Peter Linneman On Fed 'Punishment,' 'Wimpy' Executives And Why He's Bullish On Economy

Is the economy still at risk of falling into a recession?

According to economist and former Wharton School of the University of Pennsylvania professor Peter Linneman, the answer is an emphatic “no.” But his optimism comes despite the recent interest rate increases by the Federal Reserve, he said.

Speaking live from Philadelphia’s National Constitution Center, Linneman pointed out to this week’s Walker Webcast audience that the actions that began the Revolutionary War occurred just blocks away at Independence Hall. 

Linneman proposed that the U.S. government is again on a war footing of sorts.

“Anybody who borrowed floating or borrowed short-term, they're in a very difficult situation, and that's because the Fed has declared war on the economy,” he said. “It's kind of crazy what they've done, but they've done it.” 

On the other hand, Walker Webcast host and Walker & Dunlop CEO Willy Walker said he believes the economy already is in recession. In fact, he told the webcast audience that it even feels like CRE has been in a depression since the Fed began hiking rates in 2022.

Linneman said certain CRE asset classes, particularly the vacancy-plagued office sector, might feel like they’ve been “in combat for three years now, and it's maybe not getting worse, but it's also not getting a lot better.” 

But he said his reading of economic data tells him a recession is unlikely.

Linneman cited metrics that suggest the private sector, while not yet performing at pre-pandemic levels, is actually doing well. He said the annualized inflation rate is only 1.2%. Meanwhile, more than 200,000 new jobs were created last month, which he said makes it “bizarre” to claim that further hikes are needed to juice the economy. 

“It may not be our business that's adding jobs, but 68% of all the industries in the United States are adding jobs,” he said.

In his most recent newsletter, Linneman predicted that the Fed will begin to reduce rates in the summer. Until then, CRE borrowers will continue to be impacted by higher interest, particularly those who work with small regional banks.

“I have no idea what they're worried about at the Fed — none,” he said. “They're dishing out punishment to show they can dish out punishment, to show that they're righteous.” 

Linneman said he was mystified as well by bank regulators’ actions in the wake of the Silicon Valley Bank run. By imposing tighter regulations on all banks, regulators were essentially punishing blameless banks as well as those perhaps more directly responsible for failures, he said.

The fallout from this shotgun approach will be felt most acutely by developers seeking bank loans, he said.

“What that'll mean for commercial real estate is that it's going to be a tough next year,” Linneman said. 

The government wasn’t the only target of Linneman’s criticism. Noting that the return-to-office rate in the United States is notably lower than in other countries and directly contributing to the dismal performance of the office asset class, Linneman blamed business leadership.

“CEOs, earn your pay — there's a reason you're getting paid the big money, right?” Linneman said. “You tell me privately that you believe the company is much more productive and profitable when people are there. And then, in spite of your $20M, you wimp around and don't bring them back for your shareholders.” 

He said an exception is in CRE, where many companies brought their people back to the office in 2021 and 2022. That included Ken Griffin of Citadel, whose hedge fund’s performance has been “off the charts” since he called his team back to the office, Walker added.

Whether or not there is a recession, additional interest rate hikes or both, the near term is likely to continue to be challenging for developers seeking construction loans. Linneman said two qualities will continue to influence success in CRE in 2023.

“If you're in real estate and you have capital and courage when others don't and you can hold, then you're going to do well,” he said. “It’s that simple.”

The next guest on the Walker Webcast will be PGA coach and co-founder of the Titleist Performance Institute Dave Phillips. More information is available here. 

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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