Dr. Peter Linneman, Principal of Linneman Associates and Founding Chairman of Wharton's Real Estate Department, joined us on the podcast to discuss the current state of the market.
For over 40 years, Dr. Peter Linneman's unique blend of scholarly rigor and practical business insight has won him accolades from around the world, including PREA's prestigious Graaskamp Award for Real Estate Research, Wharton's Zell-Lurie Real Estate Center's Lifetime Achievement Award, Realty Stock Magazine's Special Achievement Award, being named "One of the 25 Most Influential People in Real Estate" by Realtor Magazine and inclusion in The New York Observer's "100 Most Powerful People in New York Real Estate".
After receiving both his Masters and Doctorate in Economics under the tutelage of Nobel Prize winners Milton Friedman, Gary Becker, George Stigler, Ted Schultz and Jim Heckman, Peter had a distinguished academic career at both The University of Chicago and the Wharton School of Business at the University of Pennsylvania. For 35 years, he was a leading member of Wharton's faculty, serving as the Albert Sussman Professor of Real Estate, Finance and Public Policy as well as the Founding Chairman of the Real Estate Department and Director of the prestigious Zell-Lurie Real Estate Center. During this time, he was co-editor of The Wharton Real Estate Review. In addition, he published over 100 scholarly articles, four editions of the acclaimed book Real Estate Finance and Investments: Risks and Opportunities, and the widely read Linneman Letter quarterly report.
Peter's long and ongoing business career is highlighted by his roles as Founding Principal of Linneman Associates, a leading real estate advisory firm; CEO of American Land Fund; and CEO of KL Realty. For more than 35 years, he has advised leading corporations and served on over 20 public and private boards, including serving as Chairman of Rockefeller Center Properties, where he led the successful restructuring and sale of Rockefeller Center in the mid-1990s.
Click here to learn more about Peter Linneman's acclaimed textbook: Real Estate Finance and Investments: Risks and Opportunities
Click here to learn more about Peter's educational course: Real Estate Finance and Investments Certification.
Click here to stay up to date on Peter's economic research.
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RealCrowd (00:00:00):
All opinions expressed by Adam Hooper, Tyler Stewart and podcast guests are solely their own opinions and do not reflect the opinion of real crowd. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.
Peter Linneman (00:00:23):
Okay. So first we're at a point I've never seen before in my life. Right? And that's humbling when you're 69 and you spent your life studying this kind of stuff, and you've never seen it before. That's very humbling.
Adam Hooper (00:00:40):
Hey Tyler.
Tyler Stewart (00:01:09):
Hey Adam, how are you today?
Adam Hooper (00:01:11):
Tyler, spring has sprung here in the Pacific Northwest which means it's raining.
Tyler Stewart (00:01:17):
Another couple of weeks of rain. Yeah.
Adam Hooper (00:01:20):
Ready for a second winter. But no. It's a really interesting time what's going on right now, Tyler. A lot of, I just read in a newsletter, a lot of pain in the country right now. I think a lot of underlying issues are being amplified and it's time that we all inspect a little bit of those in the current times that we're at.
Tyler Stewart (00:01:38):
Yeah. Yeah. For sure. It's a great time to listen and just kind of get involved in the community in any way you can.
Adam Hooper (00:01:44):
Yeah. I agree. With that said though, our show continues. So today we had another guest that we've been looking forward to speaking with for quite some time, just a titan of the industry and again very, very influential man in the real estate space.
Tyler Stewart (00:02:02):
Wow. Yeah. Peter Linneman. Principal at Linneman Associates, CEO at KL Realty, CEO at American Land Funds. And by the way, also the founding chairman of Wharton's Real Estate Department.
Adam Hooper (00:02:15):
Yeah. And his textbook is known world round as one of the seminal works in any real estate education. So it was an honor to have him on the show today. And boy, we covered a lot of really interesting stuff again. I mean, we started out the conversation going back to his start and just his influence in the professionalization of our industry which was again, pretty cool to get to hear from one of the main guys that really effected those changes back in the early 80s through what we know the industry as today.
Tyler Stewart (00:02:45):
Absolutely. I love his approach to explaining real estate. He can go as deep as anybody into the nuts and bolts of real estate but he also kept it simple. And for him, the metric he is really watching and encourages people to watch his how close are we to where we were the first week of March. So whatever metric you're watching, where's that metric now? And how close is it to where we were in March?
Adam Hooper (00:03:11):
Yeah. And if you'll listen to the episode, you'll hear the one key metric that's a little bit I guess, atypical from what we would expect. But one of the things that he's really paying attention to. And also in his mind, the one real reason that real estate exists. So you'll have to listen and pay attention and hear those two things I think are interesting takeaways and things to watch as we come out of the current state of crisis that we're in.
Tyler Stewart (00:03:35):
Exactly. And how fortunate are we to have Peter on, longtime industry expert. And just a great episode. I enjoyed listening to it, Adam Hooper as you're going through the interview. A lot of great information was given throughout this episode. So definitely have your pen and paper ready to take some notes on this one.
Adam Hooper (00:03:54):
Yeah. And check show notes too. There's a lot of links down there for different things that Peter's involved with and other resources out there for you. He teased a new book that he's writing that's coming out. So you'll hear about that as well. But yeah, I think that's all we've got for you and I, Tyler Stewart. But as always, if you have any comments or questions, feedback, please send us a note to podcast@realcrowd.com. And with that, let's get to it.
Adam Hooper (00:04:22):
Well, Peter thank you so much for joining today. As we said before we started recording here, we've been looking forward to having you on the show for quite some time. So very appreciative of you taking your busy day to spend some time with us and look forward to the conversation.
Peter Linneman (00:04:37):
Well, thank you very much for having me. It's a pleasure.
