Lower Interest Rates And An Industrial Boom: Peter Linneman’s Predictions For The U.S. Economy

Peter Linneman wants us all to survive to 3.5. 

Speaking on the most recent Walker Webcast, the economist and former professor at the Wharton School of the University of Pennsylvania told Walker & Dunlop CEO Willy Walker that the economy will eventually steady, inflation will return to 1.5% to 2.25%, and the yield on the 10-year Treasury will drop to 3.5% as the country puts the effects of the pandemic in its rearview mirror. He predicted five interest rate cuts in 2024.

Linneman said he has seen many pandemic-led disruptions returning to normal, with new restaurant openings and the steadying of the supply chain among the positive signs that the economy will return to normal as well. However, despite his positive outlook, he said he remains baffled by certain goals the Federal Reserve has set, including wanting to get the unemployment rate up to 5% or 5.5%. 

“The economy is still underheated, so the notion of, ‘Let’s create unemployment to cool an overheated economy,’ is just bizarre to me,” Linneman said.

There are still 2.5 million unemployed people who should be working, in theory, but have yet to rejoin the workforce since the start of the pandemic, he said. The main issue is that most of the economy is trying to “get back to trend” through increased interest in travel and healthcare and the like, while 20% of the economy, including construction and banking, is being dampened by interest rate increases. 

“So you’ve got 20% being artificially dampened and 80% trying to catch up,” he said. 

Walker said a consistent theme in his guest's Linneman Letter is the undersupply of multifamily and single-family housing. Walker asked him what he would do if he were president of the United States for one day to spur the production of these products. 

Since housing is often controlled on a local level, it would be difficult to incentivize more development from a federal position, but the government could send federal funds to local jurisdictions that are pursuing the goal of increasing housing supply and decreasing cost, Linneman said. 

Nationwide construction spending over the last 12 months has included $81B in office spending, $263B in industrial, $43B in retail and $129B in multifamily. Walker said it is clear from those numbers that industrial and multifamily are the main properties people want to own right now. Linneman said that industrial is still undersupplied and multifamily is oversupplied in some markets and undersupplied in others.

“The best friend multifamily has is the fact that single-family is hugely underbuilt,” Linneman said. “If a major competitor fundamentally cannot produce enough to meet the demand of the people who want to buy them, it's good for you. If Toyota cannot make enough automobiles to match the demand of people who want to buy Toyotas, it's good for Honda, it's good for Ford, it's good for GM. That's what's going on with multifamily.”

The difference in this scenario is that Toyota would eventually find a way to ramp up production, Linneman said. However, single-family housing doesn't seem to be able to get out of its situation. 

Industrial also has strong fundamentals, including vacancy rates that have gone from 3.3% pre-pandemic to 2% today. 

“As online sales increase, they use a lot more warehouse space than traditional retail uses,” Linneman said. “I just watched It’s A Wonderful Life over the Christmas holidays, and just like how every time you hear a bell it means an angel is getting its wings, every time you see something bought online, it means a whole lot more warehouse space is needed. We're still trying to catch up there.”

Hospitality is less clear-cut. Walker said he was surprised to see that real revenue per available room is down even though it seems that all the hotels he visits are overbooked. Linneman said the drop makes sense because it is adjusted for inflation, and it suggests that the economy isn't fully back to pre-pandemic hotel demand. 

Walker wrapped up the webcast by asking Linneman about his predictions for the year, specifically one in the Linneman Letter that Ozempic and other weight-loss drugs could save the U.S. 2% to 3% of the gross domestic product in overall healthcare spending. 

Linneman said one could argue that 70% to 80% of medical spending is somehow related to problems associated with being overweight, and Ozempic and similar drugs could be a partial solution. 

Along with that prediction, Linneman said there will be five rate cuts in 2024, the 10-year Treasury will hit 3.5%, the Dow will be up about 6% to 7%, and oil will drop to $68 to $70 a barrel. 

This article was produced in collaboration between Walker & Dunlop and Studio B. Bisnow news staff was not involved in the production of this content.

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