Peter Linneman: CEOs Need To Do Their Jobs For Office To Make A Comeback

Peter Linneman has a simple motto that he operates under: Don’t bet against the U.S. economy. At 71, the economist, professor and researcher has held onto this motto through recessions, political turmoil, wars and countless other challenges to the economy, and he still believes it to be true to this day. 

So on this week’s Walker Webcast, Walker & Dunlop CEO Willy Walker kicked things off by asking Linneman one question: What could go wrong? 

Linneman started off by drawing attention to his Zoom background, a picture of Niagara Falls. He said the most powerful waterfall in the world is an excellent analogy for the U.S. economy because, just like Niagara, what the economy achieves is stunning and it keeps going, even if at times it might be moving a little slower than others. 

“The economy is 3.5% bigger than it was before Covid, before the social unrest, before the contentious elections — what a remarkable achievement,” Linneman said. 

As to what could go wrong, Linneman said four things could seriously impact the future if they occur: the implementation of wage and price controls; the war in Ukraine turning nuclear; the war extending into NATO countries; and the U.S. talking itself into a recession. To that last point, Linneman said fear is once again conquering greed in the country, but it can be overcome. 

“We had real fear in March 2020, but a year later greed was back,” Linneman said. “And I don’t mean greed in a nasty sense, I mean you see all the good things that can happen rather than all the bad.” 

Walker asked Linneman about interest rates, pointing out that the last time he was a guest on the webcast he said that rates would adjust, and that a year ago he said that short-term interest rates would remain around zero, which is clearly not the case today. Linneman said that when the world economy shut down, there were two possible scenarios: supply could come back faster than demand, or demand could come back faster than supply. 

“Had supply come back faster than demand, we would have massive deflation, prices falling, wages falling, debt being defaulted on — not a pretty story,” he said. 

Instead, he said, demand grew and supply lagged so prices went up, driven by things few people could have seen coming, like the war in Ukraine. Despite this, Linneman said he still believes that inflation is transitory because industrial output was 3% in Q1 2022 and manufacturers find these higher prices profitable. It may not be happening as fast as it needs to, he said, but it is happening. At the same time, chip prices are falling so car sales are rising, shipping rates and truck rates have risen, oil prices are high but they are starting to go down, and so for all of these reasons, Linneman said, inflation is transitory. 

Moving on to the state of commercial real estate, Walker reminded Linneman that the last time they spoke, Linneman said the office market would bounce back once usage returned to 60%. However, Walker said that through his conversations with other CEOS, he knows that the U.S. is a long way from meeting that goal, despite their efforts. So why is Linneman still so bullish on the office market? 

Linneman said that he still believes that office workers will return, which is why he remains bullish. He said that he too has spoken with CEOs who have said they want workers to return, and he has a piece of advice for them: Do your job. 

“I say you're being paid $22M,” he said. “Earn it, and get them back.” 

He said that his generation believed that they were different, that they would “sing songs and the world would have peace,” but in the end, it turned out to be more complicated, because, “you don’t change fundamentals.” According to him, working in an office is one of those fundamentals that the U.S. will return to. 

As for multifamily, Linneman said that the U.S. has a national shortfall of 600,000 units. That, paired with a 3.6% shortfall of single-family homes nationwide, means that home prices will continue to outpace inflation and people will have to continue renting for longer in order to save up and purchase a home, leading to sustained demand for multifamily. 

Finally, Walker pointed out that some markets that have been described by industry professionals as “white-hot,” including Jacksonville, Raleigh, Durham, Salt Lake and Austin, Linneman describes as “out of favor,” while favoring more coastal gateway cities such as Boston. 

Linneman said that while years ago people were too convinced that the gateway markets were the answer, in recent years the market has overreacted to the flight to the suburbs. He said he believes that while markets like Raleigh and Nashville will continue to grow, there is a lot of supply coming into them relative to the demand, and that will eventually balance out. 

The next Walker Webcast will be July 27 with actress Jamie Lee Curtis. Register here. 

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

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