Adam Hooper (00:04:40):
So you are known widely throughout the real estate industry as literally the guy that wrote the book. So why don't you tell us before that, how did you get into real estate as a career, as a profession? And then what excited you about it? What got you into this industry to begin with?
Peter Linneman (00:04:57):
Well, it's a good, great question. Happenstance, as is probably true for most people in their career. I was PhD. I am a PhD in economics and it was a fairly kind of applied econometrics and labor markets, macro economics. I was a Milton Friedman student among others. And I taught at University of Chicago for a couple of years. And I had started them Linneman Associates as I moved to Wharton in 1979 to join the faculty. And for the first few years I was on the finance faculty. I was doing micro economics courses and applied econometrics course, public policy course, pretty traditional. I had written a lot about home ownership but as a household decision, not as a real estate asset. Very different, right?
Peter Linneman (00:05:57):
And lo and behold in 1985, Wharton had the most amazing man had become dean of the Wharton school, Russ Palmer was an amazing guy. And he came to me as a faculty member and said, "Look, I'm either going to kill this effort we're doing in real estate or grow it but what we're doing is a disaster." I had nothing to do with it by the way. And he said, "Would you look at it as an assignment and tell me what you think." So I did. And I looked at it, it was a real industry. It was way under professionalized, hard to believe, but way under professionalized. It was a knee jerk industry tax gimmicks. And I came back to him and I said, "Look, this industry is going to professionalize just like banking did, just like insurance did, just like a whole lot of other industries did." And it hadn't yet. And Wharton's in the business of professionalization. We ought to be in the forefront.
Peter Linneman (00:06:57):
And I gave him some suggestions. And I said, there's some very interesting research stuff here. And I literally went back to doing what I was doing. And he came back about three months later and said, "Well, why don't you do it?" I said, "I don't know anything about it." And I wasn't being humble. And he said, "You're a smart guy. You'll figure it out." But I had to have somebody in the industry side. At my consulting business, I was dealing with copper tube companies, paper companies, bag companies, steel companies. So I have a lot of corporate interaction and I had figured out corporate guys, there's some smart people out there, the entrepreneurs in particular. And so he said, "Do whatever you want."
Peter Linneman (00:07:47):
And so we got [Outaubman 00:07:48] who was the legend at the time and Claude Ballard and a whole bunch of guys. And they taught me the business and we scored down what terrible program we had and build an overnight success that took about a decade. And you know that story very well. That's how I got into it. And then slowly my teaching got into it. My research got into it, my business got into it, Linneman Associates. Then most of my business got into it. And if you say what turned me on, I'll go back to where I started, which is, I am an economist who focused on micro markets with macro influences and finance and public policy. Didn't I just describe real estate?
Peter Linneman (00:08:46):
So I didn't realize that as I was doing it but in an odd way, the confluence of my interest, or really the confluence that I think are at least at the heart of real estate. I'm not trying to leave out design and planning. Those are very important in law. It's just that… And so this notion that I had this multi set of interest that found what an effectuation in real estate, which is the micro of supply of a building, right, an operation. It's the macro of overarching supply and demand and what drives that is the policy issues, rent control or whatever and whatever zoning. And the financing parts of it.
Peter Linneman (00:09:38):
So it played to my skill and I had very generous teachers. I mean, unbelievable teachers in the sense of Outaubman and [Ward Zuckerman 00:09:48] and Club Ballard, these guys spent, I mean, hundreds of hours each educating me. And who can have better teachers than that? And so that's how it happened. And the next thing you know, that was 1985, it's about a few years later. And it's become kind of my thing.
Adam Hooper (00:10:11):
And you've built quite a thing since then. So that's a super fascinating story. And I think the concept of professionalization of the industry is really interesting. I'm curious, we see similar parallels I think in a lot of what we talked about on the show is the industry's uptake and attitudes towards technology. Real estate has always been a very slow industry to reflect or accept new technologies. So I'm curious in the professionalization scope, obviously it's been huge changes since early mid 80s. Where do you think we are on that arc of professionalization? Are we there? Is there still room to grow? Where are we at in that process?
Peter Linneman (00:10:52):
Outaubman died about four years ago. And before he died, maybe six months, eight months we were together and we were talking about. And we both had of a lot of individual…. He had many more than did I but a lot of individual things that you did that people know you did. And we both looked at one another and said, "One of the things we did, we were part of was professionalizing an entire industry." And remember we were talking a couple of years ago and nobody knows it. That's not true to say nobody knows it but you just assume if you're graduating from a university today, you just assume.
Adam Hooper (00:11:33):
It's always been that way. Yeah.
Peter Linneman (00:11:36):
It's always been that way. Right? Who invented the pencil? Who knows? Right? Who cares? But thank God they did invent the pencil. That was part. It's hard to describe what the real estate business was once like. You make the analogy to technology, it would be as if you said we had abacus and paper and pencil. That was the level of technology equivalent in terms of professionalization. And professionalization isn't the answer to everything but it is a game changer and it's an industry and personal elevator. And that's one of the proudest things of my professional career is that I played an important role in professionalizing an industry. I don't want recognition for it. That's not the point but it's an amazing achievement.
