandemic and what they've recovered since then, okay? So, at the top of the list there is Salt Lake City at 218 percent, Raleigh, North Carolina, at 229 percent, Austin, Texas, at 224 percent, Dallas, Texas, at 207 percent, and Phoenix, Arizona, at 199 percent. All at the top of the list, all have an incredible way of attracting jobs. And oh, by the way, that Dallas, Texas 207 number, they've added something like 420,000 jobs in Dallas.
Dr. Peter Linneman: It's stunning.
Willy Walker: Then on your laggards, this isn't going to surprise anyone. You have Los Angeles, California, at 94 percent. They're not even back to 100 percent of the jobs they lost. Boston, Massachusetts, 93 percent. San Jose, California, 90 percent. Minneapolis, Minnesota, 99 percent. Okay. Point out here. This is a political statement based on fact, not personal belief. Look at those states that are red states and look at those states that are blue states. Look at the cities in red states and look at those cities in blue states and what they have gotten from job growth post pandemic. And you cannot sit there and say that the companies and the employees want to be in those red cities in those red states. It's just numbers. It's math, just numbers. Just point that out. How can your multifamily projections for the hot markets in 2027, not even ‘25, ‘27, you're going out two years from here, okay? Your weak markets are Charlotte, Raleigh, and Austin. Three of which I just talked about having over 200 percent job growth post-pandemic, and your strongest markets are New York City at just recovering their jobs, Orange County, just recovering their job, San Jose, only at 90 percent, Detroit, just recovering jobs, and Chicago, just recovering the jobs. In other words, you've picked out, and obviously supply and demand, I know you're going to tell me, the Sunbelt markets have tons of supply, and therefore they've a glut of supply to get through and these other markets haven't had new supply brought on and therefore you've got a tighter market. They're still growing jobs just a little bit. But we're going to go with the supply and demand on apartments rather than on job growth. I sit there and I say to myself, ‘But if you're going to own, you're not owning for Q4, 2027. You're owning Q1 29 and Q1 32.’
Dr. Peter Linneman: To be fair. I only projected out to ’27, but you hit it. You really hit it in that it is supply and demand. There's no doubt that Houston, Dallas, Phoenix, Vegas, Orlando are demand-growing places. But there's a lot more supply than there was 20 years ago. If they added no more supply than when they had 20 years old, those markets would be out of sight in terms of rent. Can you imagine what would happen? I mean, it would be stunning, right? But they add supply. All we're saying is in spite of large growth, some of these markets are so restrictive on growth, right? That you're going to have a tight market even, and by the way, Detroit's a very localized special case because there's not much supply. I bet you could go to your book of business at Walker & Dunlop, and you'd struggle to find anything being added to the supply notable in the family.
Willy Walker: We're selling a portfolio in Detroit right now, and the list of bidders is out the door. Out the door, because there's no new supply, and if you have good inventory there, you're going to see rent.
Dr. Peter Linneman: People are going to live in Detroit, right? So, there's no supply. The people are going to live there. There's going to be a little population growth. There's going to be some job growth and no new supply growth. And there'll be some income growth. So that's how I'm taking Detroit, which people might say is the hardest. In an odd way, it's the easiest because the supply is the lowest. If I have no supply growth, and you might even shrink because some stuff is being torn down, you can get rents go up even though you have very little growth, right? You can have a lot of growth. By the way, there was a man named Alfred Marshall, right, in like 1912. Until that point, the economic theorists were, there was group of them who described prices being determined by supply. There was another group that was saying, no, price is determined by demand. Alfred Marshall's famous contribution is, no, it's the interaction of supply and demand. That's still true. And it's not perfect, but it's still true.
