Takeaways from the Walker Webcast…
Each quarter Willy Walker of Walker & Dunlap interviews Dr. Peter Linneman about his Linneman Letter (a highly regarded “one-stop-shop” quarterly publication for commercial real estate investors, as well as anybody seeking to understand today’s ever-changing economic and geo-political environment). Here are some takeaways from the most recent October 2021 webcast…
- It is a great time to buy assets, especially multifamily and industrial. Finance them cheaply, fixed or floating interest rates doesn’t really make a difference, and don’t worry about inflation – CAP rates will compress from here.
- According to data from ADP, employment numbers are much better this month compared to the previous two months… and this is despite September being hindered by the Delta variant. From March 2021 to September 6th, 2021, it is estimated that about 3.5 million people who could have joined the workforce stayed unemployed.
- Right now we have 8% actual unemployment, which is roughly 13. 5 million people and about 8 million more people than pre-pandemic statistics. Still, even with this level of unemployment, GDP reached $22 trillion, which is about 4 % short of what it would have been if COVID hadn’t happened.
- In the next 12 months we can expect to see GDP growth of 4.5 – 6.5%. Job growth will lag GDP growth but it has always lagged GDP in a recovery. This is because employers are hesitant to bring jobs back until there is proof of recovery.
- In the next 12 months there will be 6 million jobs added (3.5 million from people returning to work when the benefits are gone and 2.5 million from normal job growth). It will be 1-2 years before things come back fully but right now we are in an extraordinary window of time / growth hampered only a bit by the Delta variant, the percentage of people who are unvaccinated, and by the strain resulting from shutting down the economy.
- Should we worry about inflation? Some sectors of the economy are being affected by inflation more than others and Dr. Linneman argues that most of the inflation we are seeing is transitory. Developers are an example of a sector that is experiencing a lot of pressure resulting from inflation. Rising costs, shortages of building materials and labor are causing construction delays as well as increased housing prices.
- In July, CPI inflation was 5.4%. Dr. Linneman says that 20% of that inflation increase was due to the price of used cars. In March, April and May of 2020 there were almost zero cars being rented. In response, the rental companies sold their fleet down to the minimum number of cars needed. This year GDP is back and the number of cars people are renting and buying is disproportionately high due to pent up demand. A significant proportion of the used car supply comes from cars sold by rental companies and because they sold all their cars last year, the used car supply is very low – driving prices up. The scenario won’t last and the price of used cars will go back down. Increased prices in the used car market is an example of how the index is being artificially driven up and why the situation is not expected to last.
- One sector that is not experiencing transitory inflation is housing. According to Dr. Linneman, both single family and multifamily housing is fundamentally underproduced and has been for the last 20 years. The current housing shortage is due largely to NIMBYism and the situation will not be remedied until project approval times become shorter.
- Will adding 6- 8 million jobs put downward pressure on inflation and wages? According to Dr. Linneman there will be some stickiness on wages that will result in price increases, which will be a drag on the economy but it won’t create more inflation. This is because the wage increase from $12 – $14 has already occurred.
- Today, we are over deposited by about $6 trillion dollars. The US consumer balance sheet is better than it’s been in 40 years and cash deposits by corporations are at staggering record highs.
- There will be a significant increase in capital going toward commercial real estate over the next 3-5 years resulting in shrinking CAP rates (most specifically multifamily).
- Dr. Linneman and his team looked at data over the last 42 years, across all asset classes, and found that you wouldn’t have lost money by holding any asset for 10 years. They did the same for three year holds and found that depending when and what you bought you might have lost money. The best returns occurred when everything went right and you held for three years. Time cures most things and that is why coverage is so much more important than LTV. The best performing asset class was multifamily and it also had the best returns. Multifamily has the unique advantage of having Freddie Mac and Fannie Mae because they deepen the capital pool and create predictability.
Also, for more information about Dr. Peter Linneman and the Linneman Letter – check out his website: www.