Peter Linneman (00:12:38):
And in a way, my book is part of that in that it bridges the gap I think I've done the most recent with Bruce Kirsch, where we tried to bring in more technology, more online, more interfacing. It bridges between the reality of an industry done by professionals making difficult decision and theory and context. And that there's no… I always like to say, there's no single right answer. There are single wrong answers but there's no single right answer. And that's part of what a professional realizes, right? Is it's not math although you use math. And so where are we at in terms of technology in the industry? We'll never be at the forefront, I don't think. And there's probably no reason for real estate to be at the forefront in that you're not breaking into new…
Peter Linneman (00:13:47):
Put it this way. There's no reason in the following sense, the margin in real estate value creation is largely on the spread of creation, right? And that the extra juice you create by creative use of technology just doesn't get enough operating leverage to make real estate the frontier. It doesn't mean it doesn't give juice. It's just there's just not enough operating leverage. And the industries where you see at the forefront of technology are industries that have huge operating leverage vis-a-vis technology. And real estate is low in that regard [inaudible 00:14:34] kind of always will be a bit low. But where it's gone technologically is pretty amazed. I'll tell you one little… You're young.
Peter Linneman (00:14:45):
There was a program called VisiCalc. And VisiCalc was this first time to do a spreadsheet. This could probably be in the very early 80s. It's a matter of that, probably 85. And you could do a spreadsheet and calculate an IRR. Okay? And so people would do it. And the old time guys would be shown what the IRR would be and some young guy would say it's 32.1. They believe that because it came out of a computer. So that's 35 years ago let's say. The good news is we're no longer there. Right? We at least understand just because it comes out of computer doesn't mean it's magic.
Adam Hooper (00:15:32):
Right. Garbage in, garbage out, right?
Peter Linneman (00:15:34):
Garbage in, garbage out. Yeah.
Adam Hooper (00:15:35):
We've seen plenty of Argus models that have their fair share of garbage in them.
Peter Linneman (00:15:40):
Yeah.
Adam Hooper (00:15:42):
Well, so let's kind of shift back. And I think that again, interesting that your passion for economics kind of ran parallel to what we also consider kind of the fundamentals of how you look at real estate as an investment, as an asset class. We're now in a very challenging, I guess, to say the least time in terms of economic understanding of where we're at right now. So I'd love to get your take on what are some of the things that you're looking at, unemployment, jobs, kind of just where are we at in the state of the market right now in your opinion. And then we can kind of dig into some of those finer points.
Peter Linneman (00:16:17):
Okay. So first we're at a point I've never seen before in my life. Right? And that's humbling when you're 69 and you spent your life studying this kind of stuff, and you've never seen it before. That's very humbling if you think about it. And what makes it so unique is it was not economically created, the situation. It was created by, forget whether it was right or wrong, right? It was created by a series of policy decisions made in each state of the United States and around the world by policy makers and the knock on effects created something we've never seen before, which was the most virulent decline in American economic history, the quickest decline in economic history. And yet one of the things that makes it unusual is it's a very concentrated decline. So you have what? Probably 30%, 40% of the economy that's basically not operating at all.
Peter Linneman (00:17:39):
Now I know it's now coming back a bit but I'm talking if we'd had this conversation three weeks ago. And you had 30, 40% of the economy basically not operating off. Think of Disney, Disney Theme Parks, right? Vegas, the entire thing was shut down, right? And normally, a downturn is economically created. Yes. Policy influences. And the downturn is a bad sector is down 15%, a highly cyclical sector Like autos might be down 15, 20%. And the good sectors are down 1% and you average it out, right? This is, there are sectors that are not really down much at all like chicken production, right? Or hand gel, not down at all. And yet at the same time, there are other sectors completely shut down. As a result, it makes it very difficult to figure out what next happens because there's no historical basis.
Peter Linneman (00:18:53):
There's historical basis to judge, how does Las Vegas come back after a 15% downturn? I'm just taking Vegas because it's such an obvious example. Right? And so there's a lot of previous examples of Vegas had a 15% downturn. And how did it get back to fully recovered and grow again? There's no example of how did Vegas go from 100% to zero and how does it come back from that? And as a result, you find yourself using more intuition than you're comfortable with about it. But we're in an uncharted territory and to me it's very simple. It's all about jobs. Throw everything out the window, it's all about jobs.
Peter Linneman (00:19:47):
If we get jobs back quickly, this will all be real fine across the board. If we got back to the same number of jobs we had at the end of the first week of March, by the first week of September, it's great. If not, you've got issues, right? I don't see how we would be back to that kind of jobs by the first week of September. That's not the point. And I think the most recent unemployment numbers that came out were honest and wrong and they paint a far rosier picture of what really is going on.
Adam Hooper (00:20:33):
Yeah. And I think that's something that I'd like to unpack a little bit this disconnect, right? I mean, so we're recording this in early June and I just looked, Dow is up, S&P is up. I think we're over 10,000 today. Excuse me, NASDAQ is over 10,000. Yeah. We've got 21 million people that are filing continued unemployment claims. And then we talked to real estate managers in their multi-family portfolios and their occupancy is up with that many people looking for work or unemployed right now. How do we square some of these very conflicting storylines that can both be true but seems so contradictory in nature?
Peter Linneman (00:21:18):
Yeah. And I think let's do the jobs first then we can do the market pricing if you will. I think the jobs is the way that the data is collected is a sample. And the sample has lots of flaws like any methodology. But month to month in normal times, it's pretty effective because the flaw last month is essentially the same as the flaw this month. And so it's not a big deal, right? There's a flaw, right? When this happened, those flaws become enormous. And I can give you a couple of spirits of the flaw. One flaw is that if, and I'm taking a silly example, they only sample 64,000 people. Suppose there's a town that is a resort community in Florida. And there's one person in that town and they say they're unemployed. Well, you're not going to say everybody in that town is unemployed, right? That would be silly in a normal month to month sense, right?