Willy Walker: I have to go to the Real Page data that came out earlier this week, Peter. You had 227,000 units absorbed in Q2 of 2025. In the last year, we've had 800,000 units absorbed. This is unprecedented as it relates to the demand for multifamily units. If we thought that that demand was going to go away because single family housing starts were up precipitously and we were going to get a lot of new supply that people could move from their apartment building into a single family home, I'd sit there and say, ‘Okay, these oversupplied markets are going to have a longer time to get through this inventory and therefore not be able to push rents.’ But what we're seeing right now is that the other thing that was interesting in that Real Page study is that landlords today aren't pushing rents; they're going for occupancy. National occupancy right now is at almost 96 percent. It's at 95.6 percent. Even as we're at levels where landlords could push rents, they aren't pushing rents. Please, someone send that news flash to local politicians who are trying to put rent control in across the country because they're doing what's right for their assets for the long term and not trying to price-gouge at this point.
Dr. Peter Linneman: They can't push so much because there's enough buildings still at least up to stabilization.
Willy Walker: That is correct. That's why in a market like Austin, you still can't push rents because you want to get to that. That's exactly right.
Dr. Peter Linneman: Because there's a new building. There's a good, I'm going to one in Philadelphia this afternoon that we're involved in. Beautiful building and it's leasing up, but we're like 82 percent and we're in lease up. And there are buildings that are at 95, but they can't push because we're only at 82, right? Not just us. There's a handful of buildings like us, and that's disciplining it. In fact, I think what's going to surprise people about multifamily. You ask questions and you answer them. I'm going to ask myself a question and answer. I think the surprise for multifamily is concessions are going to burn off faster than people think. It's kind of what you're saying. There are a lot of markets with a month, two-month concession on free rent, right? And one of the things that has happened, and I don't have data on this, I wish I did, is as demand keeps growing and supply drops, you get back up to normal, and the first thing to go are all those concessions. You have a month or two months of concession, that's like an eight to 15 percent income increase, right? And that can happen in a matter of, not weeks, but in a manner of months, a market can go because, gee, our building that one I was just talking about gets to 94 percent. What's keeping the concessions in place suddenly anymore, right? You can get that market. I think that’s going to flip faster in multifamily. There’s going to be pleasant surprises because I think people are underwriting it as a slow phenomenon, and I think it’ll be a much faster phenomenon.
Willy Walker: I'm going to try and figure out how you and I can come up with something that shows whether you're either right or wrong on those strong and weak markets two years from now. We can have a look back on it. Final thing, because we're almost out of time, and then I have a final question after this one. So right now, the Linneman Real Estate Index, which as you're very clear in the Letter points out that it's an extremely good predictor of cap rates, you have the LREI increasing by 500 basis points over the next two years, which would take it from 147 to 152. What does that translate into as it relates to cap rates?
Dr. Peter Linneman: We only do industrial and multifamily because when you get to the office, it's hard to know what a cap rate is because of long leases and so forth. That'll be 50 to 100 basis points in pricing. By the way, I've said this; you've heard me say it. If overnight, 50 percent more money showed up to buy the same assets, cap rates are going to go down. Now, I'm not saying 50, if you get 5 percent more money overnight showing up to bid for the same number of assets, the price has to move. It just does. Cap rates have to move, and we saw it in reverse. When money went to the side, the index was down for like the last two years. It says money doesn't want to be there. When money doesn't want to be there, the building is still lovely. The location is still lovely. The rent role is still lovely, but if the money doesn't want to be there, you don't get the pricing. I think you're going to go and you're starting, you're at the edge of seeing all of it. Transaction volumes starting to creep up, right? You're no longer at record-low transaction volumes. You're not at normal transaction volumes yet, but you're what? They're in multifamily and industrial, and normal transactions are at least foreseeable. Is that a fair way of saying it? If there's momentum, you could get there.
Willy Walker: Yeah, I obviously have to be careful between now and our earnings call as it relates to talking about those issues, but we have been public about saying that we are seeing transaction volumes pick up significantly in multifamily.
Dr. Peter Linneman: Yeah, I mean, it's just data, and I don't know yours, but the reason capital's coming we're back to what we were saying where we started. Capital comes off the bench. It wants to find a home, and people are good at finding homes for money. One of the interesting things is that if you give people a lot of money, they'll find a home for it.