Peter Linneman (00:22:28):
In the context of this downturn, that wouldn't be such a stupid inference though. Namely, everybody in that resort town in Florida really probably was on it. Not everybody but you know what I'm saying, really was unemployed. So to the extent you didn't see that one and then say, everybody, you missed the picture innocently. By the way in normal times, if you had one person, you'd never say they all are, right? That would make no sense. In this one, it did. So that's one limitation. And the other is what they do is that I come to you and I say, "Are you working?" And you say, "Yeah." Well, I think some people are saying they're working even though they're not because they're furloughed and they don't even understand what that means. Not because they're stupid but who knows the technicalities, they're still paying my benefits.
Peter Linneman (00:23:26):
And by the way, I'm making more now than I was making before because of the way the unemployment insurance works. So am I working? I'm furloughed? I say, "Yes." I don't know. I don't even care. It's just a question. Right? So you've got more reporting they're working than I think they really are. And the second part is when they say, "If you're not working, are you actively looking for employment?" Again I think people don't know quite how to answer that right now. Namely, I'm making more unemployed than I was making employed. Remember, I'm not swearing under oath. I'm just answering a simple questionnaire, right? So if you say, "Am I actively looking for work?" "No." Well then I'm not counted as unemployed.
Peter Linneman (00:24:22):
And so I think when you conflate, how many times in history do you make more unemployed than you do employed? Well, probably 65 to 70% of the unemployed are making more unemployed than they were employed, at least for the end of July. So are they actively looking for work? I don't know. They're not. And so it's very confusing what's going on with the data. My guess is we're at least 30 million. If you did an apples to apples to the end of the first week of March, at least 30 million are unemployed. Now, whether they're furloughed or laid off or actively looking, I don't know. But what I do know is if the world hadn't changed, there'd be 30 million more of them today working at minimum. Could be 40 million more if the world hadn't changed. And so I don't care in a funny way what the data says. I'm trying to figure out what the reality is.
Adam Hooper (00:25:32):
Right. And I think that's something that we've seen too with the quickness that the data is changing. And there seems like there's an amplifier to some. And just generally right now, a lot of our understood norms are being stressed tested right now and amplified through this current crisis kind of across all different specters. So I'm curious then raw numbers aside, what are some of the things that you're looking at in terms of, how do we start to get a sense of when it starts to shift or what are some of the indicators that you're looking at that would indicate a trend in a positive direction?
Peter Linneman (00:26:15):
Well, that's a great question because I do think that the recent jobs report has an element of what you said, forget the specific numbers. I do think it said, we've stopped digging a deeper hole. I don't know how deep the hole is but I probably think we've stopped. That's one. I'll tell you what I look at, or that I'm trying to look at. I'm trying to look at traffic patterns. There are these technology stuff, right, where you can track how many cars and you can track how much is traffic versus the first week of March. You can track shopping, visits. You know the kind of technology stuff I'm talking about in that regard. Right? And is it perfect? No. But what I'm trying to track, and I'm not the only one is, how close are we to the first week of March?
Peter Linneman (00:27:18):
And the answer is most of those airlines, right? Bookings at hotels. We're probably, if we were at 100 at the first week of March, we got down to 10 and 20. And we're probably back up to 25 to 40 depending on the location. But that's good directionality even something as silly. I live in a high rise. In March, April, and the first two weeks of May, we saw no one come in or out of our building. Now my building is not as busy as normal but every time I go to the lobby, there are people coming in and out. That's the return of normality. And I'll tell you the one I'm trying to track most, elective medical. Because medical is such a huge part of our economy. Healthcare is 18% of our economy. We got down to where medical was emergency. Right? And I see you. That was it. That was a huge drop in economic activity.
Peter Linneman (00:28:31):
So what I'm trying to track for example is how are doctor visits? Are they returning to normal? For example, tomorrow I go to an orthopedics and they're taking appointments again. Two weeks ago, they weren't taking appointments. That's a great sign.Cleveland Clinic as of a week ago, was back to 85%, two weeks ago, was back to 85% of their normal elective surgeries. And they were down to essentially zero, right? They were done zero elective surgery. Those are great indicators because that's economic activity. And so that's the kind of stuff you're trying to pick up fabrics if you will of what's going on.
Adam Hooper (00:29:24):
Yeah. So is it fair to say that in more normal times, the nominal metrics, the numbers themselves are more closely tracked and matter more versus now some of those numbers are just so absurdly blown out of proportion and numbers that we've never even considered were possible before trying to seek those trends. Right?
Peter Linneman (00:29:46):
Absolutely.
Adam Hooper (00:29:46):
And see directional, which way we're going. Yeah.
Peter Linneman (00:29:49):
Absolutely. And you're going to get this bizarre phenomena as you get a year from, hopefully it's going to happen. Imagine a year from now, and you're going to get reports of 20 and 30% growth rates. Well, that's not reality. It's mathematically true but irrelevant information, right? In that, yeah. It's up 20% from a 30% drop. Right? And so all of that kind of stuff that normally has meaning, has less meaning, so you're looking closer to find signs if you will.
Adam Hooper (00:30:33):
And I think that's maybe somewhat reflected in the shape that everybody's talking about. The recovery is going to take. Right? Are we looking at a V, a U, a swoosh, an L hopefully not. Does that matter or what are your thoughts on, I guess, the shape of the recovery coming out of this or industry specific, right?
Peter Linneman (00:30:52):
It's very industry specific, right? Yes, it matters. Because at the end of the day, economic… I used to tell students real estate exists for one reason and that's to service, the economy. Absent economy, we'd all live in caves. Right? But because there's an economy, we do it. And therefore the comeback matters because if the economy isn't there, then we don't need as much real estate as we used to need. Multi-family is a good example. You mentioned multi earlier. Multi-family have good example. If the comeback is very quick, very quick, all the kids who just graduated high school and college, if the recovery is very quick, by September they've got jobs and yeah, a few of them plan to have jobs in June and July. But not a big deal.
Peter Linneman (00:32:05):
And if it's really rapid, all those graduating kids have jobs in September and they'll take apartments per normal. Right? Now imagine that it takes two years for those jobs to come back. You have all those kids who graduated, who have no jobs. If they have no jobs, they're not going to rent apartments. They're going to stay at home. If they stay at home, every time an apartment empties, there's nobody to take it. And that's how it matters how fast it is.
Adam Hooper (00:32:41):
So on multi-family now, again as we said earlier, a lot of the managers that we're talking with in our weekly newsletter and we track rent collections through NMHC, which are down maybe I think 150 basis points as of the last report or so. I think multi-family is in a much better space today than any of us would have predicted two, three months ago in the sense that not a lot of that pain has been seen yet in terms of occupancies or collections. So is that something that you think will be forthcoming? I mean, it doesn't seem like we've seen a dip yet really in multifamily, either in sales prices. Right? I think a lot of those discounts that people were expecting haven't shown up yet and occupancies and rent collections seem pretty good so far. So is that yet to hit?
Peter Linneman (00:33:30):
Although as I talked to people, this is not hard data, concessions or more. Concessions are coming back more so than they would have. So there's a little bit there. Look, I think what happened to multi-family is that no one of us in March guessed that you would be making more unemployed than employed.
Adam Hooper (00:33:59):
Right.
Peter Linneman (00:34:01):
Now that's not true of everybody. It's true of probably about 65% of the peers. But that 65% is disproportionately renters, right? Because of where they fall on the income distribution, they're disproportionately renters. So maybe 85% of the people who lost their jobs, who are renters are making more. If you'd have known that, you wouldn't have predicted such a dire drop in March for April, May, June and July. You just said, let's wait and see what happens in August if they don't extend that top-up, the $600 top-up.
Peter Linneman (00:34:49):
So that's why multi-family has done extremely well, which is the federal government acted very quickly to top up. And not only did they top up, they more than topped up for most unemployed people. So that's what's held multi-family together I think in that even if you didn't get a job. Now the danger happens more over time. One, if that does disappear at the end of July, you're going to have people getting big income drops, unless there's a real sharp upswing in jobs, right? You're going to get people getting big income drops and then you're going to see people not paying their rent as much. And the other side is, everybody who moves out is not going to be replaced by a kid who graduated and got a job and started renting.
Peter Linneman (00:35:51):
So I think the $600 top-up has pushed out the day of reckoning and who knows? The Democrats want to extend it. The Republicans don't want to extend it. We'll see. If it gets extended then I think it's fine although even still you'd see kids without jobs, not replacing people who move out.
Adam Hooper (00:36:17):
And obviously it has a dynamic on the single family market as well. And you're curious your thoughts on… And just generally, there's so many interesting factors of this experiment that we're going through now of remote and social distancing and all that. It's going to be fascinating to see what some of these behavioral changes are but curious how you think this flows through to the single family market. Your first time home buyers, people that maybe would have typically been purchasing houses at the top of a good economy. Where do you see the single family space going?
Peter Linneman (00:36:51):
It has to pause. It has to pause I think. Again, I say that sounding more confident than I am given we've never seen it before. The reason I say that is if I say to you, "What do you need to buy a home?" You need confidence. You need a job, so you can get a loan. You need a down payment and you need an income, so you can make your monthly, right? That's basically what you need. If you then look at it and you say, "Well, how high is confidence?" Not very. "How high or having jobs?" Not very. "How high is the ability to make a down payment?" Not so great.
Peter Linneman (00:37:35):
And how about the monthly? The monthly is interestingly okay in the way we were just talking about it, right, at least through July. But nobody's going to do a home and say, "I'll figure out what happens in August." Right? So I think single family, absent confidence job down payment and income, it's a challenge next year. Not hopeless next year but a very challenged next year.
Adam Hooper (00:38:07):
Yeah. And I guess the timeframes of all these things we're talking about, that to me has been one of the hardest aspects of this as a business owner is how do we make a confident decision on what's going to happen later Q3, Q4 let alone next year. Right? I think the timeframes of these pieces, some might be quicker, some might be more longer term. How are you thinking about that just in the timeframe of some of these recoveries and decisions?
Peter Linneman (00:38:37):
Why do you say that? I remember Milton Friedman who was a brilliant economist when I was a student one time saying, he gave a lecture. I don't even remember what the lecture was about. And he said, "Economics is very good at analyzing trade-offs and how things directionally move. And it's very bad at saying how quickly." Right? Is it an hour? Is it a week? Is it a month? Is it a year? Is it five years? And if you go back to your economics classes, we didn't really talk about time in terms of the economics of it. We talked about the directionality.
Peter Linneman (00:39:24):
And I don't think economics has got a lot to say about how quickly. And you add to that, history generally does have a lot to say because it reflects psychology and so forth but this time the history is very different. So it's doubling not only the… By the way, directionally you know what five years looks right from now, right? You have a good view but it matters a lot how quickly it gets there. I think it's very murky in every sector how you get from here to there and how fast. And it's murky to me. I'm not trying to Dodge, I'm just being honest.
Adam Hooper (00:40:11):
Yeah. And I think again, that's a lot of the challenges that most of the people we talk with are facing right now, is that uncertainty around the timing. And again, as you mentioned before, this is very much an acute external factor that caused the situation that we're in, right? It's not a normal economically driven recovery that we have to face. There's a very external health crisis that's driving a lot of this. And until again, in our opinion until there's some certainty and confidence around the health side of the crisis, a lot of that uncertainty will remain.