Willy Walker: That is for sure. I will tell you, it's interesting on the LREI, and your comment about saying that you only do it for industrial and multi. I spent the week before last in London. We opened up the office there, and I met with all the big private equity firms and all the big investors and the only two asset classes that anyone wanted to talk about were industrial and multi, period, end of statement. There was not a conversation about retail. There was not a conversation about office; it was industrial, and it was multifamily, and then data centers. The one other thing I would say on that, Peter, is I had coffee yesterday with the CEO of a pretty large data center company and we're sitting there talking about W&D entering the space and I said, ‘You know, a lot of these deals have been done by banks and single asset securitization deals and this and that,’ but we're seeing the opportunity for us to come in and work on a lot different deals and I say, you know, these are big checks of two and three and $4 billion, and this CEO, Peter, across his cup of coffee. ‘Willy, we're closing a financing next week with a syndicate of banks that is a $32 billion financing.’
Dr. Peter Linneman: One of the questions I raised to one of the speakers at the event we were at, who was talking very, very bullish about, and accurately about the data center is, and I'm doing this from memory, a six zero, 60 percent development margin, a 60 percent developed, not lever, 60 percent development. Real estate historically is a 15 to 20 percent gross margin business, and you show me any business where you can get three to four times the traditional margin, it's going to get overbuilt and I don't know how fast it's going to get overbuilt. But those margins, by the way, are not just real estate, right? You show me any business where suddenly you can get three to four times the typical margin. Money is going to flow there to try to arbitrage that away. It's not going to do it in a week, and it's going to be in two years. But 60 percent development margins? My God. Yes, you need a lot of capital. But there's a lot of capital, as you're just saying, there's a lot of capital out there for something with a 60 percent margin. But by the way, there'll be a lot of money out there for something with a 30 percent margin still. And a lot of money until it gets down to a 15 to 20 percent margin.
Willy Walker: Two things on that, and then I'm going to give a final reminder to people of what you said in January on exactly this topic. First, NVIDIA's market cap got over $4 trillion this morning, which is unbelievable. NVIDIA runs 80 percent margins, which runs circles around Google, which runs 60 percent margins. So, to your point, you need to have a monopoly on what you are selling, and there is no monopoly in the data center space right now. You need to have a monopoly on what you sell. Like NVIDIA's chips and Google search engine to be able to run margins like that. And then the final thing I will say is to remind people of your quote from our meeting in January, where I said to you, ‘Tell me, what is the stay-rich asset class?” You said, “Multifamily.” I said to you, “What is the get-rich multifamily asset class?” You said, “The office,” which right now is looking exactly right. And oh, by the way, the comments in Chicago of a couple of weeks ago were not there when you said that in January. That's correct. That's right. Then, the final thing was, what about the get poor? And you said, “Data centers.” So, as I sit around with somebody who's saying I'm raising $32 billion, and I say, ‘If Walker & Dunlop could only participate in that financing, we'd make a lot of money on it.’ There's plenty of money to be made, but I think in the long term, there's also probably plenty of money to...
Dr. Peter Linneman: Well, and to be fair to the speaker who was very bullish, they said, we don't know what the exit is. We do believe there'll be a lot of buildings. We just think a lot that the building will be dumb, and we think we have good assets. That's a micro real estate discussion, right? That's a very different discussion.
Willy Walker: Well, that's back to the Bobby Taubman or David Simon comment a couple of years ago, where I think it was Bobby who said, ‘There are a thousand big box malls in America, and we need about 250 of them.’ And then somebody else pointed out that David Simon owns 249 of the 250. Peter, I could keep on going all day. We've run over. I've loved it as always. Thank you, my friend. Thank you, everyone, for joining us today. We will obviously be back next quarter with another Linneman discussion. We'll also be back next week with another Walker Webcast. Thanks, everyone.
Dr. Peter Linneman: Thank you. Tell your friends to join and watch this. Always a pleasure, Willy. Thank you.
Willy Walker: Take care, Peter.