Peter Linneman (00:40:47):
Although interesting, I have a slightly different take on that. I've been writing a book with Albert Ratner and Mike Roizen. Mike's the head of wellness of Cleveland clinic. And we've written a book coming out in the next, whatever number of months, not about COVID although it plays to it in a way, about general health, wellness, the extension of life, what's it mean for the economy and so forth. All right? And early on as COVID began happening, I kept asking Mike, "You know medical, I don't. What's the likelihood of getting a vaccine?" And he'd say, "Well, it's quite good but it won't be in a year, et cetera." And then we'd say, "Well, what if it never happens?" We have no vaccine for AIDS. We have no vaccine for Hep C. We've been trying forever. Right?
Peter Linneman (00:41:40):
And interestingly, if we don't get one, I think we just adjust. We just move on. And it just becomes one more of the things that kills us. And there's a lot of things that can kill us. Rattlesnakes can kill us. And just is a lot of things that we deal with day to day. Some people skydive for God's sake. I used to scuba dive regularly and some people drive 100 miles an hour. So I think that either we'll get a solution medically, or we get a mental solution to it medically. And the outcome is pretty similar. Obviously I'd rather a medical one than an adjust but I did the following numbers. I won't bore you with the details but if we were to have an additional 200 to 300,000 deaths, the rest of the history of people who would not have otherwise died. So it's not somebody in a nursing home who was going to die in a week but got it and they died.
Peter Linneman (00:43:04):
But 200 to 300,000 additional deaths, the death rate in the United States would go back to what it was the first 25 years of my life, the overall death rate. Now we would be dying of different things but the first 25 years of my life, people didn't sit around going, "I can't do anything because I might die." They got on with it. And then we had a period where death rates improved. They got better, lower. And then for the last six years interestingly, unrelated to COVID, they went up related to chronic disease. And then COVID would bring, if it was an extra two to 300, would bring it right back to where it was the first 25 years of my life. So it's not like we would have a death rate beyond anything we ever saw before. Right? It would be a death rate well within developed human experience. And we know we dealt with it. I'm not saying we like dealing. My father died at 49. Nobody liked dealing with that.
Peter Linneman (00:44:21):
So I think in the near term, people are going to be overly cautious because they want to hang on until the cavalry gets there. But if the cavalry doesn't come, they're going to get on with. So I think you have a kind of cautious next six to 18 months. And if you don't have a medical breakthrough in that six to 18 month period, we get on with it anyway. Do you really think there's never going to be an in-person sporting event again? I mean, absent a vaccine. I don't. And there've been concerts performing around since the Egyptians, 3000 BC. I don't know how we adapt but it will come back in some way, shape or form.
Adam Hooper (00:45:20):
Right. And we're inherently social beings. Right?
Peter Linneman (00:45:22):
Huge.
Adam Hooper (00:45:22):
And I think even with remote work and obviously we're all remote on this podcast right now, but there's definitely a lot of folks that we talk with that they're just ready to get back to seeing their friends in the office and being somewhat quote unquote normal in how we go about our social lives for sure. So yeah. I think that that desire within us is very strong. And we'll figure out some way, again, like you said, either to adapt or hopefully have a medical, just prevention or treatment that gets people back to that level of confidence that we can start getting back to some of those normalcy, what we thought was normal historically.
Peter Linneman (00:46:07):
Anybody who thinks that by and large things are as productive remote as they are face-to-face isn't paying attention. Are there exceptions? Yeah. We are doing this but by the way we could have done this 20 years ago this way too. Right? It's not like given where you're at and given where I'm at, we would have done this 20 years ago remotely. Right? It's not like we quote discovered it. Yes. The technology makes it easier. But I love it when somebody says so and so, the present CEO of such and such company says, "We're not going to go back to our offices." Now, what is that CEO supposed to tell their investors? Are they supposed to tell them it's a disaster. I have no idea what 90% of my employees are doing. I have no idea how efficient they are. I have no idea what the hell they're doing. And that's when there's nothing for them to do.
Peter Linneman (00:47:15):
Imagine when they can go play and shop and so forth and the bars are open and so forth. What's the guy supposed to say, "Yeah. It's a disaster." They can't say that publicly. You talk to most CEOs privately and they want their people back. They want them safe. Right? They absolutely want them safe but they want them back because… I said to someone the other day about, I won't say the name because it's kind of irrelevant to the point but a guy who built an amazing organization. And I said, he can continue to operate his organization remotely. He could have never built his organization remotely. That's what I think I've not heard anybody say in the remote working discussion is now that you have to maintain your organization, you have to grow your organization. And even more importantly, you have to build your organization. I mean, yeah, there are some companies that you can build remotely but that's not the norm. Right? It's just not the norm.
Adam Hooper (00:48:39):
And one of the things, productivity like you had mentioned, and we recorded an episode a while back with Andrew Barnes talking about the four day work week and some similarities and the importance on tracking productivity. What are some of the things that you're looking at in some of the industries that it might be less I guess, inherent in typical metrics? How do you measure productivity? Right? I think a lot of people were caught maybe off guard of not having measures in place to actually track or monitor productivity. And now that we've been thrust into this remote space, I'm curious, what are you looking at in terms of tracking the actual productivity.
Peter Linneman (00:49:17):
Tracking? I haven't tracked track. I can tell you the question I ask every executive when they tell me how great it's doing. Okay? And I say, "What's the person three levels down from you doing today? Do you have any idea at all? Do you have a clue?" And of course they don't. And how would you find out as opposed to walking down the hall and so forth. I'm not talking about mega corporations here, I'm talking normal size companies, right? Where you do have a sense of what they're doing because you see them, you say, "What are you working on? Or, "Drop in." Or they drop in. I'm tracking that type of stuff. There's a lot of short short sightedness in this.
Peter Linneman (00:50:14):
For example, the notion that all shopping is going to occur online was proven wrong during the shutdown. Absolutely proven wrong. How do you know that? Look at the drop in total retail sales, right? Total retail sales plummeted when the only thing you could do was shop online. If online was really going to replace brick, what would have happened to online sales? Online sales would have done all the sales they normally did plus all the sales that would have occurred in brick, right? And total retail sales would have been largely unchanged. Well, that's not what happened. So the reality is, if you look at this as an experiment, it showed how much we need bricks or people want bricks for at least certain types of sales because online wasn't able to do it, or people didn't want online to do it. Then you add to it the other thing it showed is online, I knew this for years and then saying it can't do groceries. It can't do groceries effectively. Online loses money.
Peter Linneman (00:51:40):
So you saw something like Wayfair reported a huge increase in sales and a huge decrease in their profitability. They were already losing money and you go, "Well, wait, how's that work? You get more sales and you lose more money?" That's not a viable business model. Even the Amazon by the way. Amazon reported a huge increase in online sales. And what happened to total corporate profits? They went down not up. Do you think their revenue from the cloud went down? I don't think so. Do you think it went for third party procurement, went down? I don't think so. Do you think the revenue from Amazon prime memberships went down? I don't think so. How did their profit go down? When online sales went up. It meant they were losing money on those online sales. That's just math. Right?
Peter Linneman (00:52:44):
And so I don't know why people don't see that. It's pretty obvious. So I'm not saying online sales can't work. What I'm saying is we actually saw the limit of it, at least given current technology quite vividly. But people don't point that out. I don't know why not but people don't point it out.
Adam Hooper (00:53:08):
Well. And so I guess to expand on that, the retail landscape has been one of the… Retail and hospitality are the two hardest hit of this current crisis. What are your thoughts within those industries in terms of signs to look for? Again, the trend that we were talking about or long-term shifts, is this accelerating some of those latent issues that were already in progress or what are your thoughts on those two industries?
Peter Linneman (00:53:33):
I think it's hard to compete when the law doesn't allow you to be open, right? That's a challenge. So yes, we saw them do [Vandy 00:53:46] but they weren't by and large allowed to be open. I think that retail is going to surprise because some of the limp along retail that's been limping along for a long time is going to go out of business. Okay? And that's owned by somebody but that's not what people focus on. That's that crappy piece of shopping center, 130,000 foot shopping center that has 20,000 feet in it or 30,000 feet occupied. And it's going to go out of business, right? Those sales though by and large are not going to go to an online… Drive by one of those places and ask yourself, are those sales going to go to an online vendor or some other brick vendor?
Peter Linneman (00:54:40):
And I would hazard 90% will go to a brick vendor. Okay? That puts the terrible little center that was dying out of its misery and actually strengthens the other retail, the brick retail Because they no longer have these people shopping at the hopeless little place. Now, will that happen in a six week period? No. That's going to happen over a year or two. So I think retail, the good retail will come out of this just fine. The good retailers will come out of it just fine. And the marginal stuff gets put to death sooner. But the beneficiaries are not going to be online nearly as much of the death, pardon me, is going to be brick other bricks, some other center, which gets stronger.
Adam Hooper (00:55:41):
So a consolidation to the higher quality properties.
Peter Linneman (00:55:44):
It's just consolidation of sales into the higher quality properties.
Adam Hooper (00:55:48):
Yeah. I think it was, it might have been Eric Homan that we were talking two years ago, he said, retail it's not overdeveloped, it's under demolished.
Peter Linneman (00:55:59):
That's correct.
Adam Hooper (00:55:59):
And said, this sounds like this will be… You're kind of foreseeing a trend here where some of those fringe properties, maybe there's a better use. Maybe they get repurposed but the consolidation will be towards those more robust… Properties will see the benefit of some of those consolidations.
Peter Linneman (00:56:15):
Absolutely. Because the dollars aren't going to disappear. The dollars that are being spent there largely they're going to go online or to another brick. Right? And I say, if you look at what's in those centers, it's more likely to go into brick than online. A nail salon, right? A Chinese restaurant, you know the kind of center I'm talking about that all it has is three Chinese restaurants and two nail salons. Are they going to end up online with those dollars? No, they're going to get eaten into at a nail salon at a stronger center and a Chinese restaurant at a stronger center. Right? And so just if you think realistically. On the hospitality side, I think you hit it when you said, how quickly do people get comfortable? How quickly does the social animal overcome its fears and whether it's overcoming them by medical advances, or as I was saying psychological, I got to get on with life.
Peter Linneman (00:57:24):
And I think it's going to be a tough 18 months because it'll get better during that 18 months. But I think people are just going to be a little hesitant. But if there's no advance on the medical front in 18 months, and I'm not being mechanical in the 18 months. I just think people say I get on with it. They just get on with it. And yes, they are going to use more hand sanitizer and yes, they're going to make their kids wash their hands. Yes. They may be wearing a mask at certain times a year but they're going to get on with it.
Adam Hooper (00:58:04):
We will find a way.
Peter Linneman (00:58:08):
We'll find a way. Yeah.
Adam Hooper (00:58:10):
Yeah. I know we've already taken almost an hour of your day here. For listeners out there, a lot of which, again, investors in real estate, managers of real estate, what are some of the opportunities or metrics I guess. I guess first metrics that you're tracking. Again, we talked about some before but what are maybe two or three of the key ones for listeners to pay attention to? And then where do you see some of the opportunities as those metrics start to turn that people should be paying attention to?
Peter Linneman (00:58:39):
Well, I'm going to give an odd metric because every one of your investors knows somebody at a major hospital, right? They know the doctor, they know the administrator. Everybody knows somebody at a major hospital if nothing more than your doctor, right? Keep an eye on elective activity. So when you're talking to your doctor or you're talking to your friend at the big hospital, ask them this is the metric. How close are you back to the first week of March in terms of your elective surgeries, in terms of your visits for all the screenings, et cetera, et cetera. That's a great metric of where we are. And in an odd way, the medical is going to be a leader. So it's a leading indicator of where we're at. And it's not quantitative per se, right? Because your doctor may say something different than but you each can gather real time data almost weekly and monthly just by asking your friend, right?
Peter Linneman (00:59:51):
That's the number one metric I would suggest. It's crazy sounding, right? But that's what I'd use because medical is such a huge part of our society. And it went down to a tiny outlay. Opportunities, I think people are going to be a little disappointed in that the banking system, which is the primary source of capital at the end of the day, went into this enormously over reserved and with good tier one capital and the regulators have said, they're going to cut them slack on tier one capital as long as they don't pay dividends or do buybacks. As a result, the banks have on… For the only time in history, they have the ability to forebear on everything. And for the only time in history, they're being aggressively told by their regulators forebear. And if they get fore bearings and they give fore bearings, you don't get a lot of fore sales.
Peter Linneman (01:01:06):
And absent fore sales, you don't get those opportunities. Now you'll get some, I'm not saying there won't be any but it will be small because of the banking system's ability to forebear. You'll get some out of CMBS. Although even CMBS is showing some degree of flexibility in the near term. Fannie and Freddie are going to show forbearance. They've already said they are in the multi space. So will there be opportunities? I think the biggest opportunity will be for good news money. Where I bled, yes, I was… Think of an office. I was able to cover my debt. I was able to cover my debt but I ate up a lot of my reserve capital, so that as leasing picks up, I don't have the capital to do the good news money of TIs and leasing commissions. There could be opportunities in that type of window.
Adam Hooper (01:02:21):
Yeah. I think we've seen a lot of the again, the smart folks that we're talking with on regular basis seeing that as again like a preferred equity piece almost coming in and providing some of that not quite rescue money but for those that make it through. And again I think there's so much opportunistic capital that has been raised even getting ready for the cycle, COVID regardless. It'll be interesting to see how much the massive opportunities to capital on the sidelines will also help insulate some of those deeper opportunities if everyone you're trying to deploy right away. That could also cause another bit of a buffer I guess, of where that distress might normally come in other times.
Peter Linneman (01:03:03):
And I'd go back to the two sectors we talked about, hotels and hospitality and retail. Do you really… Being an investor in that terrible little shopping center I talked about, there's no money to be made in that. That's not an opportunity, right? It's dead. So throw dirt over it. That's the only opportunity. Maybe there's a redevelopment opportunity on the other side, right? But that's not as an existing parcel. The hospitality challenge is the burden, right? Is that to open the door is a large fixed cost number. And there may be money there for a lot of the private equity to say, "Okay. I'm going to buy it or put in mez preferred where I'm putting in the burn." Right. I'm funding the burn. And my bet is how long does that burn? I think you'll see some of that type of stuff in those sectors.
Peter Linneman (01:04:12):
But those I think will be the biggest type of opportunities you'll see. There'll always be opportunities. Guys are going to get in trouble. I think there'll be opportunities perhaps in some of the port areas because imports and exports will be down. And that was a pretty buoyant sector. And I can imagine some people losing faith and you might get some stuff there. I can imagine Houston is a place where you would get some opportunities because it's out of favor because of the downturn in general. But in addition, the oil price and it's just kind of out of favor. It's not for sale. It's just out of favor. Right?
Peter Linneman (01:05:01):
I can imagine Vegas, Vegas Apartments. Vegas is out of favor. I don't know how long it takes to come back. Will the jobs come back and so forth? I can imagine something like Vegas being opportunities, you're taking risks but there's real opportunities and it's out of favor. Same for Orlando. Right? Of how long does it take? So I can see opportunities but they're risks. They're real risk, right? It's that you are taking a real risk position but it's a real opportunity position in the traditional sense of the word.
Adam Hooper (01:05:42):
Yeah. It'll be interesting. And again, the timing of when those surface is something we're closely paying attention to. And as yet, I don't think there's a lot of confidence that those will start shaking loose in the next three, four months. I think we're still probably sometime Q4, Q1 of 21 before some of those events start to occur. So we're…
Peter Linneman (01:06:03):
I think you're right. I think you're right. Although there are always the odd ones, right? That somebody died and their heirs just want the money and blah, blah, blah, and so forth. There's always some but I think you're right on your timing.
Adam Hooper (01:06:18):
Okay. Well, this is a fascinating conversation, Peter. Is there anything that we didn't cover that you want to talk about. Curious, will keep us posted on your book that's coming out.
Peter Linneman (01:06:28):
I'm happy to have this opportunity. Yes, we have a new book. We aren't sure exactly when it's coming out at the end of the year we hope, if not very early next year on wellness. My book, Real Estate Investments: Risk and Opportunity. You can find out about it online. We have a program where we certify young professionals called REFAI. You could find out about it online. It's actually rigorous and is a way to prove your chops as a young person to a potential employer. You might want to look into that a little bit later. You can find out about online and anybody who wants to reach out, Linneman Associates online, you can reach out to my brother, Doug at dlindemann@llindemannassociates.com. And happy sailing in uncharted waters, right?
Adam Hooper (01:07:26):
Yeah. A lot of unchartered waters and we'll put links to all of those in the show notes for everybody that's listening. And again, really appreciate your time, Peter coming on the show today and look forward to seeing some of these prognostications where they end up and maybe we'll have you back on to see where we're at later this year, early next.
Peter Linneman (01:07:45):
My pleasure. Have a great afternoon.
Adam Hooper (01:07:47):
Very good. Well listeners, that's all we've got for today. So with that, we'll catch you on the next one.
